reception@amcotax.com.au | Suite 8, Level 6 / 402-410 Chapel Road Bankstown NSW 2200 Ph:9790 6277 Fax: 9790 0673

Banking & Lending

Financial Planning Message – December 2024

Following two remarkable years of global equity returns, it is understandable to approach 2025 with degree

of trepidation.

As the curtain draws on 2024, we are heading into 2025 with the same concerns we had at the start of 2024,
namely high interest rates, inflation and uncertainty/ geopolitical risks.

  • All eyes are on the sluggish Chinese economy and consumer sentiment, more importantly how the government stimulus measures will play out to revitalise the real estate sector, boost liquidity and increase demand to cater for overproduction. The potential of increased tariffs under the Trump administration will further exacerbate these challenges.
  •  2024 was the year of elections, more than 60 countries went to the polls, ( 50% of the world’s population ), this in turn created opportunity for the ‘improbable becoming possible’.
  •  Equity markets have largely navigated through the volatility of the bond market, however it is likely that the significant spike in yields going forward will weigh on equity valuations.
  • An optimistic outlook for the US – the base case is that the US ( as the main driver of financial markets ) is expected to progress to a ‘soft landing’ which is supported by further easing of interest rates, increased corporate earnings due to lower corporate tax, further de regulation of the financial sector and an increased investment in technologies leading to improved productivity.
  •  The Australian Economy faces many challenges in 2025. The economic risks in China, being our key trading partner, will impact adversely and become more evident as we progress into 2025. These challenges will be further compounded by high inflation from the geopolitical environment, higher government spending / deficits, inequality and no productivity for almost a decade will weigh on the RBA in keeping interest rates higher for longer.
  • A recent Mckinsey report on the Australian economy notes that our business investment is now at recession level, our productivity growth is at 30th place out of 35 developed countries, living standards are declining and are at a national emergency level. Our GDP growth now is the weakest since the 1990’s recession ( excluding Covid-19 ).

Federal Government spending hit 12.3% of Nominal GDP in September 2024.

The ‘Golden goose’ that produced our fair and prosperous society is gasping for air – (Mckinsey)

On balance, it appears there will be significant headwinds for the Australian households and the economy in
general as we enter 2025.

 

Accordingly, the festive season is a great time to enjoy a break but also make time to reflect on the past, take control of the present and ‘sow the seeds’ of success for tomorrow.

Some practical steps to align your long term strategy may include :-

  • Review Superannuation – Multiple funds or funds with high costs and low performance compromise your long term / retirement plans.
  • Review Non Super Investments – Re-evaluate performance and tax effectiveness, also rebalance / diversify.
  • Review cashflows and eliminate unnecessary lifestyle costs in light of the prevailing environment.
  • Let’s not forget managing your tax position, this is always relevant be it during your working life, in retirement (with respect to investments) or as part of your estate plan.
  • Make incremental savings ‘dollar cost average’ as opposed to taking a significant position when
    investing.
  • Diversification and history are our best friends, reflect and actively rebalance asset allocations.
  • Consider Dividend Reinvestment Plan (DRP) given the attractive investment returns.
  • Confirm borrowing / refinancing options well before due dates and explore potential savings across
    relevant lenders – competition appears to be intensifying across the major lenders.
  • Insurance is always important, potentially critical during extreme business cycles as are likely to
    unfold in 2025. It is not desirable to execute forced sales at depressed values.
  • Those running a business – Document a business plan, complete a business valuation and be aware
    of the Small Business Capital Gains Tax concessions (SBCGT ).
  • Explore and utilise First Home Incentives – Including The First Home Super Saver Scheme ( FHSS ).
  • With the festive season upon us, I would like to take a moment to express my sincere gratitude to all our
    clients and associates, thank you for placing trust in AMCO.

In January 2025 AMCO celebrates 28 years since inception. The practice was founded on the vision of creating a long-term wealth management firm that enlarges and enriches the lives of those with whom we interact.

We are aware of the challenges you are facing during these uncertain times and are there to advise and navigate the environment with professional care.

From the team at AMCO, we wish you and your family good health, peace of mind and prosperity in the year ahead.

 

Merry Christmas.

Danny D. Mazevski
Chartered Tax & Financial Adviser
FIPA CTA FTMA MBA (Un.NSW/SYD) Dip.FS JP

 

Any advice in this document is of a general nature only and has not been tailored to your personal circumstances.
Please seek personal financial and or tax advice prior to acting on this information

Financial Planning Message – December 20242025-01-07T16:20:03+11:00

RBA asks treasurer for dividend freeze as its losses soar to $51b

The Reserve Bank of Australia is $20 billion in the red after posting its fourth consecutive yearly loss, and asked Treasurer Jim Chalmers not to pull any money out of the central bank for at least a decade to help repair its tattered balance sheet.

A $4.2-billion shortfall revealed in the RBA’s 2023-24 annual report on Friday takes the central bank’s cumulative losses stemming from extraordinary stimulus measures handed out during the pandemic to $51.2 billion.

