While accumulated household savings are helping cushion impact of high rates, consumer spending is set to slow as borrowers approach record-high mortgage repayments.
Over the next 12 months, consumer spending is set to “slow significantly” as excess savings dwindle and mortgage repayments climb to record highs, AMP deputy chief economist Diana Mousina said in the Econosights August 2023 report.
Although accumulated savings remain high on average and suggest that consumers “could have another two to three years” before savings run dry.
“We expect the accumulated extra savings to be mostly exhausted by late 2024,” Ms Mousina said.
She added that accumulated excess savings may never return to pre-COVID-19 levels if households have “locked them away” in deposits or investments.
Reportedly, older households (aged 55 and over) hold a larger share of household accumulated savings than middle-aged households (35–54), which are the most impacted by the rising interest rate environment.
“This group has little excess savings so will have to cut back spending. This is why we expect that even if accumulated savings appear elevated, this masks a divergence of outcomes for different household groups,” Ms Mousina said.
She further stated the argument surrounding excess savings helping mitigate higher mortgage repayments and cost-of-living pressures is made “less significant” due to the fact that households with the larger share of savings are the least impacted by rising mortgage repayments.
“This is also in line with recent earnings results from banks which showed that older households accounted for the highest share of deposits,” she added.
In the latest Statement on Monetary Policy (August 2023), the Reserve Bank of Australia (RBA) projected that scheduled mortgage repayments will “increase to a historical high” of approximately 9.8 per cent of household disposable income by the end of 2023.
Moreover, the RBA has said this will hit a new record of 10.1 per cent by the end of 2024, based on the cash rate rises to date.
According to the statement, scheduled mortgage repayments (interest plus scheduled principal) increased to 9.4 per cent of household disposable income during the June quarter.
Additionally, in the minutes of the August monetary policy meeting, the board agreed that its monetary policy tightening was “working as intended”.
“Members noted that the full effects of the earlier tightening were yet to be recorded in the data,” the board stated.
“Even so, consumption had already slowed significantly, there were early signs that the labour market might be at a turning point and inflation was heading in the right direction.”
Big life decisions being put on hold
Aggregator Mortgage Choice recently commissioned a survey that found that 76 per cent of mortgage holders along with 78 per cent of prospective buyers had postponed a “big life decision” as a result of the current economic climate.
According to the research the most common life decisions that were postponed due to higher interest rates were saving money (50 per cent of mortgagors and 40 per cent of prospective buyers), buying a car (31 per cent and 21 per cent, respectively), and buying a new home or investment property (28 per cent and 42 per cent).
In addition, the survey revealed that 11 per cent of prospective property buyers postponed starting a family, while 19 per cent of respondents aged 55 and over have postponed retirement plans.