The Reserve Bank of Australia (RBA) has been cutting interest rates since late 2011, with the cash rate falling to just 1.5%, the lowest level on record.
It’s provided a boon to Australian households with a variable rate mortgage, helping to lower interest repayments at a time when wage growth has been weak.
However, that windfall for borrowers hasn’t translated to a noticeable pickup in household consumption, the largest part of the Australian economy.
According to Australia’s last GDP report, consumption grew by a paltry 0.1% in volume terms in the September quarter of last year, the weakest result since the GFC.
All these people, all these jobs and interest rates at close to the lowest levels on record and despite all that, household spending remains weak. Something is amiss.
Perhaps this chart from the Commonwealth Bank’s Investor Presentation explains why.
It shows the proportion of the bank’s home loan customers who are currently ahead on their home loan repayments, and does it tell a story.
Including offset accounts, a massive 30% of the bank’s customers are ahead of their repayments by two years or more, with a further 14% ahead by between six months to a year.
So close to half of the bank’s customers have a buffer on their repayments of six months or more.
What that demonstrates is that rather than using lower borrowing costs to spend, many are choosing instead to pay off their mortgage at a faster pace than required.
While this is only customers of the Commonwealth Bank, it likely reflects trends seen across the broader household sector.
It also helps explain why household spending remains sluggish, hinting there’s still a large degree of financial caution that exists with many mortgage holders.
Until that dissipates, the trends of recent years will likely persist, likely ensuring that if and when the RBA begins to lift interest rates, it will be slow and steady in nature.
Yes, many borrowers have a buffer, significant in some instances, but higher borrowing costs are clearly risks crimping household spending further, especially in discretionary areas.