Aussies may be forced to sell homes, warns RBA governor

The Reserve Bank Governor Michele Bullock has doubled down on her message that there won’t be rate cuts in the near term, bluntly warning that some Aussie families struggling with high mortgage payments may end up losing their homes.

The RBA governor acknowledges that high interest rates are hurting households, but she warns that the alternative is a recession.

The details

Just days after Treasurer Jim Chalmers declared that high interest rates were “smashing the economy”, a defiant RBA Governor delivered a blunt message during a speech in Sydney.

“It's premature to be thinking about rate cuts,” Michele Bullock told her audience.

Ms Bullock referred to comments she made after the last RBA board meeting in August that rate cuts were unlikely in the next six months.

“I understand that the board’s message on interest rates is not what many borrowers want to hear.”

Official interest rates have been at a 12-year high of 4.35% since November last year, meaning the majority of Australians with variable-rate mortgages are paying retail rates in the vicinity of 6-7%.

The RBA has been waging a long war to bring down high inflation in Australia since mid-2022 when it first started raising the cash rate from the emergency pandemic low of 0.1%.

It has raised the cash rate no less than 13 times.

While core inflation has come down to just under 4%, Ms Bullock made clear that’s still too high, reiterating the central bank is determined to get inflation back into its 2-3% target range - even if that means putting up rates again.

She argued that if the RBA was too slow to act, this could see another inflation break out, where the central bank would have to take drastic steps.

“Ultimately, we would need to slow the economy down by more, which would result in a larger rise in unemployment and higher risk of recession,” she warned.

Acknowledging that keeping the cash rate high was having a real impact on households, making them cut back on spending, Ms Bullock tried to argue that was preferable to high inflation.

“People are hurting from high interest rates, I do understand that,” she said. 

“It’s actually high inflation that is really causing trouble for people and causing trouble for the most vulnerable.”

The Governor highlighted high housing costs (construction costs and sharp rent growth) and the high cost of what she termed “market services” (things like dining out and recreation activities) were keeping inflation “sticky”, meaning it is taking longer to return to the 2-3% target band. 

Homeowners in trouble

“Those with mortgages are feeling the squeeze on their cashflows not just from high inflation, but also from the increase in interest rates that has occurred in response to it,” Ms Bullock said.

“As labour market conditions ease, more households will experience a strain on their finances from unemployment or reduced working hours.”

That may mean that “some may ultimately have to make the very difficult choice to sell their home.”

Referring to the graph above, Ms Bullock said that the RBA now estimates about 5% of households with mortgages “are in a particularly challenging situation where the combined total of their essential spending and scheduled mortgage repayments is more than their income.”

ABC Business reporter David Taylor estimates that about 185,000 Australian households “are going backwards…they’re having to dip into their savings to meet essentials.”

Figures from SQM Research show the number of “Distressed Listings” is rising rapidly in some states (albeit from a low base).

However, nationally, the number of vendors selling under duress is lower (-1.1%) than 12 months ago, and the overall number is still low by historical standards.

Interest rate cuts?

So, given the Governor’s latest tough talk, should we rule out the prospect of interest rate cuts in the next six months? 

Not so fast.

Despite her mantra that the RBA is prepared to raise rates again if necessary, Wednesday’s weak growth figures show that the Australian economy is far from overheating - in fact, it’s almost flatlining….and if it weren’t for population growth from overseas migration, we’d be in a recession now.

The financial markets clearly also don’t believe the RBA Governor.

They’ve fully priced in two 0.25% cuts in the official cash rate by April next year.

Peter Martin, the Visiting Fellow at the Crawford School of Public Policy at the Australian National University, is tipping that the RBA will start cutting rates in November—on Melbourne Cup Day.

Martin, who’s also the Economics Editor of the academic website The Conversation, believes that when America’s central bank—the Federal Reserve—starts cutting US official interest rates later this month (Federal Reserve Chair Jerome Powell has already signalled this will happen), momentum will be created, which will inevitably mean rate cuts in Australia soon.

“When Powell actually cuts rates”, Martin says, “the Australian dollar is likely to climb further.”

“This is because cuts in the US make the US a relatively less attractive place to hold money and Australia a relatively more attractive place.”

“The more the Australian dollar climbs relative to the US dollar, the cheaper the imports that are priced in US dollars become – which is another way of saying the lower Australian inflation becomes,” he explains.

“It’s the same for other countries,” he says. 

“Merely by cutting their own rates, the US and other countries will be easing inflation in Australia.” 

“The more they do it, the more Australian inflation will ease, building up a stronger and stronger case for our Reserve Bank to cut rates.”

Let’s hope Peter Martin, not Michele Bullock, is right.