Will 2023 be the year when forced property sales begin?

Will Australian households show their usual resilience in the face of rising interest rates?

Or will Reserve Bank of Australia Governor Dr Philip Lowe’s latest 0.25% rise be the straw that finally breaks the camel’s back?

The RBA’s latest 0.25% hike caps off the end of a series of eight consecutive interest rate rises for 2022.

It is a bit early to know at this stage, but my feeling is that the official figures are running well behind the lived experiences of Australians with mortgages.

I expect 2023 will be the year in which we finally see the extent Australians will go to keep a roof over their heads.

While 3.1% doesn’t seem particularly high for the official cash rate, it is the high numbers of consecutive interest rates rises coming on top of a highly conditional “promise” from the RBA that it didn’t expect rates to rise until 2024 that makes the coming year such a crucial one in the Australian suburbs.

Borrowers now well above loan buffers

What is particularly bad about this series of rises is that they have blown straight through the 2.5% “serviceability buffer” that banks always apply to new loans and the fact that so many fixed loans were written during the pandemic – loans that will mostly come to an end during 2023.

The size of the loans that were needed to buy properties during the pandemic price boom and the high level of general household indebtedness beforehand also adds a lot of leverage to the problem.

The existence or otherwise of “liar loans’’ – in which borrowers or their mortgage brokers effectively tell a few fibs about income levels or existing debt levels – will also add to the situation.

In brutal terms, many borrowers who bought during the boom will roughly face a doubling of their mortgage payments – in some cases in one big hit as a fixed loan term comes to an end.

How they collectively cope with the repayment shock will be the key to whether Dr Lowe will get the elusive soft landing for the economy that he fervently hopes for or we enter a recession that stalls economic growth, retail spending and puts paid to the current enviable unemployment rate of just 3.4%.

Borrowers coping surprisingly well – for now

So far, the evidence is that borrowers are coping with the extra budget pressures very well.

The Australian Prudential Regulation Authority, which has now lifted the “suggested” serviceability buffer banks apply to mortgages to 3% – released some positive figures just before the RBA decision was reached.

Despite rapidly rising interest rates, particularly for those on floating rate mortgages, the proportion of people falling behind on their housing repayments is at record lows.

Those figures showed that between March and September, while mortgage rates marched upwards in tandem with the cash rate by 2.25%, the number of people unable to keep up with repayments dropped.

Like Phar Lap, eventually borrowers will have to slow down

Interestingly, the number of people with high loan-to-value mortgages also fell sharply, which tends to suggest that people have been applying extra savings built up through the pandemic to their loans or offset accounts to try to lessen the impact of the rate rises.

Historically, Australians will do almost anything to keep their house and it appears some of those measures are already being applied, including a rush of mortgage refinancing at lower rates.

Interest rates are a bit like lead weight added to a horse’s saddle though, eventually they tend to slow things down and it looks like 2023 will be the year when that could happen.

For the sake of the rest of the economy we should all be hoping that Australian households with large mortgage debts somehow manage to keep their heads above water.