“The loss reflects the fact that returns on most of our assets were fixed at the low rates prevailing in 2020 and 2021, but the cost of our liabilities rose with the cash rate target,” governor Michele Bullock said in the report.

It showed Ms Bullock received $1.26 million in remuneration last financial year, which included 2½ months when she was deputy governor to Philip Lowe.

The RBA lent out $188 billion to the banks during the pandemic at rates as low as 0.1 per cent as part of the three-year term funding facility. But the RBA now pays those same commercial banks a much higher floating rate of 4.25 per cent on $232 billion of deposits, meaning the central bank is losing the difference between the lending rate and deposit rate.

RBA asks treasurer for dividend freeze as its losses soar to $51b2024-10-28T16:52:07+11:00

RBA won’t cut interest rates until 2025

Australia is expected to be almost the last major advanced economy to deliver an interest rate cut, after hot US inflation caused professional investors to push out bets for a local monetary easing until early next year.

The deferral of an expected rate reduction until February is later than the Albanese government had hoped as a federal election approaches.

It raises the possibility of the Reserve Bank of Australia’s interest rate policies and inflation becoming central issues at the federal election due by May next year.

Money market traders this week pushed back their expectations for the RBA’s first rate cut from November after stronger-than-expected US inflation figures raised fears that local prices could continue to rise rapidly.

It means the RBA’s first rate cut could come months after other central banks cut rates, according to market pricing from ANZ.

Former RBA official Jonathan Kearns said it would cut rates later than other central banks because it didn’t raise them as much.

‘‘Monetary policy was less tight in Australia than it was in other countries, and so therefore the disinflationary impetus coming from monetary policy has been less,’’ the Challenger chief economist said.

‘‘Inflation is largely services-driven now.

‘‘If you think about what wage growth is in Australia [4.2 per cent], and what productivity growth is, based off that inflation is not coming back down to 2.5 per cent unless we get a fairly significant slowing in wages growth or increasing productivity growth.’’

The European Central Bank and the Bank of Canada are tipped to move first, with markets fully priced for them to start easing cycles in July.

They are expected to be followed by the US Federal Reserve and the Bank of England in September, and by the Reserve Bank of New Zealand in October.

A delay in rate cuts would make an early election unlikely – as the Albanese government hopes for multiple reductions before going to the polls.

But rate cuts by May next year are not a guarantee, with a handful of economists tipping a prolonged period of rates on hold, as well as the possibility of further increases.

AMP chief economist Shane Oliver said rate cut forecasts were more distant in Australia because inflation took off later than in other advanced economies.

Markets pushed back expectations for rate cuts in Australia and America this past week after US inflation accelerated to an annual rate of 3.5 per cent in March and core US inflation – which excludes the volatile food and energy categories – was a higher-than-expected 3.8 per cent.

But Dr Oliver said local markets had over-reacted to US economic news, predicting a rate cut in August or September, despite fears high inflation could prove sticky.

‘‘I think investors appear to be assuming Australian inflation will go the same way as in the US,’’ Dr Oliver said.

‘‘A big factor behind the upside surprise and US inflation in January and February . . . was owner-occupier rents. In the US, rents have something close to a weight of 35 per cent in the CPI [consumer price index], whereas in Australia it’s about 6 per cent.

‘‘Even though rents are rapidly rising here, they’re not going to have anywhere near the same effect they have in the US.’’

Dr Oliver also said households in Australia were feeling the pain of high interest rates due to the dominance of variable-rate loans, whereas consumers in the US were still ‘‘alive and well’’.

While Australian households had cut back on spending, Westpac chief economist Luci Ellis said per capita consumption in the US was increasing. This, she said, was in large part because of the Biden administration’s loose spending.

‘‘In the United States, the federal government is running a budget deficit of around 6 per cent of GDP, with no consolidation in sight or even being seriously discussed,’’ Dr Ellis said.

‘‘Income tax brackets are indexed to the CPI, so American households are not seeing that drag from higher tax payments.

‘‘Together with the fact that average mortgage rates paid have risen far less in the United States, macro policy is barely touching the sides for the US consumer.’’

Dr Ellis said the Albanese government’s more prudent budget policy was helping the RBA to take some heat out of the economy and negated the need for further monetary tightening.

RBA won’t cut interest rates until 20252024-04-16T16:48:28+10:00

Avenue prevails after APRA raised banking bar

Avenue Bank has been awarded an unrestricted banking licence by the Australian Prudential Regulation Authority and will become the country’s first niche bank focused on providing bank guarantees to small businesses and landlords.

‘‘We are the first and only bank to specialise in bank guarantees, and we are hopeful there will be strong take-up of the product this year,’’ said Avenue Bank CEO Peita Piper.

APRA gave it the green light yesterday.

Avenue will target the $9 billion of deposits held under bank guarantees provided by tenants renting from commercial landlords. The average bank guarantee is $125,000. By winning just 2 per cent of the $9 billion market, Avenue says it can break even.

