Households run down savings buffers as cost of living bites

The Reserve Bank of Australia’s tirade of interest rate rises are working, with economic growth slowing as households pull back.

Australia’s economy grew 0.4% in the June quarter, with annual growth slowing to 2.1% from 2.3% the previous quarter, according to the Australian Bureau of Statistics.

But the devil is in the detail, with the growth largely underpinned by business investment and the continued recovery in tourism and international student numbers following the Covid-19 pandemic.

Affordability at its lowest level in 3 decades

Household consumption remained relatively flat during the quarter, with consumers pulling back on discretionary items to make room for essentials and soaring mortgage repayments.

People are also saving less of their incomes, with the household saving ratio falling to 3.2% in the June quarter from 3.6%, as consumers draw down on the buffers they built up during the pandemic.

PropTrack senior economist Eleanor Creagh says it’s the lowest rate of household savings since mid-2008.

“The Reserve Bank maintained the pause on their rate hiking cycle this month, but the substantial tightening already delivered since May 2022 is weighing on economic activity,” Ms Creagh said.

“Spending is slowing, and conditions are likely to continue to soften in the coming months as the full impact of previous tightening catches up.”

Households are spending more on essentials and saving less. Picture: Getty

HSBC chief economist Paul Bloxham says Wednesday’s GDP figures are likely to have been welcomed by the RBA and outgoing governor Philip Lowe.

“The GDP figures provide a clear indication that the economy is, so far, tracking what he has described as the 'narrow pathway' to a 'soft landing',” Mr Bloxham said.

“Growth has slowed to a bit below trend, but is still positive, and, at the same time, the economy is gradually dis-inflating. Things are moving in the right direction for the RBA to achieve its mandate.”

Interest bill almost doubles

The RBA’s decision on Tuesday to hold interest rates steady at 4.1% for a third straight month came as welcome relief to households, firming expectations that the cash rate has now peaked.

But with cuts not anticipated until next year, AMP deputy chief economist Diana Mousina says households will continue to run down their savings.

“A further decline in the savings ratio is expected as households deplete their accumulated savings given the pressure on household budgets due to the lift in interest rates and elevated inflation,” Ms Mousina said.

“Overall, the GDP data is consistent with an economy that is slowing as expected given the increase to interest rates since May last year.”

The annual interest bill has almost doubled on the back of higher mortgage rates. Picture: Getty

Over the year, households shelled out $82.8 billion in mortgage interest payments, almost double last year’s interest bill.

AMP estimates a variable rate borrower with a $600,000 mortgage will have seen $1,300 a month added to their mortgage payments since April 2022 – an additional $15,600 a year.

Even if that borrower managed to secure a 0.5% discount with their lender, the annual burden would still be $13,000 more than before the first rate hike, a significant hit to their spending power.

Household consumer spending grew just 0.1% in the June quarter, to be up 1.5% over the past year.

Unsurprisingly, more spending was directed towards essential items amid increasing mortgage, rent, utility and insurance costs, while discretionary spending fell for a third straight quarter.

Housing market activity picks up – but for how long?

Despite sharply higher interest rates and inflation, the latest PropTrack Home Price Index shows national property prices rose for an eighth straight month in August, with prices in some cities hitting new record highs.

“This year’s recovery has brought national annual price growth back to positive, with prices up 2.64% on their year ago levels and just 0.75% below their March 2022 peak,” Ms Creagh said.

A shortage of property listings for most of the year offset the 400 basis points worth of interest rate rises, Ms Creagh says, which has driven up repayments and crushed borrowing capacities by around 30%.

“Stronger housing demand is being bolstered by the rebound in net overseas migration, tight rental markets amidst shortages in rental supply and ongoing labour market tightness with slowly increasing wages growth and the unemployment rate holding close to multi-decade lows,” she said.

But with more homes now hitting the market, Ms Creagh says a levelling of supply and demand could see price growth slow in the months ahead.

“If the flow of new listings continues to lift, which is likely with the spring selling season kicking off, the pace at which prices have grown this year may slow,” she said.

“Further out, as affordability continues to worsen and the economy slows, this begs the question of whether the strong price rises of this year can continue.

“But high levels of migration coupled with lower new supply and an emergent housing shortfall is likely to continue to cause prices to lift despite affordability remaining stretched.”

She says Wednesday’s data confirms the pick-up in population growth has continued, with the strongest quarterly increase since 1974.

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