Households Brace for Mortgage Rate Pain as ASB Economists Predict 90% Has Already Been Experienced
Households across the country are bracing themselves as mortgage interest rates continue to rise, with ASB economists revealing that they believe 90% of the pain is yet to come. Since the initial effects of the pandemic passed, interest rates have sharply increased, causing home loan rates to surge from less than 3% to between 6.5% and 8.7%.
According to ASB senior economist Mark Smith, the average increase in debt servicing per household between 2021 and 2024 is just over $100 per week. However, the impact is not evenly distributed. For individuals who purchased a house near the late-2021 housing market peak, the increase in debt servicing is approximately $300 per week.
In a surprising shift, ASB now predicts that the official cash rate (OCR) will be cut from the second half of next year, rather than early 2025 as previously expected. Smith cautioned that interest rates are likely to remain at restrictive levels for some time. While advertised interest rates may decrease throughout 2024, it will take time for these reductions to affect households. Smith forecasts that the average interest rate on mortgage borrowing will approach 6% by the end of this year and peak at around 6.2% mid next year.
We anticipate that the average debt servicing cost facing households will peak at around 6.2% in mid-2024, 340 basis points above 2021 lows, Smith stated.
This surge in mortgage rates would translate to approximately $12 billion per year in debt servicing costs. Smith believes that households have already experienced around 90% of this impact.
With households currently holding around $368 billion in debt, or about $185,000 per dwelling, it is worth noting that 95% of this debt is in the form of mortgages. Smith emphasized that higher borrowing costs and stretched affordability are acting as significant counterweights to prevent the housing market from going into an unchecked frenzy, regardless of record net immigration. These factors are expected to limit the projected increase in house prices for 2024.
Smith predicts that the OCR will return to 3% by the end of 2025. However, even at that point, the average borrowing cost would only be 90 basis points below the mid-2024 peak.
By late 2024, household debt servicing is expected to peak at just over 12% of disposable income and remain above historical averages until at least mid-2026.
While household debt to income is currently easing due to a decrease in annual borrowing growth compared to household income growth, debt servicing has continued to rise alongside increasing borrowing costs, explained Smith.
As the impact of rising mortgage rates continues to be felt, households face challenges in managing their debt and maintaining economic stability. It is essential for individuals to carefully consider their financial circumstances and plan ahead to ensure they are prepared for the potential future increases in borrowing costs.
In summary, while households have already experienced a significant portion of the mortgage rate pain, economists warn that there is still a long way to go before things stabilize. The gradual decrease in interest rates may provide some relief in the coming years, but the overall costs of servicing household debt are expected to remain high. It is crucial for individuals to stay informed and make informed decisions when it comes to managing their finances and planning for the future.
