Rate Rise Will Hurt Households

Bob McMullan - Shadow Treasurer

Media Statement - 2 July 2002

Independent experts have reinforced my warning that rising interest rates will place many Australian households under unprecedented financial stress.

A survey by public affairs consultants Hawker Britton and market researcher UMR shows that almost one in three Australians with mortgages will be in trouble if interest rates rise by 2 percentage points, and even a rise of 1 percentage point will see one in seven struggling to make payments.

The Reserve Bank has warned repeatedly of the dangers of rising household debt. Yet Treasurer Peter Costello is utterly complacent.

Last month I highlighted research by Deutsche Bank which showed that a 2 percentage point rise in rates would leave Australian households paying a higher proportion of their income in interest payments than ever before. With typical arrogance, Mr Costello dismissed this argument as "a statistical type of trick". Try telling that to households struggling to pay their mortgages. He is clearly out of touch with ordinary Australians.

The average household now has much higher debt, compared with income, than ever before. So even with a relatively low interest rate, households will be paying substantial amounts of their income in interest repayments. Another rate rise tomorrow will add to the pressure.

Bureau of Statistics figures last week demonstrate household debt has doubled under the Howard-Costello government. Household debt has leapt from 82 per cent of disposable income in 1995 to 122 per cent at the end of March. In other words, households now owe $122 for every $100 they earn. Household mortgages have grown by an average 18 per cent a year since 1995. There are no signs the growth of debt is abating.

Deutsche Bank calculated the burden of interest rate repayments with the Reserve Bank's overnight cash rate at 6 per cent - a variable mortgage rate of about 8 per cent - and found that households will pay a bigger share of income in interest repayments than at any time over the 15 years of its study. That means in effect that Australians will pay a bigger share of their income in interest payments than ever before.

Reserve Bank Governor Ian Macfarlane has suggested interest rates will reach this level, and many analysts believe this could occur within a year.