Rates On Hold But Households Still Under The Pump?

income vs debt

Today investors tuned in to the Reserve Bank of Australia (RBA) rate decision. Many expected rates to stay on hold. Others were checking to see if there was a surprise hike.

In its monetary policy statement, the RBA said:

‘…The broad-based pick-up in the global economy is continuing. Labour markets have tightened further in many countries and forecasts for global growth have been revised up since last year.

‘…Headline inflation rates, having moved higher over the past year, have declined recently in response to lower oil prices. Wage growth remains subdued in most countries, as does core inflation.

‘…As expected, GDP growth slowed in the March quarter, partly reflecting temporary factors. The Australian economy is expected to strengthen gradually, with the transition to lower levels of mining investment following the mining investment boom almost complete. 

‘…The outlook continues to be supported by the low level of interest rates.

Yet while rates are on hold, Aussie homeowners are still weathering hikes. Aussie banks are viewing rate rises in the US as a green light to charge borrowers more.

Aussie homeowners still under pressure

In Australia, household debt is high. Just take a look at the graph below. It shows the level of household debt per person.

Source: Australian Bureau of Statistics


Just last week, The Australian Financial Review stated:

High household debt levels amassed in the past decade have left Australian households among the most vulnerable to a sharp rise in global interest rates, the Bank for International Settlements warned on Sunday.

Australia’s household debt-to-income ratio is at an all-time high of 189 per cent, according to the Reserve Bank of Australia.

Take a look at the graph below. It shows the level of interest payments compared to household income.

Source: Australian Bureau of Statistics

As you’d expect with falling rates, interest payments have also been falling.

But if you wanted to blame someone for sky-high debt, you’d have to blame the homeowners themselves. Sure, interest rates are low. But no one is forcing you to take on debt.

And I doubt more lending rate hikes will significantly hurt homeowners in the immediate future…although some Aussie households are on thin ice.

However, it’s not a concern I believe you should worry about. Instead, just pay off your debt and save a small amount to invest.


Regards,

Härje Ronngard,

Junior Analyst, Markets & Money

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Härje Ronngard

Härje Ronngard

Harje Ronngard is a Junior Analyst at Markets and Money.

With an academic background in finance and investments, Harje knows how simple, yet difficult investing can be. He has worked with a range of assets classes, from futures to equities. But he’s found his niche in equity valuation.  

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