Hint Of Rate Cuts Welcome News For Struggling Mortgage Holders

The Age

Tuesday February 13, 2007

NASSIM KHADEM, ECONOMICS CORRESPONDENT, CANBERRA, With BEN SCHNEIDERS

VICTORIANS have taken on more debt than they can handle, with the number of home-loan defaults soaring under higher interest rates.

But mortgage holders can take some comfort from the Reserve Bank's quarterly statement on monetary policy in which it cuts its inflation forecasts from 3 to 2.75 per cent - well within its target range.

Economists say the central bank's expectation for moderating inflation means it is unlikely to increase rates again this year and could even start cutting them by year's end.

The Reserve Bank increased rates three times last year - in May, August and November - adding $32 a month to a $200,000 mortgage repayment.

Consumer groups and the housing industry say that as a result, mortgage defaults have risen in Victoria and NSW.

Figures from the Supreme Court of Victoria show 2791 claims were lodged for repossession of properties last year, compared with 2578 in 2005.

The majority of claims relate to private home buyers defaulting on repayments. The number of repossessions also increased last month to 223, up from 184 in December.

The figures show repossessions have more than doubled since 2003, when there were 1225. There were 1773 in 2004.

The situation is expected to get worse. A November survey by Macquarie Mortgages found 61.4 per cent of residential brokers expected to see an increase in mortgage stress and defaulting. Macquarie Mortgages' head Tim Brown said people had geared up when interest rates were low, taking on huge credit debt.

The Consumer Action Law Centre's director of policy and campaigns, Nicole Rich, attacked "reckless lending".

She said although interest rates were lower than they were 20 years ago, the impact of a 25-basis-point rate rise was greater today because people owed larger amounts.

"Lenders have become more and more willing to lend to people who they know are going to have difficulty making their repayments," she said.

The average new loan in Victoria hit a record $225,100 in December, according to the Bureau of Statistics. Michael McNamara, from Australian Property Monitors, said the outer suburbs of Melbourne were hit the hardest.

"What we are noticing is an increase in auction volumes in those areas that are not strong auctions areas," he said.

"We fear that's . . . a factor of a rise in mortgagee sales."

Shadow treasurer Wayne Swan said high debt levels had made mortgage holders more sensitive to rate rises.

"Mr Howard likes to quote interest rates from 15 years ago but he simply does not understand that Australian families are now in much heavier debt than ever before," he said.

But there is some good news for mortgage holders, with the Reserve Bank cutting its inflation forecasts for the next two years.

The statement, explaining why it left the cash rate unchanged at 6.25 per cent last week, said that while the tight labour market was likely to put upward pressure on wages, underlying inflation had moderated during the December quarter and would continue to ease in 2007 and 2008 to about 2.75 per cent. This is in the middle of its target range of 2 to 3 per cent.

UBS chief economist Scott Haslem said the Reserve Bank had been "less hawkish" in this statement. "Recent data has led them to feel more confident that enough has been done on policy to see (underlying) inflation drift back," he said.

Federal Treasurer Peter Costello welcomed the news but said fluctuating oil prices and wage pressures still posed a risk. -- With BEN SCHNEIDERS

© 2007 The Age

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