That’s it. We’re done.

That last rate hike hurt like hell, but it was really just another nail in an already sealed coffin.

The RBA’s mission creep, not just to tackle inflation but to firebomb its entire village out of existence  – and the delayed effect of that mission – probably meant we were done for months ago and we didn’t even know it.

In the details of a Q2 survey of 1,000 Aussie adults (not easy to find), UBS has concluded that middle-income households are now displaying clear signs that the bank’s consecutive increases in interest rates are starting to take effect.

Survey respondents said that their mortgage rates have already risen by around 300bps over the past 12 months, and that they expect another 100 to 300bp hit to come through over the next 12 months.

“This hawkish view from the Aussie consumer tells us to expect a spending slowdown to accelerate from here,” UBS notes.

The overall picture UBS paints is of households ‘spent to the cliff’, with the Q1-23 household savings ratio already dropping to 3.5%, the lowest since the GFC.

However, household deposit growth remains remarkably resilient at 8% year-on-year in April, suggesting – at least for some households – that strong income growth means they still have plenty of cash available to support spending ahead.

The Australian consumers’ impressive resilience over the past 12 months was aided by a cash war chest built up through the COVID pandemic.

In the main, however, with cost-of-living categories unable to be scaled back (in nominal terms, due to sticky inflation), consumers suggested that they expect to sharply reduce their spending on ‘fun’ categories, such as Entertainment, Recreation, Eating Out, Takeaway etc etc.

James Whelan From VFS Group believes that the last RBA hike, ‘was the straw that broke the dromedary.’

‘There are levels that families go through with regards to discretionary spending habits. Going out for pizza gets downgraded to eating in which becomes nothing. Whatever you can do to keep paying the mortgage is the right choice.”

“Even with the cuts people are making you see a chart like the above and you have to be concerned,” James says.

Mortgage delinquencies are up and that’s bad. The RBA is continuing to squeeze families in the face of an economy a few days behind on their payments. Emotions aside the labour market is not helping the case for the RBA to pause, with 75,900 roles added in May, over four times the forecast gain.

Eliza Owen: June dashed hopes

The June cash rate decision doused hopes for many Australians that rate hikes were nearing an end, says CoreLogic’s Eliza Owen, sympathetic navigator of the forlorn.

“It prompted the major bank economists to reset their forecasts for the terminal cash rate to at least 4.35%, dragged on consumer sentiment, and may take some steam out of the recent housing market recovery.

“Of the 400 basis point increase in the cash rate so far, it’s likely that around 350 basis points will have been passed through to outstanding variable loan holders by the end of June.

“Using the example of a $750,000 mortgage, this takes monthly home loan repayments up by around $1,550 per month.”

Ouch!

Additionally, Eliza says the bulk of fixed-term home loans taken on during the pandemic are expiring this year, exposing more households to a spike in interest costs.

But households in some regions will feel the pinch more than others…

“The number of mortgaged, owner occupier households are generally highest in outer regions of major cities, particularly Melbourne,” Eliza adds.

According to CorelOgic data, at SA3 regional boundaries at the time of the 2021 Census, the highest number of mortgaged owner occupiers were in:

  • Wyndham (43,807, or around 48% of households)

  • Casey – South (38,614, or 56.2% of households)

  • Wanneroo in Perth (38,320, or 54.0% of households)

 

The top 25 Aussie mortgage hotspots

The top 25 SA3 regional boundaries with the highest number of mortgaged households are set out in the table below, (Thanks again Eliza), alongside a summary of value and listings performance.

Of these 25 regions, 9 are in Melbourne, 5 are in Perth and Sydney. Just 2 are in Adelaide.

The remaining 4 are large regional centres, including Ormeau-Oxenford on the Gold Coast, Geelong, Newcastle and Townsville:

Regions: Highest volumes of mortgaged households

Via CoreLogic

 

For markets in the capital city regions, there is an average distance to the city centre of about 34km, ranging from Stirling in Perth (which has a 9km distance to the CBD), to Wyong in the Central Coast of NSW (70km from the Sydney CBD).

As of the 2021 Census, median weekly household incomes across these markets had a decent range, from $2,722 per week across Blacktown – North in Sydney, to $1,364 in Salisbury in Greater Adelaide.

“However, 16 of the 25 regions had a median weekly household income that was lower than the respective greater capital city or region. Capital growth trends across these markets are an important consideration in the financial stability of the Australian housing market,” Eliza says.

“This is because in the event of a ‘forced sale’, growth in home values allows a seller to come away with some capital gain, or allows a mortgagee in possession to recuperate the entirety of debt on a property.

“In these dwelling markets with high mortgage volumes, capital growth since the 2021 Census has averaged 3.1%, compared to national housing market growth of just 1.0% in the same period.”

But look around.

There is a huge range in capital growth performance here – from 40.5% in Salisbury, to -8.9% in Gosford.

“New listings volumes have generally crept lower across Australia in the past few weeks, as the market enters a seasonal slowdown. However, in the four weeks to 18 June, new listings have risen across 12 of the 25 high mortgage markets,” she adds.

Across the Blacktown – North market, new listings have increased from 185 in the four weeks to May 2023, to 230 in the past four weeks.

“Total listings are still low relative to where they have been in the past five years, but the monthly median time on market across Blacktown – North has been rising since February, which may lead to an accumulation of total stock as interest rates continue to climb and buyer uncertainty increases.”

Bacchus Marsh: Where the gloves come off

Another market that holds some uncertainty is the Melton – Bacchus Marsh region of Melbourne.

Total listings are elevated relative to where they have been historically, and the flow of new listings has increased steadily to 312 new properties for sale in the four weeks to 18 June (up 8.7% from four weeks ago).

On the other hand, the western suburbs of Melbourne have seen remarkable population growth in recent years, are a popular destination for overseas migrants, and while home values still fell in the three months to May, the pace of decline has been easing.

Eliza, are high mortgage markets risky?

“At this stage, most markets with a high volume of owner occupier mortgages do not exhibit capital growth trends that are alarmingly out of step with the national housing market. Indeed, some markets have had extraordinary capital gains since the onset of the pandemic, and since the Census snapshot.

“However, it is noticeable that new listings volumes are climbing in some of these markets, where the national trend is seeing a seasonal slowdown.

“This could make it more difficult for recent buyers to make a capital gain if they are struggling to meet mortgage repayments. As buyer demand wanes amid higher interest costs and seasonal trends, there could be an extended downturn in some of these markets as stock accumulates, such as in Melton – Bacchus Marsh,” Eliza says.

“In areas such as Blacktown – North, where values have seen a strong bounce back in the three months to May, as supply creeps up it may put downward pressure on the growth trend in the coming months.”