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Rate rises hurting first home buyers: RBA

First home buyers who bought during the recent property boom are in a vulnerable position as interest rates rise, the RBA says.

October 7, 2022
By Poppy Johnston
7 October 2022

The central bank is worried first home buyers that bought during the COVID-19 property boom will struggle to meet their repayments.

In a report exploring risks to Australia’s financial stability, the Reserve Bank of Australia has identified recent home buyers as particularly vulnerable to rising interest rates.

Since May, the RBA has been hiking interest rates aggressively in response to soaring inflation. 

Unlike more established borrowers, the RBA says first home buyers tend to borrow with small deposits and haven’t had a chance to build up their financial buffers and pay off a decent chunk of their loans. 

The most vulnerable borrowers likely bought when house prices were booming and risk falling into negative equity as house prices fall.

“A large decline in housing prices that results in negative equity for households, alongside further shocks to disposable income, would increase the risk that some borrowers default on their loan commitments,” the RBA’s financial stability review report states.

A recent Equifax report showed first home buyers were more likely to default on their loans than established mortgage holders and the gap between the two groups was widening. 

The RBA admits some households are starting to suffer from higher interest rates and soaring inflation and expects more pain to come for vulnerable households.

“The resilience across private sector balance sheets in Australia is unevenly distributed,” the report says.

However, the RBA says Australian households are overall in a better position than other nations. 

The RBA says most households and businesses have strong balance sheets and banks are well-capitalised and therefore able to absorb a spike in loan defaults.

“Many Australian households and businesses built up substantial savings buffers during the pandemic and strong growth in incomes has supported the recovery in household consumption and contributed to low levels of loan arrears,” the report says.

Casting a shadow over this upbeat outlook is the possibility of a sharper-than-anticipated uptick in job losses, which would make it much harder for borrowers to meet loan repayments.

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