RBA issues chilling warning to Australian homeowners

The Reserve Bank of Australia has issued a warning to Australian homeowners as more people take on dangerous levels of debt.

As more people take on dangerous levels of debt, the Reserve Bank of Australia (RBA) has issued a chilling warning to the nation’s homeowners, urging them to have a mortgage “buffer”.

Almost a quarter of people with a new loan owed the bank at least six times what they earned, official data from the banking regulator has revealed. And, with the median Australian house and unit price now at $698,170, an average-income earner would struggle to repay their loan.

Even with a 20 per cent deposit, a full-time worker on a $90,329 salary with a $558,536 mortgage would have a debt-to-income ratio of 6.2 – considered “dangerous” by the Australian Prudential Regulation Authority (APRA).

New data released on Tuesday showed that 23.8 per cent of new borrowers in three months to September 30 of this year were in this category – up from 16.3 per cent 12 months ago, and 21.9 per cent from the previous quarter – as buyers took advantage of lower interest rates to chase soaring property prices higher.

Aussie homeowners have been urged to have a mortgage “buffer” by the Reserve Bank of Australia. Picture: NCA NewsWire/David Swift

While the RBA left the cash rate on hold at a record low of 0.1 per cent – and is expected to do so until late 2023, potentially 2024 – governor Philip Lowe had a warning for borrowers.

“With interest rates at historically low levels, it is important that lending standards are maintained and that borrowers have adequate buffers,” Dr Lowe said.

Research director at RateCity, Sally Tindall, noted that “Australians are increasingly taking on eye-watering levels of debt compared to what they earn to get into an overheated property market”.

“Record-low rates have enabled Australians to borrow more from the bank than ever before,” she said.

Australian Reserve Bank governor Philip Lowe. Picture: James Brickwood

“However, when rates start rising, people who’ve taken on risky levels of debt could find balancing the monthly budget infinitely more challenging.”

As the debt relative to incomes has risen, the APRA data showed the proportion of low-deposit loans has fallen, from 10.4 per cent last September to 7.5 per cent this year, corresponding with a decline in the proportion of first home buyers.

Dr Lowe said that the real estate market appears to be cooling down somewhat, adding in the statement that “the rate of increase [in housing prices] has eased over recent months”.

“Housing credit increased by 6.7 per cent over the past year, but, more recently, the value of housing loan commitments has declined from high levels,” he said.

The concern comes as record low interest rates are tipped to begin rising. Picture: NCA NewsWire/Christian Gilles

Another concern plaguing homeowners could be the falling Australian dollar, especially due to its impact on inflation (the increasing cost of goods and services). This is because a weaker Australian dollar means we have to pay more on imported goods, meaning the cost of everyday items would also increase, or become inflated.

This in turn would sway the RBA to increase the cash rate – despite what they’ve stated. Markets are anticipating the first rate hike as soon as July next year, Capital Economics’ Marcel Thieliant said, with 1.75 percentage points of rate rises by the end of 2023.

Should that happen, it’s almost certain that the major banks would follow – passing the increased cost to mortgage payers.

It’s worth noting forecasters are already expecting banks to begin increasing their fixed home loan rates, with Westpac, CBA, NAB and ANZ among the lenders who have done so. The move has also boosted fears the trend may continue to impact their variable interests.

However, this may also be seen as an attempt for banks to persuade consumers to avoid locking in a cheaper fixed rate for the next three to five years, especially given predictions interest rates will almost definitely rise again.

– with Jessica Wang