Australian household debt has been consistently growing over the past decade partially as a result of low to moderate interest rate settings following the GFC and increased competition in the home loan market through the availability of Private/ Non Bank Credit.
The Cash Rate in Australia was reduced to 0.1% in November 2020 in response to the Covid Pandemic.
Households have become increasingly sensitive to interest rate movements because of the growth in Australian household debt.
Government around the world including the Australian Federal Government launched extensive fiscal stimuli to support their respective economies. Although the Fiscal Stimulus has succeeded in its goal to support the Australian Economy, inflationary pressures (both supply and demand-based inflation) ensued during and post the Covid Pandemic.
Central Banks, including the Federal Reserve, increased their respective cash rates to combat inflation. The Australian Federal Reserve adopted a measured approach to combating inflation in not raising the Cash Rate compared to other Central Banks.
For example, the Cash Rate in Australia was 7.25% in March 2008 which corresponded with an average standard variable rate for home loans of 9.34% pa. The Cash Rate today is 4.35% and the Average Standard Variable Rate is 6.50% pa. combined with greater household has led to a cost-of-living crisis for many Australians.
In response to an increasing interest rate environment, the Australian Prudential Regulation Authority increased the serviceability buffer – which requires banks to evaluate the borrowing capacity of a customer by adding 3 per cent to the advertised interest rate. The current average Standard variable rate in Australia is approximately 6.50% pa.
This implies that Lenders are required to assess the credit worthiness of a prospective Borrower based on a theoretical rate of 9.50% representing an increase of 46% over the actual amount of interest paid.
Given that Australian households are more sensitive than ever to interest rate movements, I consider it highly unlikely for a cash rate setting of 7.25% and corresponding home loan rate setting of circa 9.34% like we witnessed in 2008. It begs the question as to why APRA continues to force Lenders to use a rate of 9.50%pa. to assess the credit worthiness of new Borrowers in an environment where interest rates have peaked?
George Gadallah
Chief Executive
This opinion piece is written by George Gadallah, Chief Executive and Co-Founder of Princeton Financial Services. With a Bachelor’s Degree in Economics, a Masters in Finance, and over 28 years of experience in Banking & Finance, George brings deep industry insight to his analysis.
In 2012, George co-founded Princeton Financial Services and the Princeton Fund Series alongside Craig Anderson. As Princeton’s Responsible Manager under its Australian Financial Services Licence, he oversees the strategic management and direction of the Princeton Group.
Before founding the Princeton Group, George held senior management roles at ANZ and St. George Bank (SGB) from 1995 to 2011. Between 2008 and 2011, he served as Executive Manager and Head of Property Finance CBD at SGB, where he led a team focused on prudent risk and credit management, achieving strong performance under his leadership. George’s extensive experience and commitment to risk management continue to guide Princeton’s responsible growth in the financial sector.
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