Rates On Hold But Households Still Under The Pump?

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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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. It’s not good enough to be right on average when it comes to investing. The market is volatile and it only takes one bad day to ruin your portfolio. You don’t want to end up like the six foot man that drowned in the river that was five foot deep on average. It’s why Harje is constantly reminding investors of their downside risk here at Markets and Money. He does so by simply asking just two questions.  What is it worth? And how much does it cost? These two questions alone open up a world of investment opportunities which Harje shares with Markets and Money readers. Right now Harje is focused on managing research and investments over at the Legacy Portfolio. An investment publication designed to significantly grow investor’s wealth over time with deeply undervalued businesses. Harje also contributes his insights in Total Income, headed by income specialist Matt Hibbard. Harje loves cash-rich businesses, so he feels right at home amongst Matt’s high yielding income plays.


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