Avenue will look to attract business off the major banks from big leasing agents including Colliers, CBRE, Knight Frank and Ray White; large commercial landlords like Dexus, Mirvac, GPT and Scentre Group; and tenant advisers such as Franklin Shanks and Kernel.

‘‘The current bank guarantee procedures are onerous, paper centric, and cause issues for small businesses and landlords, as they can take four to six weeks,’’ Ms Piper said.

‘‘We have digitised the process and can do them in 24 hours, with a five-minute application. And this is just the start of what we are doing.’’

Avenue also has plans to launch, within a year, a drawdown facility on its deposits, to allow tenants to free up working capital.

Avenue is the second new bank to be fully licensed by APRA after the high-profile failures of two neobanks, Volt and Xinja, both of which had targeted retail deposits and lending.

Alex Bank, a personal lender, won an unrestricted licence in December 2022. Avenue has been operating under a restricted authorised deposit-taking licence granted in September 2021.

Ms Piper said the collapse of Volt and Xinja, and the failure of several US lenders last year including Silicon Valley Bank, had raised APRA’s bar for new entrants.

‘‘It’s been a very thorough and rigorous process,’’ she said. ‘‘The bar kept getting higher and higher. The fact we have got through COVID, and the collapse of neos and some American banks, in a dire equity [raising] market is testament to our strength.’’

The market opportunity for Avenue has been created because commercial landlords force tenants to put up between nine and 12 months of rent to provide the landlord with funds should a tenant’s business fail, or if it breaches a rental agreement.

Avenue will write term deposits, paying 3.5 per cent to the tenant, and issue the guarantee digitally to the landlord or property owner. Under its restricted licence, it has been able to take on 14 customers, including Tank Stream Labs, which provides working space for start-ups, to test its systems and procedures.

Initially, Avenue will take no credit risk. It will make money by investing the deposits, returning more than what it pays out in interest. The spread will be around 1 per cent.

When interest rates fall, the margin is managed by reducing term deposit rates in lockstep with bond yields. It will also earn a fee of 3 per cent of each guarantee written.

Ms Piper said major banks, which also issue the products, were not likely to respond with better processes ‘‘because bank guarantees are not a priority for them’’.

The plan is to then add features, including allowing tenants to withdraw 90 per cent of their deposits to free up cash flow. This will involve Avenue taking credit risk on the tenant’s ability to meet the conditions in the lease. It will also offer other tools for landlords to manage claims on guarantees.

Non-bank mortgage lender Liberty Financial Group is a major shareholder of Avenue, which has just completed a series D capital raising for $17.7 million. This brings total equity raised since 2021 to about $70 million; it plans to raise more to fund its expansion.

Xinja failed in late 2020 because it started paying interest to savers before making loans on which it would earn returns, evaporating funding. Volt Bank was forced to close and return its deposits in mid-2022 after it failed to get enough funding.

APRA slowed down the timetable for Avenue’s licence, to get satisfied it had sufficient resolution plans setting out how it would exit the industry were it to fail, a requirement for all banks.

Avenue’s co-founders were Colin Porter and Dale Hurley, who set up CreditorWatch in 2011 and cracked the credit reporting agency duopoly before that business was sold in 2017.

On the 2 1/2 years it took Avenue to get its full licence from launch, Mr Porter said: ‘‘APRA don’t like seeing a bank application from a bunch of disruptive entrepreneurs with an innovative product. That has been the challenge, and that is something they will need to get their head around if more banks will be starting.’’

Avenue prevails after APRA raised banking bar2024-03-08T16:18:22+11:00

Investors warn on ‘unmoored’ global debt load

London | Investors are warning governments around the world over ‘‘unmoored’’ levels of public debt, saying excessive pre-election borrowing promises risk sparking a bond market backlash.

Government debt issuance in the US and the UK is expected to soar to the highest level on record this year, with the exception of the early stages of the COVID-19 pandemic.

Emerging markets are set to add to the deluge of bond sales, after government debt climbed to a high of 68.2 per cent of GDP last year, according to the Institute of International Finance.

Deficits are ‘‘out of control and the real story is that there’s no mechanism for bringing them under control’’, said Jim Cielinski, global head of fixed income at Janus Henderson.

He added that the issue would become a serious concern to markets ‘‘in the next six to 12 months as something that matter[s] a lot’’.

The US Treasury will issue around $US4 trillion ($5.9 trillion) of bonds this year with a maturity of between two and 30 years, according to estimates from Apollo Global Management, up from $US3 trillion last year and $US2.3 trillion in 2018.

Net issuance, which is adjusted for Federal Reserve purchases and debt falling due, will be $US1.6 trillion over 12 months to the end of September, according to calculations by RBC Capital Markets, the second-highest year on record. The Canadian bank estimates that net issuance in 2024-25 will surpass pandemic-era levels.

The scale of borrowing is likely to distract markets from their more typical focus on the future path of interest rates, fund managers say.

