This analysis is by Bloomberg Intelligence Industry Analyst Mohsen Crofts and Bloomberg Intelligence Associate Analyst Jack Baxter. It appeared first on the Bloomberg Terminal.
Australia’s A$302 billion in fixed home loans rolling to variable rates in 2023 could be a big negative for the borrowers involved, but probably not for the economy as a whole. The “fixed-rate cliff” could reduce retail sales growth by 2.2 percentage points, coming off a very strong 2022.
Loan repayments to rise over 80% for some households
We estimate that 15% of total home loans outstanding are due to expire in 2023. This could result in loan repayments increasing over 80% to an average of 6.5%. The total household cash flow impact will be almost A$9 billion, equivalent to 2.2% of calendar year 2022 retail sales. While this will be a drag on consumer spending, retail sales are currently running hot. Trailing 12-month sales rose 11.4% year-on-year in December to A$411.5 billion. The Reserve Bank of Australia will welcome this deceleration in its attempt to ease inflation.
Earnings for discretionary retailers like Wesfarmers, Endeavour and Qantas will be negatively impacted by the trend. Australia’s banks are well provisioned, and the slowdown will be more of a challenge for loan growth rather than balance sheets.
Low-cost fixed rates no longer available
Buyers rushed to take advantage of low interest rates in 2021, but these offers are no longer available with the expiry of the RBA’s term funding facility, and their rapid hiking of interest rates. Fixed-rate loans for under 3 year terms bottomed in May 2021 at 1.95%, increasing to 5.1% by November 2022. A$266 billion in fixed loans were taken out in calendar 2021 as a result. Many of these will expire over the course of 2023 and 2024.
The shift to variable from fixed loans will negatively impact household cash flows, but won’t have as direct an impact on house prices. New borrowers are assessed on their ability to borrow on the variable rather than fixed rate. We think Australian house prices will find a bottom by mid-2023 after the RBA cash rate peaks.
CBA, Westpac have most fixed expiries in 2H23
Commonwealth Bank and Westpac have the largest values of fixed loans expiring over the next two years, with A$128 billion and A$122 billion respectively rolling onto variable rates. Fixed-rate rolloffs are skewed toward 2H23, with 8.3% of Australia’s A$2 trillion of total home lending expiring vs. 6.7% for 1H23. This will be positive for margins, as it could more than double the interest rate received for those loans.
Arrears to peak with rates in 2H 2023
Total RMBS arrears rose 11 basis points to 1.03% in December, but on a like-for-like basis the result would have been 9 bps higher at 1.12%. November marked the turning point in mortgage arrears as repayments began to price in higher rates. Delinquency will rise further over 2023 for two core reasons. There is a delay of up to two months between an announced RBA rate hike and higher variable rates. Additionally, fixed-rate lending accounted for 35% of funded home loans over fiscal 2021-22 vs. just 19% in fiscal 2020. These fixed loan terms will conclude from early 2023, and will be exposed to higher rates thereafter.
RBA cash rate futures currently price in a 3.7% peak by August vs. 3.1% in January. Economic consensus predicts a 3.6% peak will be achieved by March.
Bloomberg
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