Borrowers beware: Household debt binge may worsen
- As widely tipped, RBA pauses cash rate at 1.75%; which 97% of experts predicted
- 83% of experts believe at least one more cash rate cut on the horizon
- 79% of experts agree that household debt will become a concern in coming months
- Practical ways to manage your debt
5 July, 2016, Sydney, Australia – Borrowers are being warned to keep an eye on their debt as credit becomes cheaper, despite the Reserve Bank keeping the cash rate on hold at 1.75% at this afternoon’s board meeting, according to one of Australia’s biggest comparison websites, finder.com.au.
Today’s outcome was unsurprising, with 97% of the 31 economists and experts in the finder.com.au Reserve Bank Survey predicting this outcome.
Many experts believe that a rate drop is around the corner, however, with 67% (of the 30 experts who opted into this question) forecasting this will happen in August, while 17% believe this will occur in November this year.
This expected cash rate cut may be the final in the cycle, with 59% of experts forecasting the cash rate will fall no lower than 1.50%. However one in four economists (24%) predict the cash rate will fall to 1.25% this cycle before an upturn.
finder.com.au Money Expert, Bessie Hassan, says the current low-interest rate setting may entice people to borrow more than they can comfortably afford.
“In fact, the majority of experts (79%) surveyed are in agreement about household debt becoming a concern facing Australians over the coming months. Australia’s average household debt is four times what it was 27 years ago, currently standing at $245,000 per household.
“Low interest rates have exacerbated Australians’ debt appetite, and we’re in real danger of seeing this rise further and so households must plan for future financial shocks.
“Australia has enjoyed a low unemployment rate since the early 2000s, but if unemployment rose, if interest rates headed north, or if there was poor consumer confidence, Australian households could face severe financial hardship as this could have a flow-on effect through the economy.
“It’s unsurprising that borrowers are being tempted to take on more debt. It’s also crucial to understand the difference between good debt and bad debt. While good debt can build wealth, bad debt can drain it.”
Borrowing money to buy property has long-term benefits through capital gain if it the property increases in value over time or equity by paying down your mortgage, Ms Hassan explains.
“The key is in managing your debt; Devise a clear long-term plan to pay down your debt. This should involve factoring in a buffer of 2-3% on top of your current interest rate so you’re able to service future rate hikes.
“If you’re unsure about the amount you can borrow, then consult a professional such as a mortgage or finance broker. For instance, a mortgage broker can help you understand your propensity to repay a home loan after assessing your financial position including your income, assets, debts, and liabilities including the number of dependents that you have. Speaking to a professional can help you eliminate emotion from your purchasing decision and prevent you from over-borrowing or getting into a debt spiral.
“A good way to take control of your debt is to pay off high-interest debt first. If you have several accounts that you’re paying off, give priority to high-interest debt as this can help you minimise your interest payable.”
What our experts had to say in the July Reserve Bank Survey:
Shane Oliver, AMP Capital: "The RBA expressed comfort with current monetary settings after the June meeting and it's likely in wait and see mode regarding the risks posed by Brexit."
Garry Shilson-Josling, Australian Associated Press: "The RBA will most likely wait until after the CPI figures in late July, but a July 5 cut should certainly not be ruled out, After the Brexit vote and the market turmoil that has followed it the RBA could easily decide not to wait and cut at the first opportunity."
Peter Munckton, Bank of Queensland: "The RBA are comfortable with the level of interest rates."
Richard Robinson, BIS Shrapnel: "Economic and employment growth is currently strong enough to keep the unemployment rate below 6%, so there is no urgency to cut rates. There are also lingering concerns any cut will again bolster house prices"
Chris Caton, BT Financial Group: "There's another cut out there, and July can't be ruled out, but the RBA would probably prefer to wait for more evidence on inflation."
Michael Blythe, CBA: "RBA is waiting for next CPI reading before deciding on rates"
Savanth Sebastian, CommSec: "RBA will want to look through the current share market volatility and also wait on the June quarter CPI result."
