2023 Fixed-Rate Mortgages Threaten Australia’s Economy

Australian Economic Outlook
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The post-pandemic collapse in the housing market in Australia is expected to worsen next year when hundreds of billions of dollars of mortgage debt fixed at record low rates in 2020 and 2021 expire, compelling borrowers to refinance at interest rates that are punishingly high.

At a time when real earnings are already declining as a result of increasing inflation, repayments on an estimated A$370 billion ($245.79 billion) of home loans might jump by as much as two-thirds, giving a body blow to house values as well as the economy’s primary growth engine – consumer spending.

Home prices in Sydney have decreased by 12% so far this year, and Eliza Owen, director of Australian research at property consultancy CoreLogic, anticipates additional losses as more foreclosed and other troubled homes are placed on the market.

According to Owen, “even if the vast majority of borrowers are anticipated to be in a position to continue making their mortgage payments, there might be more motivated selling if mortgage arrears climb from record lows.”

Francesca Lemon, a homeowner, is familiar with the suffering; the repayments on her variable-rate mortgage have already increased by A$1,200 per month this year, which has compelled her to return to work in spite of a chronic health condition in order to ensure that her family can continue to meet their financial obligations.

“It’s incredibly irritating, and people are already having a hard enough time just surviving. The amount of money that each person must spend each month to pay down their mortgage is actually increasing by thousands of dollars “explained Lemon, who was 31 years old at the time.

The mortgage industry in Australia is dominated by the country’s top four banks, which are the Commonwealth Bank of Australia, Westpac , National Australia Bank and ANZ. These four banks account for 75% of the market share.

Since May, the Reserve Bank of Australia (RBA) has increased interest rates on a monthly basis, bringing them from a record low of 0.1% to a decade-high of 3.1%.

The fact that policymakers are well aware that mortgage payments will skyrocket to record highs in the following year as a result of the expiration of fixed rate loans was cited as one of the reasons why the Federal Reserve was the first major central bank to slow the pace of tightening monetary policy. continue reading

In the event that interest rates increase to 3.6% as the market anticipates, the RBA is concerned that 15% of the borrowers who are now paying variable rates might see a negative change in their cash flows.

 

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