‘‘We are truly in an unmoored environment for government debt compared with previous centuries,’’ said Robert Tipp, head of global bonds at PGIM Fixed Income.

‘‘Everyone is getting a pass right now, whether you are in the US or Italy, but there have been some signs recently that investors and rating agencies are starting to think about this again.’’

The UK, where an election is expected this year, is also on course for its second-highest year of debt sales, behind only 2020 when the Bank of England stepped in to hoover up supply during the early stages of the coronavirus pandemic. Issuance net of BoE purchases and including its gilt sales is expected to be about three times more than the average over the past decade.

Sir Keir Starmer, whose Labour Party enjoys a substantial lead in the polls, has scaled back a promise to borrow £28 billion ($53.1 billion) a year for its ‘‘green prosperity plan’’ amid concerns about the level of public debt.

Sir Robert Stheeman, head of the UK’s debt management office, warned in an interview with the Financial Times that ‘‘in a world where we have debt to sell, policymaking cannot be divorced from the reality of the market’’.

In Europe, 10 of the eurozone’s largest countries will issue about €1.2 trillion ($2 trillion) of debt this year, around the same as last year, according to estimates from NatWest. But the bank expects net issuance – which includes the impact of quantitative tightening and excludes refinancing existing bonds – to rise by about 18 per cent this year to €640 billion.

Scrutiny of debt levels comes in a historically busy year for elections that boosts the incentives for political leaders to raise spending. As the US gears up for its presidential election on November 5, there is little sign of appetite for fiscal restraint from the main contenders, say investors.

‘‘Given the two apparent frontrunners . . . it doesn’t seem like much will change even when the election is over, and they will continue to spend at a high level,’’ said David Zahn, head of European fixed income at Franklin Templeton, referring to US President Joe Biden and his likely opponent, former president Donald Trump.

‘‘Eventually that could create a problem for the US.’’

The US budget deficit as a proportion of gross domestic product is set to hover between 6.5 per cent and 8 per cent over the next four years, according to forecasts from the IMF, a sharp increase from less than 4 per cent in 2022. Interest payments are forecast to rise from less than 3 per cent of GDP in 2022 to 4.5 per cent by 2028.

The IIF, which acts as a global trade group for the finance industry, warned that a swath of elections and ongoing geopolitical frictions in the emerging world ‘‘raise concerns about increased government borrowing and fiscal discipline, including India, South Africa, Pakistan and the US.

‘‘If upcoming elections lead to populist policies aimed at controlling social tensions, the result could be still more government borrowing and still less fiscal restraint,’’ the IIF said, adding a surge in government expenditures during this global election cycle ‘‘could further increase the interest burden for many sovereign debtors’’.

Investors warn on ‘unmoored’ global debt load2024-01-11T14:56:12+11:00

The myth of the mortgage ‘cliff’

Monetary policy Much-hyped concerns that people rolling off cheap fixed-rate home loans could be caught up in a wave of defaults and mortgage arrears have so far proved overblown.

Households and the domestic financial system look well braced to withstand the 4 percentage points of interest rate increases so far, amid the possibility of more monetary policy tightening by the Reserve Bank of Australia.

The exaggerated fixed-rate mortgage ‘‘cliff’’ has turned out to be a manageable staircase for borrowers graduating from super-cheap fixed loan rates of about 2 per cent to variable mortgage rates of 6 per cent or so. While there is a painful financial squeeze on a subset of borrowers, there is little evidence to suggest monetary policy is biting households in aggregate too hard.

If anything, the RBA’s Financial Stability Review published last Friday should give the central bank confidence that it can lift interest rates further if underlying inflation proves more persistent than hoped when the September-quarter consumer price index is published on October 25.

Much-hyped concerns that people rolling off cheap fixed-rate home loans could be caught up in a wave of defaults and mortgage arrears have so far proved overblown.

Banks issued about $400 billion of fixed-rate mortgages in 2020 and 2021. Ultra-cheap fixed-rate loans were turbocharged by the RBA’s $188 billion term funding facility (TFF) offering loans to commercial banks for three years at rates of 0.1 per cent to 0.25 per cent.

The stock of housing credit outstanding with fixed-rate loans doubled to almost 40 per cent and the flow of fixed-rate home loans was even higher.

Now, about half of the loans by value have rolled off onto higher interest rates, with the vast majority of borrowers opting for variable-rate loans. The peak of the roll-off passed in the June and September quarters. Most of the remaining cheap fixed-rate loans will expire over the next 12 months.

‘‘The majority of current fixed-rate borrowers are estimated to have sufficient income to continue meeting their obligations after moving onto higher mortgage payments,’’ the RBA notes.

‘‘The majority also have large savings buffers,’’ the review says. ‘‘Fixed-rate loans yet to roll off do not appear materially riskier than those that have already rolled off.’’

The RBA won’t be surprised the apocalyptic mortgage cliff has failed to materialise.

Historically, fixed-rate borrowers were a bit riskier than variable-rate borrowers. But during the pandemic, a large new cohort of fixed-rate borrowers emerged to take advantage of the very low rates.

