The fixed-rate mortgage tsunami hitting the Australian consumer in 2023

The ASX All Ordinaries Index is up 8.0% since the beginning of the year. And, in contrast to its performance over the past 12 months, the ASX Small Ordinaries Index is up further than that, jumping 8.2% already.

JB Hi-Fi (ASX: JBH) released a bumper Christmas trading update. Sales were up 9% in the six months to December 31 and profit increased 15%. Margins for this company are nearing all-time highs and its sales per store remain well above pre-pandemic levels. Demand for electronics seems insatiable, pandemic or not.

What was that you said about recession?

Well, other investors might be, but we wouldn’t suggest getting too comfortable. Rate hikes by the Reserve Bank of Australia (RBA) are not done yet. And their impact on the consumer has only just begun.

The coming fixed-rate mortgage tsunami

Australia has one of the lowest levels of long-term fixed-rate loans in the developed world.

Almost two-thirds of outstanding housing loans in Australia are on variable rates. These borrowers are the first to feel the pain and the first to be affected by the RBA’s rate hikes. Of the remaining 35% of outstanding housing credit on fixed-rate terms, two-thirds are due to expire by the end of 2023, with the brunt hitting during the June and September quarters. In contrast, 90% of mortgages in the United States have a fixed rate for an average of 30 years. So unlike in Australia, this shields consumers from short-term fluctuations in interest rates.

In October of 2022, Australia had approximately $2 trillion in outstanding housing liabilities.

With the RBA’s target interest rate rising from 0% to nearly 4% in a short period, this implies headwinds of around $80 billion for Australian consumers. For fixed-rate mortgages expiring in 2023, two-thirds of households will experience an increase in mortgage payments of 40% or more. For those on variable rates, a similar increase will occur but over an extended period of time.

Offsetting factors

Not all Australians are in trouble.

RBA statistics show that, of the total outstanding home loan portfolio, only 25% of borrowers have a debt-to-income ratio exceeding six times, and less than 10% have a loan-to-value ratio of over 90%. Further mitigating factors include savings built up during the pandemic, wage increases and the possibility that the RBA may slow the pace of rate increases or even reverse some tightening measures if conditions get too ugly.

While housing is a national pastime for many Australians, 35% of the population does not own a home and therefore does not have a mortgage. Many also own their home outright. These segments of the population have in fact benefited from strong labour market conditions and elevated salaries and higher interest rates on cash.

Worth worrying about

There are lots of moving parts to the economy and we are strong believers in the benefits of owning equities over the long term. Just a few weeks ago, we made the case for small caps in 2023. That doesn’t mean piling into discretionary retailers just because recent results have been good, though. Those offsetting factors won’t be enough to save the Australian consumer. While the tsunami hasn’t hit, it is still on the way.

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RBA The Australian Economy and Financial Markets Chart Pack January 2023

RBA Financial Stability Review October 2022 Report

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Steve Johnson
Founder & Chief Investment Officer

Steve began Forager Funds in 2009, and now manages approximately $350m across two funds. Offering a listed Australian Shares Fund (FOR) and an unlisted International Shares Fund, Steve focuses on long-term investing in undervalued companies.

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