Some years ago, two Bankstown boys went to a ritzy Bondi restaurant. One has been valued at a personal wealth of over $200 million and has delivered some of the greatest boosts to Australian families’ wealth, and the other has done more than any financial institution or government to ensure Australians retire with internationally-spectacular levels of wealth.
As former illustrious Prime Minister Paul Keating sat down to lunch with the well-known Mark Bouris of Wizard Home Loans and Yellow Brick Road fame, he produced a copy of an AFR news piece, recounting the positive impacts of the former 1980s treasurer’s banking deregulation reforms. The news copy had important parts circled and it led to Mr Keating reminding Mr Bouris how much money he made for him with his overdue and wise financial reforms. (My words not Keating’s, but I’m pretty sure he wouldn’t argue the toss with me on that subject.)
Importantly, I’ve argued that deregulation brought forth the likes of Bouris and John Symond with Aussie Home Loans, who bolstered Australians’ net wealth by forcing the big banks to cut home loan interest rates by 2% or more! Their actions in providing interest rate competition and building up an army of mortgage brokers, lowered the costs of borrowing and raised households’ wealth for three decades.
It’s not difficult working out who paid for the lunch!
Bouris revealed this story in an interview he and I conducted yesterday at his annual YBR conference at the significant Grand Sheraton Mirage on the Gold Coast.
The theme of our chat and sharing of our economic crystal balls was to inform his mortgage and finance brokers in the audience about how bad this market slump will be. After all, their businesses depend on a strong economy with optimists, called borrowers, and so how deep this housing downturn is and how long it lasts are really important issues for them and their future customers.
We agreed that a September interest rate hike is live but both hoped the RBA would wait until November and Cup Day to make that lift of the cash rate from the current 4.35% to 4.6%. Only yesterday, Westpac’s chief economist and a former Assistant Governor (Economic) at the Reserve Bank of Australia got on board with the other big four bank head economists in accepting a rate rise is likely, but she too hopes that rise comes after the 3rd quarter CPI is released on October 28.
Her replacement at the RBA, Sarah Hunter, told an AFR property summit that the big bank does not see a recession in its crystal ball but an economic slowdown is expected. She would never say this, but economists like me know if unemployment doesn’t rise, the central bank will lose its battle with sticky inflation and more rate rises will happen.
The CBA also expects a Cup Day hike and so Bouris and I agreed that the only thing that could save us from another rate hike this year, will be the impact of the Budget’s assault on the housing sector.
If the net wealth effect of over 7 million Australians knowing their homes are less valuable today compared to the day before the May 12 Budget has sunk in by October, the run of economic data could change the RBA board’s collective mind but I wouldn’t bet on it.
In case you’ve forgotten, with the Chalmers 2026/27 Budget, property investors buying an existing property lost negative gearing and the 50% capital gains tax discount, though they retained the former if they buy a new property.
Meanwhile, all property investors lost the 50% discount going forward after June 30 next year, to instead have an inflation adjusted discount, which is less financially attractive.
One important thing Bouris and I agreed on is that no economist or central banker knows how Australians have been reacting to the realisations of the impact of the Budget changes on their perceptions of how their wealth has been affected.
Right now, the economic data isn’t showing excessive negative reactions that would make the RBA cautious about a fourth rate hike this year but they know there are lags between budget tax actions and consumer, as well as business reactions.
That said, the Westpac-Melbourne Institute Consumer Sentiment Index declined 5.2% to 84.4 in September from 88.9 in August. The fall takes sentiment back towards the deeply pessimistic levels seen earlier in the year, which we saw during the Covid era, which did create our first recession in 30 years!
The chart below from Trading Economics and the ABS shows unemployment has risen from 4.1% in January, before rate rises resumed, and is now at 4.5%.
Australian unemployment rate
If I was on the RBA board, I’d want to see the unemployment readings on September 24 and October 15, along with the CPI figure before I piled on a fourth rate rise, on top of a Budget that’s expected to cut house prices by 10%.
Investment firm Capspace revealed that Australian household net wealth was at $16.2 trillion in the March 2024 quarter, because of a surge in the value of property assets. “The value of Australian property assets hit a record of $11.0 trillion at the end of March 2024, making up around 67.9% of net household wealth, up from 61.7% in December 2020,” financialnewswire.com.au reported in June 2024.
A Capspace newsletter said: “Australians are stockpiling their wealth in residential property, with… around two-thirds of household wealth is now held in bricks and mortar.”
The Budget has made Australian homeowners less wealthy and that’s bound to have an effect, and that’s why the RBA needs to give it some time to see if the impact of its rate rises, that can take six months or more to hit the economy, on top of the Budget’s slug on home values, is starting to bring down inflation.
Sarah Hunter can’t see a recession looming and I hope she’s right, but if the RBA gives us two more rate rises, as some economists are proposing, then I would fear a recession is a big chance.
Mark Bouris didn’t argue with me on that.
By the way, the RBA deputy governor Andrew Hauser was interviewed on the ABC’s 7.30 program and wouldn’t give Sarah Ferguson any strong clue that a rate hike is “inevitable” at the September meeting.
As the RBA Governor, Michele Bullock has said, data will determine what her board decides and that’s why I’d say “give data a chance” to tell us what’s really going on in this economy.
For the record: a quarter-point hike would raise minimum monthly repayments by around $92 on a standard $600,000 variable home loan. On a $1 million mortgage, the rise would be a $152 monthly hit.
Another point Bouris and I agreed upon is that we hoped Treasurer Jim Chalmers took a lesson from his own study of his mentor, Paul Keating, who took away negative gearing in 1985 but reinstated it in 1987 after not liking the economic implications of his action.
We agreed we hoped Chalmers developed the courage of Keating, even though we recognised that he too, didn’t always get his policies right, such as the interest rate settings he permitted the RBA to do in the 1980s, which saw home loan rates hit 17% and higher!
In those days, unlike now, the treasurer was the ultimate boss of the RBA Governor.
