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Why we’ll get the rate rise we don’t need

Peter Switzer
30 October 2023

With Cup Day looming, is there any data revelation that could save Australians with big home loan debts from a 13th interest rate rise? This question comes as the housing cost burden on borrowers is worse than it was in 1988, when home loan interest rates were 17% (or higher) for many borrowers!

The answer is ‘yes’ but it is argued that the new Reserve Bank Governor could be accused of being politically influenced if she and her board decide not to raise rates on Cup Day. This comes as most economists are tipping a rise on the first Tuesday in November, but this news is arguably misinterpreted.

You see, surveyors on future rate rises ask economists: “Will the RBA raise rates?” This is a question that calls on economists to ‘guess’ what the RBA board will decide, which isn’t just a pure economics question. There are politics and national psychology issues involved in the RBA’s decision, along with a fair bit of guessing.

Economists are really better qualified to answer this question: “Should the RBA raise rates on Cup Day?”. Patrick Commins in The Australianfocused on how NAB’s chief economist Alan Oster looks at the possibility of a rate rise in two Tuesdays’ time.

Oster says that while he always expected one more rise, he doesn’t think it’s needed. “Personally, if I were the RBA, I would not do anything and sit back and wait, because they have time,” he said. “But given what the governor has said, if she doesn’t follow up with a hike, then there’s going to be an issue of credibility.”

Oster said the fall in per capita consumption after inflation was also steeper now than in 1991, but the historically low unemployment rate gave families more opportunity to work their way out of financial stress. This also gave the Reserve Bank more time to respond with rate cuts if unemployment began to rise too precipitously.

This is a potentially dangerous time for the economy, with ANU research showing that “an average 28 per cent of mortgage holders’ take-home pay is being gobbled up by loan repayments and other housing costs, such as council and water rates,” Commins reported. “The housing burden is substantially higher than in 1988, according to the research, when indebted families were dedicating 22 per cent of income to housing costs in the years leading up to the devastating early ’90s recession.”

So, why is the economy looking stronger than it should with unemployment only at 3.6%? The answer there is because we have a surge in population, thanks to immigration, which brings in demand as the RBA is trying to lower spending to kill inflation. “In the absence of comprehensive and timely financial stress data in Australia, it’s difficult to know to what extent families with mortgages are struggling,” ANU Professor Ben Phillips said. “We do know that most households with a mortgage are facing the highest average repayments relative to income in 40 years, suggesting that many households will find their current repayments challenging.”

One economist who thinks the RBA will raise rates on Tuesday week is CBA head of Australian Economics Gareth Aird, who said mortgage payments as a share of income would continue to rise, regardless of further rate hikes, with a large share of fixed-rate borrowers still to roll on to higher variable rates into next year.

I bet Aird would prefer to see no rate rises. He knows that as these borrowers go from low fixed rate home loans to high variable rate loans, they’ll cut spending and the economy will slow next year, with unemployment likely to rise significantly.

My view is that the RBA has done enough, but the impact of the rate rises is having a lower effect because of the number of people who went on to fixed rate home loans during the pandemic was historically a record 40%. Usually only 15% of borrowers have fixed rate loans, so interest rate policy worked more quickly.

I’d love RBA Governor Michele Bullock to say what I’m arguing but she’d be accused of giving into government pressure. However, a person of Ms Bullock’s standing should be able to do the right thing without worrying what political pygmies, some self-assured economists and smart Alec media types have to say.

We’re talking about households with historically high money problems and the prospect that it will get worse with a 13th rate rise and more people migrating onto high variable rate loans.

I hope Michele sticks it to the pressure groups, and as the respected economist Alan Oster said, holds back on another rise.

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