How much will households and businesses be impacted by a rate increase?
As the Reserve Bank of Australia (RBA) prepares for its upcoming decision on interest rates, Equifax’s executive general manager, Moses Samaha (pictured), has issued a warning about the escalating rate of mortgage arrears. Samaha predicted that this trend could worsen if the unemployment rate rises, especially affecting consumers with higher risk profiles.
Equifax’s latest data has revealed an increase in mortgage arrears among consumers deemed average in credit risk. Over the past four quarters, arrears for this group have surged by 32 basis points to 2.82% as of the second quarter of 2024, Equifax noted. This contrasts sharply with the 6 basis points increase seen among all consumers.
Samaha highlighted the potential impact of a possible interest rate hike by the RBA. He warned that such a move would intensify financial difficulties for these consumers. “This cohort will face even tougher household budget decisions should the RBA increase interest rates. Any interest rate increase will negate any household budget relief delivered by Stage 3 tax cuts to these consumers,” Samaha said.
Impact of another rate increase
In addition to concerns about rising arrears, Samaha noted that the job market appears fragile despite current low unemployment rates. The decline in open job positions could signal potential employment challenges in the near future. Equifax data also indicated a 2.87% drop in average household expenditure in 2024 compared to 2023, suggesting that consumers are prioritizing mortgage payments over other expenses.
Samaha warned that further interest rate increases could push household finances to a critical point. “Any rate rise would further push household finances to a knife’s edge, widening the impact across other cohorts that so far have been able to protect their mortgage payments,” he said.
In the commercial sector, Equifax’s report indicated a contraction in the credit market. There was an 8.1% decline in demand for asset finance compared to the same period in 2023. This drop is attributed to decreased business confidence and changes in tax write-off rules.
“End financial year asset finance applications fell to the lowest levels since the beginning of the COVID-19 pandemic due to a combination of lower confidence and rule changes to the instant asset tax write-off,” Samaha said.
Moreover, insolvency rates have risen, with notable increases in the hospitality and construction sectors. Insolvency rates in hospitality have surged by 45%, and in construction by 23%, while overall market insolvencies have increased by 34% compared to the previous year.
Samaha warned that further interest rate hikes could jeopardize many businesses. “A rise in interest rates may impact the survivability of many businesses with immediate consequences for business owners and employees—particularly those in construction and hospitality sectors,” he said.
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