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The Reserve Bank of Australia (RBA) left rates on hold yesterday.

Not long ago, the RBA’s rate decision used to be widely anticipated and reported. Now it barely gets any fanfare.

It’s probably to do with the fact that rates have been stuck at a low 1.50% since August 2016.

The RBA may be wanting to raise rates…but they can´t, because of high household debt levels.

Household debt is at a record high, due to high house prices.

Yet while the RBA may be keeping rates on hold, lenders may start increasing them. This is from The Australian Financial Review:

The big four banks, which account for more than eight in 10 of the nation’s mortgages, are expected to raise rates because of soaring funding costs, according to Citi.

Major lenders, and their smaller mortgage-centric competitors, can no longer afford to absorb the rising costs of their residential loan books, which account for more than 55 per cent of their total loan portfolios, its analysis warns.

The out-of-cycle rate hikes are expected to average around 8 basis points across their residential lending products with interest-only investor loans expected to rise more…

This will increase financial stress on many household budgets already struggling with record levels of debt as the average debt-to-income ratio tops 200 per cent…

Lenders are also increasing rates on lines of credit, which are popular features offered to property owners allowing them to use the equity in their properties as an ATM.

While unemployment has been decreasing, wages have barely increased.

With costs of living and mortgage rates rising, households with high debt levels may be having a hard time. Especially if property prices keep on decreasing.

Prices have been declining recently after banks tightened credit, especially for investors.

The RBA hasn’t made a big deal about housing price declines:

Nationwide measures of housing prices are little changed over the past six months. Conditions in the Sydney and Melbourne housing markets have eased, with prices declining in both markets.

Housing credit growth has declined, with investor demand having slowed noticeably. Lending standards are tighter than they were a few years ago, with APRA’s supervisory measures helping to contain the build-up of risk in household balance sheets.

Some further tightening of lending standards by banks is possible, although the average mortgage interest rate on outstanding loans has been declining for some time.

But they are worried about household consumption. As they said:

One continuing source of uncertainty is the outlook for household consumption. Household income has been growing slowly and debt levels are high.

As we told you yesterday, household consumption is a large contributor to Australian GDP growth. Yet consumption could go lower if housing prices keep on declining.

Melbourne and Sydney homeowners have seen eye watering increases in home prices in recent years. Large gains in prices make people feel like they are sitting on a lot of money…so they spend more.

Yet falling prices will have the opposite effect.

Property prices could keep on sliding down

Especially if there is panic and people flood the market.

As SQM recently reported, the number of listings is already increasing.

Figures released today by SQM Research reveal national residential listings rose 1.9% in June 2018 to 331,407 led by a jump in Brisbane properties hitting the market. Strong rises were also posted in Sydney and Melbourne, with greater stock in those cities pushing down asking house prices.

Property listings rose 3.8% in Brisbane in June, while in Sydney listing rose by 3.0% from May to be up 25.0% from a year earlier. In Melbourne, listing rose by 2.3% to be up 7.7% over the year to June 30. In Canberra, listing rose by 1.1%, 11.0% higher than a year ago.’

The Bank of International Settlements (BIS) recently released their 2018 annual report. If you are not familiar with BIS, it is the bank of central banks.

As BIS explained, using debt to drive up the economy will only create so much growth.

One noteworthy mechanism behind the interaction between the financial and business cycles operates through the accumulation of debt and the subsequent increase in debt service burdens. That is, in the upswing of the financial cycle, new borrowing and rising asset prices boost economic growth.

Over time, however, the accumulation of debt implies ever larger debt service commitments. These commitments have a strong and long-lasting negative impact on expenditures of indebted households and corporations.

Hence, once the financial cycle turns, the positive effects of new credit on spending fade while the negative ones of the debt service burdens grow.’

We could very well be entering the negative phase of the cycle now, where debt becomes a burden.


Selva Freigedo,
Editor, Markets & Money

PS: Australia could be headed for a recession in 2018. But there’s a few steps you can take now to protect your family’s wealth. Find out more here.

Selva Freigedo is an analyst with a background in financial economics. Born and raised in Argentina, she has also lived in Brazil, the US and Spain. She has seen economic troubles firsthand, from economic booms to collapses and the ravaging effects of hyperinflation, high unemployment, deposit freezes and debt default. Selva now writes from her vantage point here in Australia. She is lead Editor at the daily e-letter Markets & Money. And every week, she goes through each report and research note produced by our global network of trusted advisors to find the best investment opportunities for you in Australia and overseas. She packages these opportunities for you in Global Investor.

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