Fixed-rate ‘cliff’ to impact consumer spending

According to the latest Econosights, last year was a time of huge swings of momentum for property ownership, with low rates, government incentives and rising prices seeing owner-occupiers and investors alike flock to the market. 

According to a report by the National Housing Finance and Investment Corporation (NHFIC), in the year to December 2021, regional dwelling prices increased by 26 per cent while capital cities bumped by 21 per cent.

Separate data from the ABS also noted that, over the COVID-19 pandemic, residential property prices have increased in value by over 35 per cent.

However, AMP Capital noted in its report that fixed rates declined over 2021, with the “three-year fixed rate bottoming at 2.1 per cent” in the middle of the calendar year. 

Further, in April, AFG revealed that, between the September 2021 quarter and the March 2022 quarter, its fixed rate volumes fell from 38.2 per cent to 20 per cent – the “lowest it has been in two years”, according to chief executive David Bailey. 

According to AMP Capital, this plummet was the result of increased competition between lenders, lower costs of borrowing, and the Reserve Bank’s 0.1 per cent three-year bond yield target.

“This led to a big lift in mortgage holders fixing their loans,” the report noted. 

“Usually, fixed lending is 10-15 per cent of total outstanding lending in Australia but in 2020/21, this lifted to over 40 per cent.” 

The report added that Australia is facing a fixed-rate cliff, with significant chunks of these loans expiring in the second half of 2023. 

“CBA analysis of their lending book suggests that the largest share of these loans expire in the second half of 2023 which means that households will roll onto a variable mortgage rate that could be two to three times their current fixed rate,” the report noted. 

Earlier this year, the major bank reported that its total loan book, including Bankwest, was valued at $539 billion as of 31 December 2021.

An analysis published by RateCity last month noted that $53 billion worth of CBA fixed-rate loans are set to expire between July and December 2023. 

A figure of $48 billion of Westpac fixed-rate loans, and almost $30 billion of NAB fixed-rate loans, are also expected to expire over this same period. 

AMP Capital has said this will impact roughly 30 per cent of the total housing loan stock, which is a “significant downside risk for consumer spending”. 

According to AMP Capital, consumer spending growth will decline from 4 per cent to just over 1 per cent between March 2022 and late 2023. 

However, this analysis also noted that there could be potential offsets to these higher costs of debt, including accumulated savings. 

In May, RBA governor Philip Lowe said that increases in interest rates and consumer prices are anticipated to weigh on households’ budgets over the forecast period, “but the effect on consumption is expected to be cushioned by a decline in the household saving ratio”.

A survey conducted by the finance platform Money.com.au reported that, in April, eight in 10 borrowers felt they had a savings buffer. 

AMP Capital also said that high mortgage prepayments could also be a remedy for this prospective decline in consumer spending. 

Earlier this month, both NAB and Westpac updated their cash rate forecasts, with both of the major banks predicting a 2.6 per cent figure by February 2023.

[Related: Housing key driver of incoming inflation: ANZ]