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The rapid rise in interest rates, along with soaring inflation, has been identified as the primary factors impacting consumer spending and increasing credit risk, particularly in the second half of 2023.
The Reserve Bank of Australia’s (RBA) July monetary policy minutes, revealed the rapid rise in interest rates, at 4.1 per cent, alongside high inflation (5.6 per cent) was weighing heavily on consumer spending.
In particular, the central bank noted the burden of mortgage interest payments had reached a “record high in May”, which could rise even without further cash rate increases, especially as fixed-rate loans matured.
According to illion’s inaugural ‘credit risk barometer’, the risk of credit default has increased “by 9 per cent since January 2022”, given the 12 cash rate hikes in one year.
The data indicated that financial stress is spilling over into consumers’ borrowing behaviours, as savings diminish and wages fail to keep pace with rising living costs.
In particular, the data showed that revolving credit applications experienced a staggering 40 per cent year-on-year increase up to April 2023.
The credit data from more than 18 million credit consumers in Australia is modelled on the risk of credit default on current and historical credit performance, credit demand, different types of credit products, and risk sectors (such as prime, near-prime, and subprime lenders).
Manager of bureau analytics at illion, Michael Landgraf, expressed concern that the surge in credit demand might be masking deeper problems as consumers defer obligations during this financially burdened period.
Mr Landgraf said credit default risk had escalated by 6 per cent during 1Q23, surpassing the increases observed in 2022 and the same period of the previous year.
This suggests that the “impact from dwindling savings and negative cash flows has only recently become visible in consumer credit holdings”, he said.
Underlying this shift, the ‘30+ days past due’ rate of revolving credit facilities has lifted 9 per cent higher in March 2023 when compared to 2022.
Additionally, delinquent home loans rose by 5 per cent year on year in the same month, potentially indicating that consumers are struggling to meet all credit obligations, including their core home loans, Mr Landgraf said.
Savings deteriorate
Despite a period of stable savings rates, since mid-2022, there has also been a sharp fall in the amount people are putting away, with the household saving rate declining in the March quarter to below its pre-pandemic average, according to the central bank.
Mr Landgraf added, most concerning was the circa 40 per cent fall since October 2022, suggesting that balances are not yet rebounding.
“Preliminary observations of savings trends to May 2023 indicate that a rebound is not likely anytime soon,” Mr Landgraf said.
“The data also appeared to imply that balances may not fall much further, indicating that consumers may have used much of their savings buffer and that harder cuts to spending may be needed.”
Unemployment major factor on mortgage stress
While savings plays a big part in mortgage stress, the Commonwealth Bank’s chief executive Matt Comyn has recently stated unemployment is also a key driver of mortgage stress.
“By far the biggest increase in terms of the reason why someone will be unable to continue making repayments is a change in their employment circumstances,” Mr Comyn said.
Beyond unemployment, the other contributors to mortgage stress tend to be serious illnesses and a change of familial situations or relationships, he said.
Given the unemployment rate is at record lows and the growing expectations that it will rise, further pressures are expected.
[Related: Unemployment biggest driver of mortgage stress: CBA]
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