Hence, fixed-rate borrowers closely resembled typical variable borrowers. The performance of fixed and variable rate borrowers converged.

Many borrowers used the low rate era to build up extra savings and get ahead on their mortgage. Of the remaining fixed rate owner-occupier borrowers, about two-thirds have liquid savings equivalent to at least 12 months of scheduled mortgage payments – similar to variable-rate owner-occupier borrowers.

Fewer than 20 per cent of fixed-rate borrowers who will roll off onto higher interest rates have much lower savings buffers, equivalent to less than three months of scheduled mortgage payments. This is the tail the RBA will be keeping a close eye on.

Unsurprisingly, arrears rates for all loans were higher for borrowers with high ratios of loan to value (LVR) or loan-to-income (LTI), and moderately higher for first home buyers.

As long as unemployment stays relatively low, most borrowers will navigate the squeeze. The August jobless rate was unchanged from July at 3.7 per cent.

To be sure, the impact of interest rates on households is very uneven. For low-income households that have a mortgage (many rent), the lowest income quartile are devoting an average of 43 per cent of their income to mortgage payments, compared to just 8 per cent for the top income quartile.

It won’t surprise the RBA that the unfortunate side effect of monetary policy is distributional consequences. Monetary policy is a blunt tool that operates at the margin to squeeze household cash flow.

Paradoxically, low-income households (with and without a mortgage) have recorded a big increase in real employment income of between 5 and 10 per cent over the year to June 30, even discounting for inflation. Higher-income households have recorded a bigger squeeze.

The surprising dichotomy is because the employment earnings of low-income people are more cyclical and tied to the performance of the labour market.

In the hot labour market of the past couple of years, low-income earners have been able to secure more jobs and hours. But as the economy slows and unemployment edges higher, these marginal workers are most likely to be the casualties.

Hence, the RBA is trying to navigate a soft landing to retain employment gains since the pandemic, while trying to gradually reduce inflation.

Financial stress is creeping in for a small minority of borrowers. Since May, required household mortgage payments – interest plus scheduled principal repayments – have risen from about 7 per cent of household disposable income to almost 10 per cent.

About 5 per cent of variable-rate owners-occupiers are earning income that is less than their combined mortgage payments and essential living expenses, up from 1 per cent in April 2020.

Including broader ‘‘essential’’ items such as private health insurance and school fees, 13 per cent are in negative cash flow.

Households in Melbourne and Sydney, where borrowers take on more debt because of high house prices, are being stretched a bit more.

Nevertheless, the negative cash flow does not necessarily indicate acute mortgage stress because some of these borrowers have savings or are ahead on their mortgage.

Slightly more borrowers are dipping into their household savings in offset and redraw accounts – but only about 15 per cent, compared to about 11 per cent six months ago. In aggregate, households are still adding to savings, albeit at a slower pace.

The question on the minds of commercial bankers is what happens if the RBA increases the cash rate beyond 4.1 per cent. Households have already tightened their belts and some have very limited capacity for a further round of spending cuts.

Besides tackling the primary goal of underlying inflation, another related factor the RBA will need to consider is the surprise continued growth in house prices. The ‘‘wealth effect’’ could cushion weak consumer spending and challenge its plan to reduce the 5.2 per cent inflation rate to the 2 per cent to 3 per cent target by 2025.

Hence, the last mile of the inflation fight will be the most challenging for the RBA and households.

John Kehoe is The Australian Financial Review’s economics editor.

The myth of the mortgage ‘cliff’2023-10-17T10:50:30+11:00

Mortgage pain set to get worse: RBA

The already-record share of income households spend on mortgage repayments will increase even further, the Reserve Bank has warned, causing borrowers to dip into savings to meet the rising cost of living.

Surging home loan repayments were successfully reducing household spending and helping the central bank get inflation back to target, Chris Kent, the RBA’s assistant governor for financial markets, said in a speech yesterday.

But Dr Kent said the RBA would likely respond to any evidence that inflation was not on track to return to the central bank’s 2 per cent to 3 per cent target by December 2025 with another interest rate rise.

‘‘We’ve made it pretty clear we would be not wanting inflation to take much longer,’’ Dr Kent said, pointing to a significant upward price shock as a potential trigger for a 13th cash rate increase.

The RBA has cited the strength in interest rate pass-through as a reason for leaving the cash rate on hold at 4.1 per cent since June, as the central bank assesses the cumulative effect of its 12 cash rate rises since May 2022.

On Tuesday, International Monetary Fund analysis showed households in Australia devoted a greater share of their income to mortgage repayments than in any other advanced economy.

Dr Kent said scheduled mortgage repayments had risen to almost 10 per cent of disposable income from 7 per cent since the RBA began lifting rates from a record low 0.1 per cent 17 months ago. These figures include households without a home loan.

‘‘This is above estimates of the peak reached in 2008 when the cash rate was 7.25 per cent,’’ he said.

