Mortgage interest payments will more than double, household debt service ratio will soar to 18pc, warns Jarden

Households are only halfway through the interest rate pain triggered by RBA rate hikes, as the cost of servicing a home loan is set to hit a 15-year-high, warns Jarden.

Mortgage interest payments will more than double as the household debt service ratio jumps to 18 per cent, its highest level since 2008, warns investment bank Jarden as the Reserve Bank on Tuesday lifted rates for the ninth consecutive month and signalled more increases to come.

Investment bank Jarden says households are only halfway through the pain of higher interest rate payments tightening their cashflows with those aged in their mid 30s and 40s the most exposed to elevated rates as this demographic traditionally carries the most debt.

Consumer spending could be cut in half, with not even the estimated $200bn in built up savings hoarded away through the pandemic to prevent a hard and painful landing for the consumer this year, Jarden added.

In a note to clients ahead of RBA’s official cash rate rise by 25 basis points, Jarden said the consumer slowdown is set to worsen – even if the RBA stops lifting rates in March — with the lag effect of steeper mortgage rates to last until the end of 2023.

Jarden has updated its forecasts for the latest data and now expects growth in nominal consumption to slow from 12 per cent in calendar 2022 to 6 per cent in 2023. Given inflation is running at well above 6 per cent it means actual consumer spending growth will ground to a halt.

Analyst Carlos Cacho said households are only halfway through the impact of higher rates on their cashflows and ability to spend at the shops, pointing to the staggered rollover of fixed mortgage rates to variable rates through 2023 as an indication there was still plenty of pain to come for some households.

This pain would be especially acute in the proportion of household income needed to service mortgage debt, which Mr Cacho has forecast to hit its highest level since 2008.

“With two more RBA rate hikes expected, we forecast household interest payments will more than double and the debt service ratio will rise to 18 per cent, the highest since 2008. However, once accounting for both the expiration of $300bn of fixed-rate loans in calendar 2023 and the two to three-month lag in rate hikes flowing through to higher repayments, we estimate that households are only halfway through the effective impact of higher rates on cashflows,” the Jarden analyst wrote.

Even if the RBA paused its current interest rate tightening cycle in March, the impact of the rises since last year would wash through the rest of 2023.

“Indeed, by January 2023 we estimate only around 57 per cent of the eventual tightening had been felt. Importantly, this lagged impact means that even if the RBA stops hiking in March 2023, as we expect, higher rates will remain a drag on household cashflow through 2023.”

The pressure on household and consumer spending will stretch out to the end of 2023 even if the RBA stops hiking interest rates in March, Jarden warned.

Mr Cacho said savings buffers built up since the outbreak of the pandemic might help, but this would not be evenly distributed. Older and younger Australians looked to be in a much healthier financial position, but people in their 30s and 40s – who typically also have the largest mortgages and are most exposed to rate hikes – have much less savings buffers to support spending.

“Analysing distributional data on deposits, we find that whilst the increase in deposits has been relatively uniform by income, the large majority has gone to older households (55 years plus).

“Importantly, 35-44 year-old households are the cohort most impacted by rising rates given higher debt levels and have seen no net increase in deposits since 2018, leaving them little buffer to maintain consumption in the face of rising mortgage repayments.”

The pressure on consumer spending as more disposable income is sucked into mortgage repayments would crimp sales for many retailers, especially those in discretionary sectors.

“And I think it means next year is going to be a little challenging for retailers. Retailers have seen over the last three years a surge in consumer demand as people weren’t able to travel, weren’t able to leave home and we had big cash handouts to increase deposits. So if you look at household goods spending it has been way above the pre-Covid trend over the better part of the last two years. And as that comes back, that’s going to make conditions a lot more challenging for some retailers, particularly those in discretionary goods who were exposed to discretionary spending.”