Rates on hold but mortgage arrears rising

Research Director Tim Lawless unpacks what today’s cash rate decision means for the housing market.

The cash rate was held firm at 4.35% in June, having been at this level since the 25-basis point rise in November last year, and up 425 basis points since the record low of just 0.1% between November 2020 and April 2022.  For some longer term context, the current cash rate setting is 1.8 percentage points higher than the pre-COVID decade average of 2.56%.

The RBA’s stance seems largely unchanged relative to the May meeting.  Although headline inflation remained well above the top end of the target range at 3.6% over the year to March, mostly due to the stubbornly high services sector, the RBA has been clear that household spending has pulled back, wages growth is easing as labour conditions gradually loosen and some signs of productivity improvements have emerged.

However, the RBA has noted some ‘upside’ inflationary risks remain, highlighting recent budget outcomes could influence demand despite a temporary reduction in inflationary pressures from federal and state energy rebates.  The RBA called out the need for a further improvement in productivity growth if inflation is to continue to decline.

The consensus among economists is that rate hikes are finished and the next move from the RBA will be a cut, but the timing is highly uncertain.  Financial markets, based on the ASX cash rate futures, have brought forward the timing of a rate cut from around mid-year 2025 to a fully priced in cut by March of next year. Meanwhile three of the big four banks’ economic units are forecasting a 25 basis point cut in November 2024.

Although the cash rate has risen by 425 basis points, variable mortgage rates haven’t seen quite the same lift.  The average variable mortgage rate for a new owner occupier loan has risen to an estimated 6.27% in June, a rise of 386 basis points since April.  Similarly, the average variable mortgage rate on a new investor loan has risen by 382 basis points to an estimated 6.53%. The smaller rise in variable mortgage rates relative to the cash rate reflects a heightened level of competition among lenders; no doubt borrowers are shopping around for the best rates.

Housing markets seem to be somewhat insulated from higher interest rates, with CoreLogic’s Home Value Index continuing to rise through June, and the combined capitals daily index already 0.4% higher over the first 18 days of the month. The RBA made a point of calling out an increase in household wealth via higher housing prices which, together with a rise in disposable incomes, could support household spending.

Similarly, the volume of home sales is tracking higher than a year ago and above the five-year average, demonstrating consistently strong demand from purchasers despite an array of headwinds including high interest rates, cost of living pressures, low sentiment and stretched affordability.

Most borrowers are keeping their mortgage repayments on track, but the latest data from APRA for the March quarter shows mortgage arrears are trending higher, albeit from a low base and remaining lower than pre-COVID levels.  Mortgage arrears, including non-performing loans and borrowers that are 30-89 days overdue in their repayments, comprise 1.6% of home loans for all ADI’s. This is up from a recent low of just 1.0% in the September quarter of 2022, but below the 1.8% level recorded at the onset of COVID in March 2020.

With interest rates set to hold at their current levels until at least late this year, alongside a gradual loosening in labour market conditions and reduced saving buffers for most borrowers, it’s likely mortgage arrears will rise further.

From CoreLogic

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