Business Environment Profiles - Australia
Published: 29 August 2024
Ratio of interest payments to disposable income
13 Percentage
1.3 %
This report analyses the ratio of household interest payments to disposable income. This ratio is expressed as the percentage of disposable income that is spent on interest payments. For the purposes of this report, disposable income is measured before the deduction of interest payments. The data for this report is sourced from the Reserve Bank of Australia (RBA) and is seasonally adjusted and measured in financial years.
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IBISWorld forecasts the ratio of interest payments to disposable income to fall by 0.75 percentage points to 13.22% in 2024-25. The cash rate is a key factor in determining interest costs paid by households. The rate is expected to remain relatively stable in 2024-25, potentially inching downwards towards the end of the year. As of August 2024, the Reserve Bank of Australia tentatively expects that inflation in the Consumer Price Index will fall within the 3.0% target upper bound by late 2024 to early 2025. This would likely allow cuts in the cash rate in the later stages of 2024-25, leading to a decrease in interest payable on existing loans. The unemployment rate is also expected to rise slowly in 2024-25. However, an increase in GDP growth will allow disposable income to rise as labour will remain in high demand. Growing disposable income and the potential of interest rate cuts in early 2025 will place downward pressure on the ratio of interest payments to disposable income.
The ratio of interest payments to disposable income has increased significantly over the past five years, strongly correlating with movements in the cash rate. The RBA introduced record-low interest rates in response to the COVID-19 pandemic in order to stimulate wider economic activity. The low interest rate environment helped encourage households to take on more debt as a record low cash rate kept interest repayments low. A surging residential property market also prompted more mortgage activity as residential real estate became an increasingly attractive investment. Despite intensifying household debt, a low cash rate environment helped reduce interest repayments as a proportion of disposable income over the pandemic.
In 2022-23, the RBA was forced increase the cash rate rapidly to tame out-of-control inflation. This impacted many individuals who had increased their debt liabilities during the pandemic, as interest repayments on outstanding debt skyrocketed. High inflation led to a growing cost of living, causing a contraction in household disposable incomes. Rising interest payments and the contraction in disposable income caused a spike in the ratio of interest payments to disposable income in 2022-23 and 2023-24. While some respite may come in the form of interest rate cuts in late 2024-25, the ratio of interest repayments to disposable income will likely remain close to all-time highs. In total, IBISWorld forecasts the ratio of interest payments to disposable income to rise at an average annual rate of 1.28 percentage points over the five years through 2024-25.
IBISWorld forecasts the ratio of interest payments to disposable income to fall by 1.01 percentag...
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