Australian Homeowners Brace for Yet Another Mortgage Shock

Treasurer Jim Chalmers says Australian workers should not be held responsible for the nation’s inflation problem. That is, at least, a welcome clarification.

“I’m reluctant to blame the workers of this country for our inflation challenge,” he said on Tuesday morning, directing attention instead to elevated petrol prices.

But no one is blaming workers for inflation. The argument is that demand is running ahead of the economy’s ability to supply goods and services — and that government spending under Labor is adding to that pressure.

By suggesting his critics want to blame workers, Chalmers avoids addressing the part of inflation the government can influence: excessive public spending at a time when the Reserve Bank of Australia would prefer demand to be weaker.

Petrol prices are undoubtedly adding to household costs. However, inflation was already above the RBA’s target before the latest oil shock.

The RBA is widely expected to raise the cash rate from 4.35 per cent to 4.6 per cent on Tuesday afternoon. If delivered, the move would take interest rates to their highest level since 2011 and mark the fourth increase this year.

Borrowers who believed last year’s three rate cuts signalled the start of lasting relief have now seen those expectations thoroughly overturned.

If lenders pass on the full increase, Canstar estimates monthly mortgage repayments would rise by about $91 for a $600,000 loan, $114 for a $750,000 mortgage and $152 for a $1 million loan.

The combined impact is more alarming. Four rate rises this year would increase repayments by about $364 a month on a $600,000 mortgage. For borrowers with a $1 million loan, the monthly increase would be roughly $606.

That amounts to approximately $4,400 and $7,300 a year respectively — money being taken from household incomes that have already been taxed.

For families already struggling to balance their monthly budgets, there may be no painless costs left to eliminate. The interest rate increase is intended to bring down stubborn inflation, but high prices are already placing significant pressure on everyday household spending.

The fallout from the expected rate rise will reach far beyond people with home loans. As households cut back, restaurants, retailers and other small businesses will lose customers.

Those businesses are also paying more to borrow as interest rates rise. Over time, weaker sales can reduce working hours, hiring and employment. That is how higher rates slow demand throughout the wider economy.

For prospective home buyers, the outlook is complicated. Falling property prices could improve affordability, but higher interest rates will reduce the amount banks are willing to lend.

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Renters do not face mortgage repayments, but they remain exposed to a weaker jobs market. They may also find it harder to benefit from new housing construction when higher financing costs make building more expensive.

Some landlords may try to recoup their higher borrowing costs through rent increases, although how much they can charge will depend on housing demand and supply in each local market.

The RBA has a clear reason for acting. Underlying inflation has been running at 3.6 per cent, well above its 2 to 3 per cent target. Higher oil prices add to an inflation problem already being exasperated by domestic inflationary pressures.

Yet Finance Minister Katy Gallagher declared yesterday that ‘the challenges that we’re having now in relation to inflation are not caused by government spending’.

How convenient for the minister responsible for controlling expenditure.

In February, RBA governor Michele Bullock said ‘we are seeing aggregate demand, public and private, push up against the limits of growth’. Public spending counts, even when ministers consider the programs worthwhile.

The government can’t control global oil prices, quite obviously. But it should be able to control its own federal Budget.

Pressure from overseas should strengthen the case for restraint at home. Instead, borrowers are being asked to absorb another increase while the Finance Minister declares her own portfolio blameless.

It’s ridiculous head in the sand stuff.

Nor is there a reliable moment when things are likely to get any better. ANZ expects another increase in November. The Commonwealth Bank isn’t currently forecasting one, but acknowledges the risk and has pushed its expected first rate cut all the way back to August next year.

The RBA is left to weigh up the cost of persistently high inflation (when Labor isn’t doing its part fiscally) against the damage another increase will do to an economy already slowing down.

The danger is that bringing inflation under control will cost Australians their jobs as well as more of their income. That makes the government’s refusal to acknowledge its own contribution harder to stomach.

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