‘‘And for those households with a large mortgage, required payments are a much higher share of their income.’’

The share of household income spent on mortgage repayments will increase further as borrowers on pandemic-era fixed rate mortgages roll off onto variable rates, which are 3 to 4 percentage points higher. The share of fixed rate credit has already fallen substantially to 20 per cent of all home loans from 40 per cent in early 2022, Dr Kent said.

While high interest rates cool the economy, Dr Kent said the main way they slowed demand was by making mortgages more expensive, known as the ‘‘cash-flow channel’’ of monetary policy.

‘‘Many borrowers have had to cut back on spending to meet higher mortgage payments, while also feeling the pain of rapidly rising living costs. This has led to slower growth in demand for goods and services,’’ he said. Retail sales are in their most prolonged contraction since the global financial crisis, as consumers cut back on purchases of discretionary goods such as furniture and appliances.

The RBA estimates the 4 percentage point increase in the cash rate since May 2022 had reduced overall household spending by about 0.4 per cent to 0.8 per cent per year through the cash-flow channel.

Households accumulated about $300 billion in additional savings during the pandemic, which has provided a cushion to borrowers dealing with rapidly rising interest rates.

However, households had started drawing down on these savings since the start of 2023, RBA analysis shows.

While banks have been under fire for not increasing the deposit rates paid to savers in line with the cash rate, Dr Kent said they had been more generous than their international peers.

Australian banks have passed on about 75 per cent of the 4 percentage point increase in the cash rate since May 2022.

‘‘In New Zealand, for example, the equivalent figure is about 50 per cent, while in the United States it is about 35 per cent.

‘‘Among other things, this difference may reflect Australian banks’ focus on variable-rate borrowing and lending,’’ Dr Kent said.

Dr Kent pointed to the 30 per cent decline in household borrowing capacity since last year and the support provided to the exchange rate from high interest rates as evidence of the contractionary effects of the most rapid tightening cycle in decades.

Mortgage pain set to get worse: RBA2023-10-17T10:47:57+11:00

Rate pain won’t hit households until 2024

Australian households are yet to feel the full impact from the Reserve Bank’s tightening cycle on mortgage repayments, with economists tipping the first half of 2024 to be the most challenging for consumers.

Several economists in TheAustralian Financial Review’s quarterly survey said the September quarter was too early to assess the full impact of a cash rate at 4.1 per cent and the rollover of mortgages from fixed rate to variable rates.

Commonwealth Bank chief economist Stephen Halmarick said the final three months of 2023 and the first quarter of 2024 would be when households on variable rates would be likely to feel the maximum impact from the fastest monetary tightening in a generation.

The central bank this week kept the cash rate on hold at 4.1 per cent for July but flagged that further increases would be needed in the coming months to get inflation back to the RBA’s 2 per cent to 3 per cent target. It has added four percentage points of rate increases since May 2022. ‘‘There is a large volume of fixed rate mortgages expiring in the second half of 2023 and there is a similar three-month lag between when a fixed rate mortgage expires and the new variable rate mortgage interest rate is paid,’’ Mr Halmarick said.

Despite CBA’s forecasts showing the cash rate to peak at 4.35 per cent in August, he expects tighter financial conditions for households in the December and March quarters.

KPMG chief economist Brendan Rynne agrees, saying. ‘‘A greater proportion of households who have been relatively shielded from cash rate increases to date will have rolled off their fixed rate contracts by the end of the first quarter of 2024 . The September quarter is when this starts to gather pace, but it peaks during the first half of 2024.’’

Barrenjoey economist Jo Masters said households were already in the toughest period, citing the second and the fourth quarter of 2023. Inflation remains high and there are expectations that mortgage repayments are set to increase.

For December 2023, she expects trimmed inflation to slow to 4.3 per cent, the same as the survey’s median forecaster.

Ms Masters said there was ‘‘no doubt’’ that the household sector was being squeezed, but she said that ‘‘the pain is not evenly spread across the sector’’.

‘‘Highly leveraged households are being confronted by high interest costs, while those with no debt and high savings – typically older Australians – are benefiting from higher interest income and rental income,’’ she said.

Judo Bank economic adviser Warren Hogan said for those looking to the labour market to measure the health of the economy, the ‘‘real fright’’ would be when job losses started in the fourth quarter of 2024.

He predicted Australia’s unemployment to rise to 3.9 per cent in the December quarter, before going to 4.5 per cent in the June quarter of 2024.

‘‘The extent of the job losses will determine how much of a fright the broader household sector gets,’’ Mr Hogan said. ‘‘If people are worried enough by the extent of the slowdown in economic activity and the loss of jobs that comes with it, then we should expect to see a risk in precautionary saving.’’

MLC Asset Management senior economist Bob Cunneen said households would feel the pain over at least three quarters into halfway through 2024 amid ‘‘the crushing impact of high interest rates and surging rents and electricity prices’’.

‘‘Households face little choice but to cut spending given these cost pressures while the weaker labour market and renewed weakness in housing prices will caution even those who have some savings buffers,’’ he said.

