Will the fixed rate roll-off cause a recession or will low unemployment save the day?

Mortgages in Australia are becoming harder to pay. That's because the Reserve Bank is raising its official cash rate every month, which has pushed broader lending rates into restrictive territory.

ANZ thinks we will see a cash rate peak of 4.1 per cent this year and we don’t expect it to come down at all until late 2024.

How is this affecting mortgages?

Currently in the Australian mortgage market, 70 per cent of housing debt is variable – which means interest rates move roughly in line with the RBA cash rate (although not necessarily). That means for every $100 of mortgage debt in Australia, $70 is at a variable and $30 is fixed.  In fact, most households have already experienced some form of interest hike impact.

Now, the proportion of fixed rates is still a little bit above the pre-COVID level, where 20 per cent was fixed and 80 per cent was variable but by late this year we should see a more traditional mix between fixed and variable loans.

The concern is many low-rate mortgages acquired through 2020 will come off fixed rates through this year, suddenly becoming significantly more expensive as they roll onto a variable rate or higher fixed rate.

Will this cause a recession?

When people’s mortgages go up, households and businesses have to think more carefully about spending or borrowing. So far, the fix rate roll-off has not led to a material impact on household spending. However the impacts of rapid inflation and rising interest rates are bound to hit and the amount people buy on average is likely to stop growing in the second half of the year.

A pause in per-person consumption growth has happened many times in the years before COVID, including in 2018. But it’s generally offset by Australia's population growing quickly, which is how the economy can stop growing on a per-person basis, but not on a total basis.  The current economic pressures, including the impending fix rate roll-off, is very unlikely to cause a recession in Australia.

One of the upsides for people in the mortgage market is even though there is a higher risk of financial stress, and they'll be squeezed by paying more on their mortgage, there is a much lower risk they’ll be squeezed out of their mortgage due to a job loss or an income disruption.

The Australian unemployment rate remains lower than it’s been at any time between 1975 and 2021. We're still seeing extremely high job vacancies and we're still seeing employers screaming out for workers.

The risks to the fixed rate roll-off is a lot of households will likely slow down their spending. But the risk of unemployment is vrery low and this will reduce the overall negative impact.

Adelaide Timbrell is Senior Economist at ANZ Institutional

The views and opinions expressed in this communication are those of the author and may not necessarily state or reflect those of ANZ.

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