30% of mortgagors ‘at risk’ if RBA raise rates: Roy Morgan

New research from Roy Morgan has estimated that there would be 171,000 more mortgagors ‘at risk of mortgage stress’ if the Reserve Bank of Australia (RBA) raises the cash rate by 25 bps tomorrow (2 May). 

According to the research company, ‘at risk of mortgage stress’ is defined as a mortgagor paying more than a certain proportion of their after-tax household income (25–45 per cent depending on income and spending) into their home loan. This is based on the appropriate standard variable rate reported by the RBA and the amount they initially borrowed.

In the three months to March 2023, 27.1 per cent of mortgage holders (or 1,352,000 million mortgagors) were considered ‘at risk’.

This is the highest number of mortgage holders considered ‘at risk’ since September 2008 (when there were over 1.37 million people in this classification).

Moreover, the proportion of mortgage holders considered ‘at risk’ of mortgage stress in the three months to March 2023 is the highest for over a decade at (27.1 per cent). The last time it was higher was in November 2011 (27.7 per cent).

Roy Morgan flagged that the number of Australians ‘at risk’ of mortgage stress has increased by 590,000 over the last year as the RBA increased interest rates for 10 consecutive monthly meetings before holding it at 3.6 per cent in April. 

The number of mortgage holders considered ‘extremely at risk’, (where even the ‘interest only’ is over a certain proportion of household income) has now increased to 835,000 — 17.3 per cent — in the three months to March 2023. This is significantly above the long-term average over the last 15 years of 660,000 (15.9 per cent).

What happens if the cash rate rises?

While the market is largely anticipating the RBA to hold rates where they are for a second month in a row tomorrow (2 May), the Commonwealth Bank of Australia (CBA) has suggested a hike is still on the cards.

If the central bank increases the cash rate by 25 bps to 3.85 per cent, Roy Morgan analysis estimates that 30.5 per cent — or 1,523,000 mortgagors — would be ‘at risk’ in May. This represents an increase of 3.4 percentage points or 171,000 people.

With potential future interest rate increases to come, this would increase to almost one-in-three mortgage holders by June 2023.

Indeed, Roy Morgan suggests that a further 25-bp rise to the cash rate in June (to 4.1 per cent) would take 31.1 per cent (up 4.0 percentage points) of mortgage holders into the ‘at risk’ category. This would equate to 1,557,000 mortgagors, an increase of 205,000.

Mortgage stress remains below GFC levels

Despite the sharp increase in the level of mortgage stress over the last year, the overall number remains below the high reached during the global financial crisis in early 2009 of 35.6 per cent, Roy Morgan noted. However, this level — 1,455,000 mortgage holders — is set to be reached with further interest rate increases.

Michele Levine, the chief executive of Roy Morgan, commented: “The slowing in the monthly inflation indicator was a key factor that prompted the RBA to pause its cycle of increases by leaving interest rates unchanged in April. The further reductions seen in the latest ABS Quarterly and Monthly Inflation figures for March 2023 take some of the pressure off the RBA to resume its cycle of interest rate hikes…

“However, of concern is that the monthly ANZ-Roy Morgan Inflation Expectations indicator, which has proved a reliable predictor of future inflationary trends in the economy, increased 0.3 per cent points in March to 5.6 per cent.

“This result suggests that there are still inflationary pressures in the economy even if the early figures from this year do show a reduction compared to late 2022.

“If the RBA does raise interest rates again [by 0.25 per cent] ... Roy Morgan forecasts that mortgage stress is set to increase to over 1.5 million mortgage holders (30.5 per cent) considered ‘At Risk’ by May 2023 — this would be a record high number of mortgage holders considered ‘At Risk’.

“Of more concern is the rise in mortgage holders considered ‘Extremely At Risk’, now estimated at 835,000 (17.3 per cent) in March 2023 — the highest for over a decade since July 2012 (17.6 per cent). This is an increase of almost 400,000 mortgage holders from a year ago (+6.6 percentage points).”

However, the researchers noted that unemployment is still the main factor impacting income and mortgage stress and that its modelling is “a conservative model, essentially assuming all other factors remain the same”.

Ms Levine added: “When considering the data on mortgage stress it is always important to appreciate interest rates are only one of the variables that determines whether a mortgage holder is considered ‘At Risk’.

“The variable that has the largest impact on whether a borrower falls into the ‘At Risk’ category is related to household income — which is directly related to employment.

“And of course we are already seeing an increase in unemployment.”

The latest Roy Morgan employment estimates showed a record 9 million Australians were employed full-time in March 2023, up over 300,000 from March 2022, but this has been falling.

“The latest figures show rising interest rates are causing a large increase in the number of mortgage holders considered ‘At Risk’ and further increases will spike these numbers even further. If there is a sharp rise in unemployment mortgage stress is set to rise towards the record high of 35.6 per cent of mortgage holders considered ‘At Risk’ in May 2008 during the Global Financial Crisis,” Ms Levine concluded.

The analysis comes after a recent report from the International Monetary Fund (IMF) flagged that Australia is second only to Canada when it comes to being at “housing market risk” out of 27 countries.

[Related: Australia ranks second highest for ‘housing market risk’: IMF]