With interest rates on the rise and rents soaring it’s easy for householders to feel they are bearing the burden of the economic downturn but the reality is that the economy, and everyone from the big banks to the government, is ultimately dependent on the financial health of individual Australians.
If too many people default on their home loans then banks like the CBA, which has a mortgage book worth a stunning $40 billion, will see their margins and their profits crumble and this will have knock on effect for all of the shareholders who depend on their dividends from the bank’s share price.
The Reserve Bank actually knows this, and there is a tipping point in their interest rate policy. Right now, they want to raise rates to get inflation down but if they go too far and Australia goes too deep into recession because rates are too high, then that will scar the economy as much if not more than inflation.
The University of New South Wales has just released some analysis under the headline ‘what happens to the economy if you can’t pay your home loan’ and the positive news is that Australian homeowners are a resilient bunch.
According to Dr Romero Cortés, from the UNSW School of Banking and Finance, the fact that more Australians are on variable interest rates than in the UK and US means that while mortgage stress might rise faster, this helps the RBA’s goal of preventing the economy from “running red hot” and collapsing in on itself because of runaway inflation.
“Like any central bank, the RBA wants to ensure price stability, and they will do whatever it takes to prevent us from losing this. They don’t want consumables like bread and eggs to suddenly be seven times as much the next day. If that happens people will revolt, effectively,” Dr Cortes said.
“We’re nowhere near there. But that’s why we don’t want to get anywhere near there. So, the RBA stay very much on top of this, and their role is to keep this issue as front and centre of the Australian public for as long as they need, so they are more cautious with their spending over a longer period of time.”
It’s in this way that the RBA plays a psychological stabilising role, not just a financial one.
“You know, ‘Okay, the RBA is on this: so, I don’t need to freak out’,” says Dr Romero Cortés. “Because if you as a member of the financial public start freaking out, you’re more likely to make poor financial decisions which have more of a domino effect on the wider economy.”
Having said that, there is a limit to how much financial stress homeowners can undergo.
“There could be a point where homeowners and others can’t withstand the raising of monthly repayments any longer,” she says. “This is not yet the case.“
Dr Cortes says that at the end of the day, lenders don’t want homeowners to default on loans or to proceed with a repossession. “It’s costly, in time, effort and capital for them,” said Cortes.
“They would much rather work with the borrower before they get to that point of extreme financial difficulties.” It’s a situation of mutual dependence. Remember that your bank needs you as much as you needed them to provide the mortgage. It might not feel like it right now, but that gives homeowners – and that is 6.2 million households –more power as a group than they realise.