News live: Tanya Plibersek vows to protect 30% of Australia’s land and oceans by 2030 in press club speech
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At the same time as Plibersek’s speech, Michelle Bullock, the deputy governor of the Reserve Bank of Australia is in Brisbane delivering a speech on how the central bank sees rising interest rates playing out for home owners.
Now, it was not that long ago that Bullock was speaking about Australia’s “very buoyant” housing market. You know – nine months ago, when the RBA was envisioning it would be locking in the historic low 0.1% cash rate target until 2024.
But that was a different world. Since then, inflation fears have led to interest rates increasing, meaning home owners are facing higher payments, so the RBA has turned its attention to how it thinks mortgage holders will cope.
It’s mostly focused on the third of “indebted” home owners – those who hold mortgage debt.
You won’t be surprised to learn that the RBA thinks most of that cohort will be able to handle the increase in payments. Its reasoning is there are still a higher than usual level of savings from the pandemic, and while debt may be high, the value of the assets (the houses) is higher (in most cases). Plus, Bullock is heartened by the tighter lending controls from the banks since the royal commission.
But that is all in the aggregate.
As always, the story is in the margins – and those who sit on the outskirts of the “aggregate”. And for them, the story is not quite as rosy.
And in this case, the margins are homeowners in the bottom 20% of incomes, or first home owners.
As Bullock said:
Highly indebted households are especially vulnerable in the event of a loss of real income through higher inflation, particularly if combined with rising interest rates, and a decrease in housing prices.
Recent borrowers are more vulnerable than earlier cohorts, as they are more likely to have borrowed at high DTIs [debt-to-income ratio] have had their serviceability assessed at lower interest rates (albeit with larger interest rate buffers) and have had less time to accumulate equity and liquidity buffers.
Government policies to improve housing market accessibility for first home buyers (FHBs) during the pandemic also means that FHBs are more highly represented among this group of recent borrowers than they are in earlier cohorts. Historically, FHBs have tended to have persistently higher LVRs [loan-to-valuation ratio] and lower liquidity buffers than other borrowers, making them more vulnerable to a given house price or cash flow shock.
So the less you earn, or the later you bought, the more likely you are to be affected by rising interest rates.
