Transcript of Question & Answer Session Financial Stability and the Financial Health of Australian Mortgagors

Thank you, Andrea; that was great. So, now is your chance to ask a representative from the Reserve Bank of Australia (RBA) all the things that you’ve been wondering about, in particular, mortgages but also interest rates and inflation perhaps.

Firstly, thanks so much for the interesting presentation. I want to ask a question about fiscal policy. You’ve mentioned quite a lot about what the RBA can do, and you started off the speech by talking about, I guess, the impact of things such as inflation, interest rates and taxation and how that’s eating into people via bracket creep. So could you perhaps give us an idea about the role of fiscal policy in helping to both get inflation under control and, potentially, ways to mitigate bracket creep and whether something perhaps needs to be done about that.

Thank you for the question, but I’ll have to refer you to the Governor’s previous remarks on that topic. I’m here today to talk about financial stability and mortgagors’ financial health, so we will stick to that topic, if that’s okay.

Thank you for the very interesting briefing. Just following the financial news in North America and Australia as well, in the last week suddenly there seems to be people really building in interest rate cuts, weaker job markets, a rapidly deteriorating economic outlook. I’m wondering if you’ve had any thoughts on that.

Again, I’m afraid I can’t comment on the outlook for the economy, so I’m happy to take questions on financial stability and mortgagors’ financial health.

You said that you have the data on the variable rates, but you couldn’t get the data on the fixed rate, and you surveyed for that. So, I just want to know, from the empirical point of view, what are the hurdles to get the fixed-rates data?

Right. That’s a good question, thank you, and I can answer it. I’ll start by the securitisation data that we have does have a mix of the full spread of mortgage types in there, so we do have information on fixed-rate loans. The challenge is fixed-rate borrowers tend not to hold their savings against their mortgage because those kinds of products don’t allow you to, generally, don’t allow you to have offset and redraw accounts. So, the challenge is that fixed-rate borrowers tend to hold their savings elsewhere where we can’t see them in our specific dataset. But from the work we have done – and this is set out in detail in our recent Financial Stability Reviews – what we can tell from piecing together the different information we have: the information we’ve got from the securitisation dataset, the information from various surveys, we do know that fixed-rate borrowers have actually built-up similar savings buffers as variable-rate borrowers. We do have a good sense of their financial position and it does seem that, as I said, they are similarly resilient. Certainly, in terms of how they’ve been performing in terms of continuing to pay their loans as they’ve rolled off their very low fixed rates, they’ve been performing on par with variable rate borrowers. So that’s kind of reinforcing that there’s not some significant difference in, I suppose, the financial positions of those types of borrowers. Now, of course no one can tell the future but, from the information we have, these borrowers don’t look any different in a risk sense to variable-rate borrowers, and that’s consistent with what the banks themselves are seeing. And you will have seen that in their commentary that their fixed-rate borrower book is performing similarly.

What is the ratio between the fixed-rate and the variable-rate borrowers; any sort of estimate on that?

At the moment, the fixed-rate share is about 20 per cent versus 80 per cent. The bulk of loans are variable-rate loans. The share of fixed-rate loans did increase significantly in recent years during the pandemic, with interest rates at very low levels, and fixed-rate interest rates were extremely low and attractive. So, there was an increase in the share of fixed-rate lending, but that’s now coming back off. But it remains the case that the bulk of loans are variable-rate loans.

Thank you for your presentation. I have a question to you. Maybe you can answer or not; I don’t know yet. So, the housing price in Sydney had almost double-digit growth this year, and then the interest rate grew from last May to now by 4.25 per cent. Even after that, the market is growing; house prices are growing. Do you have any insight, modelling or whatever; do you have any insight you can share with us for why the market is bubbling up like this? We know the answer a little bit, but any insight from RBA?

I think all I would say on that issue: in terms of the dynamics and what’s going on in the housing market, it is clear that supply of housing has not kept up with demand, and I think that is why we’re seeing such tightness in rental markets and in the established housing market. And beyond that, I’d just refer you to our latest Statement on Monetary Policy, which talks through that in more detail.

Yeah, thank you. In regard to the previous questions, you said 20 per cent are fixed-rate …

I’m going to check that number.

20 per cent are fixed-rate loans, and that’s a very big number in the sense that 50 per cent of our banking exposure is home loans, and that 20 per cent tells you 10 per cent of the exposure of the whole banking market is a big number. Many of the fixed loans are being converted to variable rate now, but that 20 per cent is still holding maybe for a couple of years or something. I don’t know the exact numbers, but it’s still a very big number. And when they convert it to a variable rate, they’ll move to a six per cent plus rate. In that case, do you foresee any stress in the market?