QIC chief economist Matthew Peter said the worst phase for households was already behind them. He acknowledged that many households would convert to variable rates in the September quarter but he said ‘‘real disposable incomes will be supported by increasing wages, a slowing in the rate of inflation and support from government subsidies’’.

He expects trimmed inflation to slow to 4.4 per cent in the December quarter before further dropping to 3.3 per cent in June 2024.

Rate pain won’t hit households until 20242023-07-10T16:17:24+10:00

Katoomba leads worst suburbs for arrears

Mortgage arrears are climbing as borrowers run down their savings and collide with a tighter refinancing market that has escalated financial stress, S&P Global says.

The credit ratings agency observed arrears in residential mortgage backed securities rose notably for prime and less stable non-conforming securities, which it attributed to ‘‘rising interest rates and cost-of-living pressures’ weight on debt serviceability’’.

‘‘The cumulative effect of multiple interest rate rises is taking effect and borrowers’ savings buffers are eroding as the cost of living rises,’’ S&P said.

While refinancing had so far ‘‘tempered arrears’’, this market has tightened as the Reserve Bank lifts interest rates and banks put an end to aggressive cashback incentives, moderating competition. This, according to S&P, will mean ‘‘tougher’’ conditions and lead to more arrears later this year.

‘‘As interest rates continue to rise, refinancing conditions are becoming tougher for many borrowers, particularly those who are more highly leveraged. This is likely to add to arrears pressure because refinancing is a common way for borrowers to self-manage their way out of financial stress.’’

The worst hot spots for arrears in NSW are the Blue Mountains suburb Katoomba (5.6 per cent of loans in arrears), Sydney suburbs Bonnyrigg (4.9 per cent), Dolls Point (4.9 per cent) and Allawah (4 per cent), and the Southern Highlands suburb of Alpine (4.5 per cent).

Forrestfield in Western Australia (4.9 per cent), Avoca Dell in South Australia (4.1 per cent) and Barkly in Queensland (4 per cent) underperformed. In Victoria, Broadmeadows (4.1 per cent) and West Melbourne (4.2 per cent) stood out for arrears.

Prime RMBS arrears rose from 0.76 per cent in December to 0.95 per cent in March to ‘‘nudge up against long-term averages’’. Non-conforming arrears lifted from 3.2 per cent to 3.7 per cent, but were ‘‘unlikely to reach financial crisis peaks’’, the ratings agency said.

Lead analyst Erin Kitson told The Australian Financial Review the uptick was ‘‘reasonable’’, but said predicting how much further bad loans would rise was impossible given the dispute around the RBA’s intentions.

The RBA has lifted the cash rate in 11 of the past 12 meetings to 3.85 per cent, tightening monetary policy to fight runaway inflation which raced to 7 per cent in the March quarter.

Ms Kitson said the severity of arrears would ‘‘depend on the duration of the interest rate rises’’. ‘‘As long as interest rates go up, arrears will go up as well because people have to find more money to pay their mortgage,’’ she said.

Historically low unemployment of 3.7 per cent had put a floor under arrears, she said.

Despite this, S&P declared the overall economic and industry risks to the banking sector to be relatively low, in a separate report released on Monday. ‘‘The risk of a sharp price fall in property prices has eased,’’ S&P said.

‘‘Credit losses over the next two years should remain low, and close to pre-pandemic levels even as rate hikes erode debt serviceability for highly leveraged borrowers,’’ it said.

‘‘Nevertheless, banks in Australia remain exposed to elevated risk of a jump in credit losses due to high household debt, rising interest rates and uncertain economic conditions.’’

Katoomba leads worst suburbs for arrears2023-06-07T16:14:42+10:00

RBA change is coming, like it or not

More people, more input, more cooks in the kitchen. That’s ultimately the price the Reserve Bank of Australia will pay for a couple of years of bad or miscalculated calls, made in response to the pandemic.

Ironically, the review was conceived in the pre-COVID days when the RBA was criticised because inflation was running below its 2 to 3 per cent target range. All the attention is on what has happened since.

When money was flooding into the financial system and the economy, it is now clear the RBA board was too slow to apply the handbrake. The result is the highest level of inflation since the 1990s and an unprecedented 10 straight rate rises that were never going to be popular with ordinary Australians or politicians. No one seems to care that the unemployment rate is around its lowest level in nearly 50 years.

Right or wrong RBA governor Philip Lowe wears the blame. He will be all over the newspapers and nightly television news bulletins, even though markets (equities, bonds, currency) barely blinked. Mr Market saw the review coming, and now says the changes are some way off.

From the market’s perspective, next month’s budget is more material. Treasurer Jim Chalmers needs to set up the books for the next few years, which means finding more money. The economy is finely poised: it would be tempting to throw money around to ease cost of living pressures, although money’s tight and the inflation doesn’t need stoking.

In the meantime, old-head RBA watchers said it was a significant day. The fact that the central bank, which has such a great impact on Australians’ daily life, was subject to such scrutiny made it a historic day.

