CoreLogic’s recent analysis sheds light on the anticipated ‘fixed-rate cliff’ scenario initially outlined in February 2023. This phenomenon refers to the impending shift of approximately 1.3 million home loans from low fixed rates to higher variable rates.
Fast forward six months to the present, August marks the peak of this transition period, spanning three months, where most of these loans are set to expire. This time frame provides insight into how the housing market is faring amidst this crucial phase, alongside fresh perspectives from the RBA and APRA on the mortgage market.
In light of the expiring fixed-term facilities triggered by COVID, there’s been a notable economic slowdown and a deceleration in housing market momentum due to elevated rates affecting all mortgage holders. Furthermore, CoreLogic has observed an unexpected surge in new listings in recent weeks. Despite these shifts, the risk of arrears and defaults remains manageable within Australia’s extensive mortgage market, with some resilience expected despite challenging labour market conditions.
Fixed-Rate Recap
The term ‘fixed-rate cliff’ denotes a situation where a higher-than-average number of fixed-term loan agreements, secured between mid-2020 and mid-2022, are reaching their expiration. Initially sparked by the pandemic, Figure 1 illustrates a surge in fixed-rate lending to 46% of secured housing finance in July and August 2021, compared to pre-pandemic levels of 15%. The majority of these loans have a term of three years or less, making this year the prime period for their expiration (880,000), followed by an additional 450,000 next year.
Fixed-Rate Risk
The concern tied to the expiring fixed-rate loans centers on potential difficulties for borrowers in servicing loans with the new, higher variable rates. As average fixed rates (under three years) bottomed out at 1.95% in May 2021, while current average variable rates stand at 5.66%, the resulting increase in monthly home loan repayments for an average loan size ($549,498) translates to almost 60%.
Risk Assessment
The latest quarterly report from APRA sheds light on fixed loan term expiries. The statement highlights that the peak of fixed-rate term expiries amounted to around 5.5% of outstanding credit during the June quarter, remaining a minor segment of outstanding credit on a monthly basis.
Data shows a return to predominantly variable terms after a surge in fixed-rate borrowing during the pandemic. This means that the majority of housing debt is at variable rates, indicating that a significant portion of variable-rate mortgage holders have already experienced cash rate hikes.
Official data reveals that housing credit in arrears remains extremely low at 1.2% of outstanding debt. Although late repayments comprise a small fraction of housing credit, this isn’t necessarily an immediate measure of mortgage stress.
Source: CoreLogic
Economic and housing data reflect the impact of rate hikes on borrowers, with consumer sentiment dipping and additional payments into offset and redraw facilities decreasing. Housing metrics, such as the CoreLogic Home Value Index and clearance rates, have also shown slight declines, suggesting a nuanced shift in the market.
The rise in new listings may be linked to motivated selling due to rising mortgage repayments, as well as improved selling conditions due to increased home values. While this uptick doesn’t necessarily indicate forced selling, it’s a key metric to monitor.
In conclusion, the fixed-rate cliff hasn’t led to a surge in arrears as anticipated. The potential mild deterioration in housing market conditions might arise as more listing decisions increase. Nevertheless, the period of economic slowdown could bring the RBA closer to its inflation target, possibly resulting in a cash rate reduction in the latter half of 2024.