I would say, obviously, there are risks, and it’s safe to say both ourselves and the banks themselves are monitoring this very closely. But in terms of the assessment, we can do with all the information we have so that the sort of general risk characteristics of these types of borrowers and the kind of savings that they’ve built up – they don’t seem significantly riskier than any other cohort of borrowers. so they’re not a concern in themselves. But having said that, time will tell. It’s not to say there aren’t any risks, and I think this would be sort of a fair characterisation – our assessment of financial stability risks in general is we’re in as good a position as you could hope to be, facing into what is undoubtedly a challenging economic environment.

One of the obvious issues is that you’ve got an issue around mortgage products or mortgage product design. When you talk about the way that the Australian banks aren’t letting fixed-rate borrowers make accelerated payments, that doesn’t necessarily apply in other markets. We’ve been reading about the challenges in the US market and how the big prevalence of fixed-rate loans there has actually slowed, that prevalence is (inaudible) a negative impact on housing turnover. And if we look at other countries, there are – well, if we look at the obvious contrast is between Australia and New Zealand, where you’ve got 20 per cent fixed rates and, in the New Zealand market, it’s about a 10 or 15 per cent floating rate only. Do you think that you’ve got some interest in looking at mortgage product design so that you get a more efficient pass through – a less disruptive pass through the impacts of changing different mortgage products to design on financial stability?

I would say that is certainly an issue that is considered in the literature, as you suggest. In terms of the challenges here, I think, as we’ve seen by the behaviour of fixed-rate borrowers here, it’s not that they’re not saving as a result. They are saving, just somewhere else, just because of, as you say, the design of products; but that doesn’t stop them saving. To counter that dynamic that you’re describing about, I guess, the risk faced by households with variable rate versus fixed rate, one benefit of having variable-rate loans is, when we do ease monetary policy and cut rates, that flows through to all borrowers immediately, which does help them. There are different aspects to consider. I think that’s about all I can say on that one; thank you.

You emphasised a few times the risks associated with fixed versus variable-rate borrowing. I’m not very familiar with the Australian banking system but, when the rates change, can’t the borrowers just switch their banks? In particular, if the rate goes down for example, if I have a fixed payment, can’t I just go to another bank and close the first loan and go forward with the variable?

Yes, you can. Now, depending on the product, there’ll be exit fees, so that will, I guess, play into the decision of any borrower, whether that it is worth their while doing that. But you’re right; there are options. It’s just it will cost. There may be a fee associated. I think it’s fair to say each individual situation will be different.

Thank you. My question is, again, about the banking system in Australia. Are there any tax-exempt savings for the individuals? Because right now, when it comes to savings, your data hovers only around mortgages. So, what happens if people – would they have any other avenues for saving, when they are saving on their mortgage payments?

Yes, and I think that’s one of the reasons that we say our analysis is most detailed for variable-rate borrowers because they tend to save where we can see it. People might save in other types of savings accounts; they might invest in other liquid assets. Now, obviously, there’s superannuation where people are saving in a sense as well, but that’s not in the normal course of things, that’s not accessible and that’s not a liquid form of saving. But there are certainly many different other places for saving. I guess, just on the saving point, we’ve talked about fixed-rate borrowers and why we can’t see their savings. Investors are another type of borrower who we’re unable to do the same extent of detailed analysis about, because that is then a tax incentive thing. Investors, for tax reasons, are not incentivised to save against their mortgage, so they tend to save somewhere else. So that’s the reason we don’t have as good visibility of their savings. But, once again, you know, that’s not to say these people aren’t saving; they’re saving in other products and, we can use surveys to get some sense of that. And there’s certainly no sense that fixed-rate and investor borrowers are any riskier at all. Fixed-rate borrowers tend to be on par and, if anything, investors look even more resilient.

Hi. Are you keeping track of the amount of spending that’s going on, on credit cards, in particular looking at the delinquency rate on credit cards and the rise that is potentially predictive of what’s going to happen to the mortgage market? We might think that’s quite a good leading indicator for future mortgage delinquency, and I think we’re seeing a large growth in the amount of spending on credit cards and a return, a real rebound, of the industry. So, I’m wondering if you have any thoughts on how long the effects of this inflationary period are going to take to flow through to the economy; thanks.