Lowe and the RBA will be hauled over the coals for what happened a few years ago, even though it was just as much the government stoking the fire that continues to burn today. The critics argue he should be accountable for the combination of low rates, forward guidance, yield curve control, quantitative easing and the term funding facility, which combined to whipsaw the economy and may yet cause a recession.

Of course, Lowe’s monetary policy is just one tool.

Once the commotion passes, we should all still be worried about the rising cost of rent and energy and how both can be addressed. The review doesn’t change that.

The review prompted plenty of thinking about the RBA, its corporate governance, board composition and decision-making. It recognised that in more normal times, the RBA had done well to keep inflation around the midpoint of its 2 to 3 per cent range for the past 30 years.

However, it is the past few years, a wartime for central bankers when no one escaped with a goldilocks path out the other side, that will now shape the direction of Australia’s monetary policy system.

What’s the answer to it all? Get more people involved in the decision-making. A specialist monetary policy board, fewer board meetings and more outsiders sitting around the table.

Reading between the lines, there seemed to be concern about how insular the RBA either is, or has become. Lowe is a perfect example; he’s got a great temperament for the governor’s job, is clearly smart and well regarded by colleagues and peers globally, but he is an RBA lifer and ingrained in current-day practice.

The creation of a new nine-person Monetary Policy Board, widely tipped by pundits, is about getting more rigorous thinking into rates decisions.

The nine people would include the RBA governor, deputy governor, Treasury secretary and six outsiders. The review recommends that ‘‘external members should be able to make a significant contribution to monetary policy setting through expertise in areas such as open economy macroeconomics, the financial system, labour markets, or the supply side of the economy, and in the context of decision-making under uncertainty’’.

So, this specific rate-setting board should mean more challenge and debate to the house view, which appears to have become more entrenched. At the same time the review calls for RBA’s operatives to spend more time with board members, making it a bit of an each-way bet but a good use of what is a big and expensive research team. (The need to spare a day a week or so in the RBA’s offices surely tilts the external board positions towards academics.)

The undertones were that the board wasn’t functioning properly, either because it didn’t have the right people or the right information. Lowe defended his board at a press conference yesterday, saying discussion around the boardroom table was robust and not dominated by himself.

It’s all well and good to have more people in the room on rates decision day, but it does not mean the board will function more efficiently or come to better decisions.

But big boards do not necessarily mean better outcomes. Corporate Australia is littered with poor boards and ‘‘jobs for the directors club’’ type attitudes that ruin what can be otherwise good businesses.

Often the bigger the board, the more constipated the decision-making process. The other scourge is chairmen roping in old mates and colleagues from other boards.

Ultimately, whether a separate and bigger Monetary Policy Board works will depend on who is on it. It was a logical and welcomed decision to create the separate board, and clear rate-setters of the governance-type matters that tend to dominate board meetings.

The review recommended a transparent appointment process, starting with advertised expressions of interest. External members would be appointed for five years, and up to another year depending on the circumstances.

There would also be fewer board meetings; eight not 11. And the governor would have to front the press following each meeting to explain the board’s decision, with more emphasis on the expected path of inflation and the labour market. That shouldn’t prove too onerous. External board members would also be required to make one public address each year.

The idea of more communication is conceptually good, although post-meeting press conferences can be a double-edged sword. We’ve seen Federal Reserve chairman Jay Powell mix his messages in a live setting, which can leave the market with more questions than answers.

Fewer meetings mean more time between rates decisions and arguably more punting and reading the crystal ball for fixed income investors. There could be more focus on monthly/quarterly economic data, to fill the information void between meetings.

Market economists liked that there could be more briefings, as it should (in theory) help them with their forecasts. They also probably like that there would be an unattributed published vote after each policy decision.

Other parts of the review said RBA should work more closely with the government/ Treasury, although it remains to be seen how. The review said fiscal and monetary policy should be set separately, however the RBA and Treasury needed to ‘‘have a good understanding of the intentions of the other and informs better policy choices’’. The two institutions are already close, but the review said their co-operation should include increased information sharing on risks, scenarios and policy constraints, and some joint scenario analysis.

Lowe was gracious at his press conference, although it was clear he did not love all the recommendations. For example, he bristled at any notion rates decisions were his alone and thinks it’s important to be careful with the number of public messages out of the RBA to ensure consistency and stability.

Lowe said he would leave his reappointment to the RBA top job in the Treasurer’s hands. He said he would be happy to go around for another term if asked. If not, he said he would find another way to contribute to society.

The fact that the RBA was subject to a 294-page review and there were 51 recommendations suggests change is on the cards.

Next week’s CPI reading could be material to the situation. Economists are tipping a number just shy of 7 per cent.

For all the focus on Lowe, in the near term the real attention should be on Chalmers and the budget. That’s the real showstopper for the economy.

a.macdonald@afr.com 

RBA change is coming, like it or not2023-04-24T16:53:10+10:00