A sizable portion of Australian households will feel the weight of interest rate hikes
Young families and middle-income households will be disproportionately impacted by rising mortgage repayment rates. These pressures will also spill over into the rental market, as landlords facing mortgage pressures will pass on rent increases to their tenants. As a result, young professionals, students, and expats will also see a moderate decline in their purchasing power. These customer segments will cut discretionary items from their budget, such as on-trade services and travel, while also trading down to more cost-effective products. Firms that rely on these customer segments for top-line growth should revise their targets and demand expectations to account for these dynamics. B2C firms should alter their marketing and sales strategies to instead focus on resilient customer segments, such as high-income earners and tourists.
High interest rates will also deter consumers from investing in homes in 2023–2024, until interest rates begin trending downward. As a result, firms in the construction industry should reorient their sales efforts toward capturing opportunities in the private non-residential sector as well as the public sector, where short-term demand will prove more resilient.
As higher interest rates flow through the Australian economy, households with variable rate mortgages are going to get squeezed by ballooning repayment costs. Due to the rapid increase in interest rates in Australia, mortgage repayments have grown by over 60% annually. Those households whose mortgage rates have been revised recently, or are up for revision between 2022 and 2024, will feel the squeeze of skyrocketing repayment rates on their budgets. According to market estimates, 24% of mortgage holders, or 1.1 million households, currently fall into this category, with another 800,000 households set to join them in 2023.
Nearly 2 million out of Australia’s 9.3 million households will see their mortgage payments increase in 2022–2023. While some of these households will have savings buffers to support their repayments, most of them will be saddled with uncomfortably large repayment rates that will persist into 2025–2026—and perhaps longer. As variable mortgage rates are only revised every 2–3 years and the RBA is only expected to begin cutting interest rates in mid-2024, households with mortgage rate revisions between H2 2022 and H1 2024 will see sustained payment pressure in the coming years.
Therefore, 10–15% of households will see a substantial decrease in their purchasing power that will persist into the medium term. This will not only lead to weaker spending levels in 2023 but will also weigh on spending growth in 2024 and 2025. Moreover, these households are also exposed to inflationary pressures for the goods and services they consume, putting greater pressure on their budgets and raising the risk of defaults. These dynamics will weigh on demand for new homes and home prices as well. Loans for both owner-occupied and investor houses have fallen 29% YOY, as of December 2022.
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