ANZ expects income growth to ‘cushion’ interest rate hikes

By Jon Bragg

April 22 2022
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Increased household incomes will partly offset the impacts of rising interest rates, the bank has predicted.

The strong outlook for employment and wage growth moving forward will cushion the anticipated lift in rates, new analysis from ANZ has predicted.

“We expect wages to continue to accelerate through the impending cash rate hiking cycle, as they did during the 2002–08 cycle,” said ANZ senior economist Adelaide Timbrell.

“Moreover, we expect that unemployment will continue to fall, reaching a five-decade low of 3.3 per cent later this year.

“This means that some of the impact of higher interest payments and reduced borrowing capacity will be offset by higher household incomes as interest rates rise.”

Ms Timbrell explained that while higher interest rates have a negative impact on house prices, rate hikes do not always lower prices.

For example, house prices rose by more than 50 per cent during the tightening cycle of 2002-08 or an average of 8 per cent year-on-year.

“While we don’t expect to see such a strong run of housing prices through the impending tightening cycle, we do expect the correction in housing prices to be a moderate one, especially when compared with the rapid housing price growth over the last two years,” she said.

High levels of household savings are also expected to lower the risk of forced selling as interest payments rise.

ANZ has predicted that the average share of household income that services interest will remain below the long-term average even as the cash rate hits 2 per cent, which the bank expects will take place by the end of next year.

Another key distinguishing factor of the impending tightening cycle identified by ANZ is the introduction of stronger regulation that reduces financial stability risk.

“The current mortgage serviceability buffer requires prospective borrowers to prove that they can afford a mortgage at 3 ppt higher than the advertised rate,” explained Ms Timbrell.

“This equates to twelve 25bp cash rate hikes and should reduce the risk of forced selling or financial instability as the cash rate rises.”

Notably, Ms Timbrell said that a small percentage point increase would have a greater impact on interest payments than seen previously, with owner occupier variable mortgage rates poised to rise by 75 per cent as the cash rate hits 2 per cent.

“This may lead to a payment shock across some households. Though for most households, strong savings and wage growth should offset this for the most part,” she said.

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