Almost exactly two years ago, a major Australian investment bank issued a dire warning.
Barrenjoey forecast that the Reserve Bank’s aggressive campaign of rate hikes would tip Australia into a recession.
Not only that, high mortgage rates would see dwelling prices around Australia crash by 16%, while Sydney real estate would plummet a jaw-dropping 25% because it was “very leveraged”.
“It will be the largest and the longest house price correction in modern history,” Barrenjoey Chief Economist Jo Masters told an aghast audience at The Australian Financial Review’s annual Property Summit on the 19th of September 2022.
The armageddon-like warning seems even more hilarious now when you consider it was made when the RBA had raised the cash rate just 5 times to 2.35%, and Barrenjoey was predicting the sky would fall when the cash rate reached just 2.85%.
Fast forward to today, and the RBA has raised the cash rate no less than 13 times since May 2022, and interest rates have been at a 13-year high of 4.35% since November last year.
The Australian economy is not in recession; the labour market is still strong, and after national home values fell 7.5% between April 2022 and January 2023, they quickly bounced back and have roared ahead to reach new heights.
So why was Barrenjoey so wrong?
There are two main reasons.
The first is the investment bank’s economists didn’t look carefully enough at the fundamentals of housing supply and demand and recognise that there was already a substantial housing deficit BEFORE the international borders were re-opened in early 2022, which then led to the biggest annual net overseas migration intake in Australia’s history.
Secondly, Barreyjoey also massively underestimated the resilience of Australian households in the face of higher and higher interest rates, assuming there would be much higher mortgage default rates and a glut of repossessed properties, which would see the bottom fall out of the real estate market.
There’s been plenty said and written about housing supply problems in the face of strong population growth, but less about the second factor.
However, new data from the Reserve Bank demonstrates just how resilient Australian households with mortgages have been in the face of higher and higher interest rates and a simultaneous cost-of-living crisis.
The Financial Stability Review
The RBA’s latest Financial Stability Review for September 2024 finds that while the minimum payments for most mortgage holders have increased between 30% and 60% since May 2022, remarkably few households are defaulting on their repayments.
“While a small but rising share of Australian households are falling behind on their mortgage repayments, the vast majority of borrowers continue to be able to service their debts,” the review says.
What’s more, it points out that “most have maintained, if not added, to their mortgage buffers.”
So, from the chart above, we can see that just over 5% of households with a variable rate mortgage are leveraged to the extent that they are spending more on scheduled loan repayments and essentials than they have money coming into the house.
“In addition to cutting back their spending to mostly essential items and trading down in quality for some goods and services, these households have had to make other difficult adjustments to continue servicing their mortgages,” the review says.
“These include drawing down on liquid savings, selling assets and working additional hours.”
“Lower-income borrowers are more likely to be in this group,” the central bank says.
Nevertheless, the majority of these households still have more than 6 months of savings buffers to help alleviate some of the mortgage stress they are experiencing.
The Review also concluded that less than 0.2% of outstanding variable-rate owner-occupier loans were to households who were in “negative equity” - that’s where the value of their outstanding loan balance is greater than the value of their home.
It notes that this is partly “because of the ongoing growth of housing prices.”
So, while many Australians are doing it tough, most are still a long, long way from being in a financial position where they will be forced to sell their homes.
And while the RBA says that “the economic outlook is highly uncertain”, the central bank says it believes “the vast majority of borrowers would remain able to service their debt under a range of plausible scenarios.”
National Australia Bank’s Head of Market Economics Tapas Strickland says the RBA Review points to “a high level of resilience in the Australian financial system”, with banks now expecting mortgage arrears rates “to remain around their pre-pandemic levels.”
Better days ahead
What’s more, the Reserve Bank says it believes “that budget pressures on households should start to ease in the second half of 2024.”
It says the full effect of the Stage 3 tax cuts and further falls in inflation “are expected to result in a pick-up in real disposable income growth over the rest of the year.”
And that’s before the RBA starts lowering rates, which most economists now believe will start with a cut of 0.25% early next year.
For would-be property buyers still waiting around for the mortgage default rate to rise and for a host of repossessed properties to hit the market, leading to big home price falls, the RBA’s message is clear.
That won’t happen.
And for those of you who took Barrenjoey’s silly warning seriously, how’s that working out for you?