Old habits die hard.
“Ten news chiefs looking for new mortgage holder now getting slugged by interest rate rises,” was the request via the media call-out site Source Bottle on Monday.
The Age got its mortgage holder, a struggling family in Melbourne’s south-east, for a run today.
These were the sorts of stories we were told back during the boom, when the Reserve Bank kept jacking up interest rates. “Mortgage stress” had a brief moment in the sun as the fashionable economic indicator for the commentariat.
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It’s different now, in two ways.
As we’ve noted before, the majority — perhaps 80-90% — of residential mortgage holders did not lower their repayments rate when the RBA slashed interest rates in the face of the oncoming GFC shock. The monetary stimulus so beloved of conservative economists ended up being saved at a much greater rate than the fiscal stimulus. As interest rates come off emergency setting employed by the RBA, the “increase” in repayments will be confined to a tiny minority of mortgage holders.
The media, with its fixation on mortgage holders, doesn’t appear to get that. Hopefully, the RBA does get that, however, because it means that, until rates increase significantly, its attempts to throttle back on demand will have limited effect. For a year or two, we’ll be living in a US- or NZ-like mortgage market where the dominance of fixed-rate loans means monetary policy is less effective.
The downside of that is that the inflation-obsessed RBA might figure that’s all the more reason to go hard on interest-rate hikes. That’s despite the fact that wage-inflation is likely to be low to moderate for another year or two as businesses fully use the employees they’ve still got before adding new staff. And, as economist Barry Hughes noted in an excellent piece in the AFR yesterday, it’s despite the fact that the treasuries of our incompetent state governments are playing a key role in driving up inflation with taxes and charges, something doubling or tripling interest rates will have no impact on.
It’s different in another way, a more important way, as well.
The movement of interest rates from emergency lows back to more normal, non-stimulatory settings is not a simple Ctrl-Z of what’s happened over the past 12 months. We are not returning to the circumstances before last September. We are moving to a new normal, one much more dominated by the big banks.
The collapse of the non-bank mortgage market and the consolidation of the big banks — permitted by a government desperately worried about their health — means our financial system is now far more than ever in the thrall of the Big Four. Moreover, they have used the collapse of the non-bank sector to reduce their exposure to business lending and increase their exposure to safer, securitised residential mortgage lending, replacing the non-bank sector.
The result is being felt by small- and medium-sized business across Australia who continue to struggle to get finance. The media should be out interviewing not home owners but small businesses who want and can’t get, or can’t afford, loans to expand their businesses and employ more people. The big banks are part of the reason why commercial lending remains stuck at levels not seen for several years, despite the turnaround in consumer and business sentiment.
It’s not merely that the era of easy credit has ended, it’s that our finance industry has altered its structure in favour of household mortgages or, in the case of ANZ, what history says will be an ill-fated offshore expansion strategy.
Whether the RBA fully understands the predicament faced by many businesses seeking finance is not clear. Every rate rise, however meaningless for residential mortgage holders sitting on boom-era repayment levels, hurts businesses who already face higher rates and more difficult borrowing. And they’re where most of our job growth will come from as the fiscal stimulus winds back.
What’s left of the residential mortgage-backed security industry is still on life-support from the government via AOFM financing. The government needs to do a lot more to encourage the non-bank sector back to something approaching life, given it won’t return to its pre-GFC levels for, seemingly, many years. The Reserve Bank has minimal interest in such structural issue. It is focused on one number only, inflation. Let’s hope it understands how the country has changed since it hit the emergency button last year.