Personal bankruptcies expected to triple as interest rates soar
Personal insolvencies may reach a new high as the recent interest rate hikes in Australia align with previous slowdowns and put 800,000 households at risk.
The Reserve Bank of Australia raised interest rates by 0.25 basis points to 3.35% this week, marking the ninth time this has happened in the past nine months. The sudden surge in interest rates, coupled with inflationary pressures, has sparked concerns among experts that personal insolvencies could triple if history repeats itself. According to Michael Chan, a national insolvency expert at Jirsch Sutherland, there is a clear correlation between interest rate hikes and personal bankruptcies.
"When rising interest rates are coupled with inflationary pressures, past trends have shown a corresponding rise in bankruptcies," Chan stated. He added that there have been instances in the mid-90s and during the 2007-08 global financial crisis where personal bankruptcies rose in lockstep with the cash rate. This trend could continue if the current situation follows a similar path.
Many households used the equity in their homes to invest in rental properties during the GFC, and were unable to cover their mortgages when interest rates spiked. Chan believes that the current situation is not much different and that "a lot of properties purchased through the last two years still have a good amount of equity and savings to stave off these ongoing issues". However, with staff cuts, recession warnings, and the tax man lurking, Chan predicts that personal insolvencies will follow the increase in corporate insolvencies.
According to Jirsch Sutherland's graph, personal insolvencies could reach 15,000 this year if interest rates approach 4%. Chan believes that this is not a pessimistic view, given the historical numbers. He also pointed out that many property buyers were blindsided by the speed of interest rate hikes and were not prepared for such a steep increase so quickly.
The impact of the higher rates is expected to hit as many as 800,000 households who have fixed loans at very low rates during the pandemic. Chan advised the RBA to wait before increasing rates further, as the impact will only be evident towards the end of the year. He said that "when you speak to people around you, you know they are all tightening their belts" and that the RBA should "let it run its course at the moment."
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