Dr Andrew Wilson, Domain Group: "Waiting for June qtr CPI data"
Scott Morgan, Greater Bank: "There is nothing in the recently released data to suggest further cuts are needed at this stage. There is no need for a knee jerk response to Brexit or other issues. I think the RBA will want the election to be out of the way and some time to look at how the economy and markets are responding to the previous cut. "
Mark Brimble, Griffith University: "Given the frenzy of speculation, action and reaction re the Brexit the RBA will be reluctant to muddy the waters this month and will want to see how this plays out. Bias remains to easing further however."
Atul Narang, HashChing Pty Ltd: "RBA might hold the cash rate considering Australia's seasonally adjusted unemployment rate stood at 5.7 percent in May 2016, unchanged from the previous two months. Having said that, Brexit might have an impact on the interest rates in the near future if US Federal Reserve delay the rate hike which would keep the Australian dollar higher than the RBA would like. This might force RBA to cut interest rates again to stimulate the economy and to lower the Australian dollar. So we might see an interest rate cut in the next RBA meeting. Though this is a good time for consumers to shop around for great home loan deals and demand a rate cut from their lender."
Peter Haller, Heritage Bank: "The RBA's focus is on the domestic economy. There has been no data releases in the last several weeks to materially change the bank's neutral tone from its June meeting."
Jason Spencer, Homely.com.au: "There is no significant weakening in the Australian economy to justify a drop at this time."
Paul Bloxham, HSBC: "Waiting for the Q2 CPI"
Saul Eslake, Independent Economist: "Outlook for Australian economy hasn't changed materially since last meeting; Brexit vote does cast a shadow, but it is too early to tell whether that shadow will last long enough and be dark enough to warrant a monetary policy response. RBA likely to wait for June qtr CPI before reconsidering."
Stephen Koukoulas, Market Economics: "Downside risks to the global economy has intensified to the point where a cautionary rate cut would be prudent."
John Caelli, ME: "The full extent of Brexit’s impact has yet to be played out. We expect the RBA will assess the next CPI figures due late July before considering any further rate cuts in August."
Mark Crosby, Melbourne Business School: "The RBA decision will be made at the last minute based on global market volatility in the few days leading up to the decision. As of Wednesday before the decision markets seem to have stabilised, warranting a hold decision. The Brexit vote that is causing financial market volatility should ultimately have little to no impact on our economy, and therefore should not affect the rate decision unless global financial markets crash."
Emily Dabbs, Moody's Analytics: "Monthly indicators suggest the economy continues to perform well. The impact of Brexit on Australian markets is relatively minor. The central bank will wait until the CPI data release to assess inflation pressures. "
Jessica Darnbrough, Mortgage Choice: "I think the Reserve Bank will wait and see what the true impact of the Brexit result will be before making any decisions on the future of the official cash rate. In addition, they may want to wait and see what the next round of inflation data reveals before reducing the cash rate further. "
Ken Sayer, Mortgage House: "Too much uncertainty "
Christopher Schade, MyState Bank: "The RBA will take further time to see how the economy is tracking before making a further change to the cash rate. Whilst risks are to the downside, a hold is more likely in July, with the August meeting following the next CPI read looking particularly interesting."
Jonathan Chancellor, Property Observer: "They are still content to watch their last cut play out."
Matthew Peter, QIC: "While BREXIT makes for a more compelling case to cut rates, the RBA will not want to give the impression of knee jerk reaction. The RBA will wait to August allowing it to prepare markets for a renewal of the easing cycle, particularly if the July inflation read remains weak."
Noel Whittaker, QUT: "Wait and see."
Angus Raine, Raine & Horne: "a wait and see due to Britain's exit from EU and federal election.”
Nathan Mcmullen, RAMS: "RBA likely to review Q2 inflation data due late July before revisiting changes to the cash rate. "
Janu Chan, St.George Bank: "RBA has provided little guidance on rates and little indication that it will lower them any time soon. While that was before the Brexit vote and downside risks to the global economy have increased, this isn't likely to be enough for the RBA to cut as soon as next week, particularly ahead of inflation data later in July. "
Nicki Hutley, Urbis: "No strong reason to move rates in either direction at present"
For further information
The information in this release is accurate as of the date published, but rates, fees and other product features may have changed. Please see updated product information on finder.com.au's review pages for the current correct values.
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