Interest rates pain a symptom not the cause of housing market sickness
Australian households are feeling the pain of interest rates. But we need to look at the underlying disease in the housing market.
Australia's indebted home owners currently pay a bigger share of their income to meet their mortgage obligations than those in other comparable economies. That's a fact the International Monetary Fund has reaffirmed in its latest Global Financial Stability Report.
What the IMF report tells us is that countries with both a high level of variable rates alongside higher house prices (above the pre-pandemic average) are “likely to experience the largest effect on household debt-service ratios from further increases in interest rates”. It shouldn't shock anyone that Australia falls into this category, alongside places such as Canada and New Zealand.
One symptom of this is how closely Aussie home borrowers pay attention to the Reserve Bank’s interest rate decision each month. That's for reasons of finance, not fun.
Reserve Bank assistant governor of financial markets Chris Kent said, in a Bloomberg speech on Wednesday, that since May last year, repayments have gone from 7% of household disposable income to about 10%. That's interest and principal combined and it's above 2008 peaks of 7.25%.
