The real pain from rising interest rates is yet to come

Detailed summary

The number of borrowers who are behind on their mortgage payments is rising, and it’s likely to climb further as rate hikes bite.

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The evidence is piling up that interest rate hikes are biting. Westpac’s measure of consumer sentiment is so gloomy it’s at levels seen in past recessions, house prices are tumbling, and a swag of retailers have recently posted weak results.

It’s long been feared that under this sort of pressure, Australia’s highly indebted households could break, and drag down the economy with them. So how serious are the cracks that are starting to appear in the household sector, which is seen as the economy’s engine room?

Over the past fortnight, we’ve been given a good indication of how millions of households and businesses are coping, as the biggest banks have lifted their bonnets to the market.

The numbers revealed a mixed picture. The vast majority of people are managing their repayments – indeed, some economists say households as a whole have been surprisingly resilient. But against this, a small but growing minority is struggling, and that’s happening when we still haven’t felt the full economic effects of this year’s rate hikes.

In reported results this month, National Australia Bank, Westpac, ANZ and Commonwealth Bank have all recorded a recent increase in the proportion of Australian borrowers who had fallen more than 90 days behind on their mortgage payments (known as being “in arrears”) by September 30. The number of borrowers who are behind is still fairly low overall, but experts expect mortgage arrears rates to increase.

There are a few reasons for this. One is the time it takes for rate rises to inflict pain on household budgets.

Since September 30, when the banks ruled off their books, we’ve had two more interest rate rises announced by the Reserve Bank, and it generally takes a month or two for banks to raise the actual repayments that customers make.

Beyond this, there is a sizeable group of people who will not have seen much of an increase in their monthly repayments from…

Opening of the article, excerpted from The Sydney Morning Herald. To read the rest, open the article on the publisher's site.