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Almost $100 million a day in extra interest repayments are being sucked out of the pockets of the nation’s mortgage holders as the Reserve Bank battles to bring down inflation amid growing signs the jobs market and economy will slow even more than expected.
As Commonwealth Bank economists said mortgage repayments as a share of household income were approaching 1980s levels, when mortgage rates were 17 per cent, Reserve Bank data showed the daily hit to borrowers had increased to a record $181 million since it started lifting rates last May.
Australian mortgagors are paying an extra $181 million a day in interest as the Reserve Bank targets inflation.Credit: Rhett Wyman
This compares to almost $82 million a day in interest when the Reserve Bank had official interest rates at 0.1 per cent through the first four months of last year.
In the three months to September, people with mortgages paid a record $16.5 billion in interest, taking interest paid over the past 12 months to a record $57.9 billion, compared to $32.9 billion in the previous 12 months.
The interest bill will grow as the data does not include this week’s decision by the Reserve to take the official cash rate to a 12-year high of 4.35 per cent.
Mortgage payments as a share of Australian household disposable income have reached a record high of 9.5 per cent. The previous record of 9.1 per cent was in December 2010 when the cash rate was 4.75 per cent and the average mortgage was $364,000, compared to today’s $599,000.
The big lift in interest rates, coupled with high inflation, has resulted in borrowers slashing their extra mortgage repayments. In the September quarter of 2021, borrowers made $15.8 billion in “excess” payments on their loans. That has now fallen to $6.5 billion.
The financial crunch on mortgage holders is expected to mean a tough Christmas for retailers.
The Australian Retailers Association on Thursday said it expected 30 per cent of shoppers to slice their Christmas spending, 61 per cent to outlay the same as last year and just 9 per cent to lift their expenditure.
Average gift spending per person is forecast to fall from $700 last year to $646, a near-8 per cent drop before considering inflation.
Moody’s Investors Service economists said consumer weakness was emerging across the economy as people struggled to deal with the Reserve Bank’s aggressive tightening of monetary policy.
They expect the economy to expand by just 1.5 per cent this year and 1.3 per cent in 2024.
“Required household mortgage payments have risen to almost 10 per cent of disposable income from around 7 per cent since the RBA began lifting rates in May 2022, with the share set to rise further as borrowers on pandemic-era fixed-rate mortgages roll off into variable rates,” they said.
“Australian borrowers will likely pull back spending further as the full effects of the RBA’s cumulative 4.25 percentage point rate hikes permeate through the economy.”
The pain being felt by mortgage holders is now approaching the plight of borrowers in the late 1980s.
CBA economist Harry Ottley said mortgage repayments as a share of average household income were now the least affordable, outside Brisbane and Perth, since it started collating data in the 1990s.
Across Sydney, the average dwelling price of just over $1 million is now 5.1 times the average household income. In Melbourne, the average dwelling price of $800,000 is now 3.8 times the average household income.
Ottley said it appeared repayment levels nationwide were approaching those last seen in the late 1980s, when the Reserve Bank took official interest rates to 17 per cent. The country went into a recession in 1990.
The Reserve Bank will release its latest outlook for the economy on Friday, with its unemployment forecast expected to edge up from 3.6 per cent to around 4.25 per cent over the next 18 months.
But Australian Bureau of Statistics data, taken from business payrolls, suggests the jobs market is already weakening.
The number of jobs on business payrolls lifted 0.2 per cent to the middle of October, it found. But without the temporary jobs linked to the Voice referendum, they would have fallen by 0.3 per cent.
“The monthly and annual growth in payroll jobs continues to be weaker than what we saw in 2022 and early in 2023. This, along with what we’re seeing in other ABS labour market data, may suggest labour market growth is starting to slow,” the bureau’s head of labour statistics, Bjorn Jarvis, said.
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