Thanks. So, I guess, just on the issue of credit cards, and delinquencies in that space and personal loans. That tends to be a big feature in the reporting and analysis of developments in the United States, and that’s because those products play a much larger role there. In Australia, those products basically, personal loans and credit card use have been in trend decline just because actually it’s much easier to use, basically, to draw on your mortgage; because of these offset and redraw accounts, it is very easy to save there and then withdraw it as you need it. So, basically, you end up, effectively, with a lower interest rate by accessing liquidity that way. So, they tend not to be heavily relied on. Although, as you said they are still potentially a leading edge. The work we’ve done: there hasn’t been a substantial increase in the amount of outstanding credit-card debt accruing interest, because the bulk of people, just because of this sort of structural-trend decline in credit card use, tend to use it, basically, and pay it off in full each month. So, it’s not used as a source of credit, as such, and we haven’t seen substantial increases in the outstanding credit-card debt accruing interest, so that gives a sense that that’s not as big an issue here. Having said that, I mean, as my speech made clear – I mean I’m talking about in the aggregate and from a financial stability lens – there is obviously a wide variation across the experience of different households. So, in making these comments, I’m not wanting at all to suggest that there has been an increase in the number of households in severe financial stress. We have seen some households looking to use these products more to make ends meet. But it is still a small share of households and the bulk of households have remained resilient. So, I guess that’s just to recognise there is a wide range of experiences. There are, undoubtedly, people in severe financial stress, and I don’t want to detract from their situations at all. There are real-life personal and financial consequences for those people. But when you take that broader lens, when you’re looking for financial stability risk, which is what we’re doing, it remains the case that the bulk of households continue to be able to make ends meet and service their debts and their essential costs.

Thank you very much for this presentation. I have two questions. The first question I have is related to the story of fixed and floating interest rates because, as economists, we go by something called the ‘Euler equation’, which is effectively talking about ‘real interest rate equals the nominal interest rates, minus inflation expectations’. So, in this current environment, whereby there’s an increase in these inflation expectations, we would expect, for those fixed interest rate holders, the real interest rate would go down so that they’re better off, so it’s possible that they can change their consumption patterns as well. I’m just wondering: is there any data or any evidence of changes in consumption patterns for those fixed interest rate borrowers, because they’re going to be saving and because they might want to spend because they’re better off as compared to others? That’s the first question. The second question I have in mind is talking about what we call the ‘hand-to-mouth people’. It connects with the literature as well; it is this term called ‘hand-to-mouth’. So for hand-to-mouth people, effectively, are those that spend their money; whatever they have, they just spend it altogether. So, in this lowest end of the spectrum, is there any so-called work being done to study how to help this hand-to-mouth literature, hand-to-mouth people, in this current environment as well? Yeah, they’re the two big questions I have. Thank you.

Thank you. So, on the first question about differing consumption patterns across fixed-rate and variable-rate borrowers, the analysis that we’ve done in my team, we don’t have access to that data, but I know there are other parts of the Reserve Bank that are pouring over all the consumption data we do have. So, what I could do is: I’d refer you to our recent Statement on Monetary Policy and all the different cuts and distinctions we can make between different consumption patterns as set out there, so I’d refer you to that. I’m going to have to ask what your second question was about – could you just repeat it?

My second question is about the hand-to-mouth consumers, ‘hand-to-mouth’ in the sense that whatever money they have coming in they will get it out straight away, so it’s hand-to-mouth. So, I use economics.

So, for this hand-to-mouth literature for these people, is RBA doing anything to monitor them; and what can be done to help them?

I guess we certainly, as I’ve explained – and you can look in our latest Financial Stability Review in much detail – we have, as best we can with the data we have, analysed the spare cash flows. I think that’s what you’re talking about: so people with very limited spare cash flows, once you take into account debt servicing costs and their basic expenses. We are monitoring the share of households in that position. And so, as I mentioned, from the results, we estimate that around five per cent of borrowers are in that position, and we are monitoring it very closely. Now, one comment I would make here is, as I’ve said, this analysis is based on those people with mortgages. So there will be some people in that position that you’ve described that actually don’t have mortgages; they can’t afford the mortgage. They’re renters and, as I said. Renters do tend, by comparison with mortgagors to have lower incomes and lower saving levels, so they are, potentially, more likely to be in that position. The dataset we’ve got that I’ve been describing that analysis: that we can’t analyse their cash flows in the same way we can for borrowers just because we don’t have the data. But there’s lots of survey information out there and all the analysis that we’ve done in this space: you will find there’s been recent Bulletin articles that we’ve published, by the Reserve Bank. So, if you go to our website, there’s a good Bulletin article about analysing the situation of renters there and, as well, in the latest Statement on Monetary Policy. As to what monetary policy could do about that, I think monetary policy is a certain tool for a certain job. I think the thing to emphasise here is that inflation hurts everyone and that’s why it reduces people’s real income. It damages the functioning of the economy, and that’s why it’s so important. That’s why the Board’s priority continues to be to get inflation down back to the target. So, I think that’s probably all I’ve got to say on that one. But yes, there’s a lot of good analysis we’ve done and published, so have a look at the website.