In the thick of a cost of living crisis, a “profitless boom”, stagnant wages, and an impending global recession, some of Australia’s richest men think life could soon become “hell” if interest rates rise as they’re expected to.
The call was made by Chris Richardson, an economist and partner at the Big Four consulting firm Deloitte, at the Australian Financial Review’s Banking Summit this week. At the conference, a throng of Australia’s well to-do reptilian executives gathered to proselytize on the risks faced by banks in today’s economy, as Australians gear up for what are expected to be some of the most violent economic conditions seen in modern times.
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The thesis goes: If interest rates rise above 3 percent, as is the running bet made by financial markets, banks could earn themselves much-unwanted political attention after they’re forced to twist the knife in the back of borrowers who have taken out colossal loans at extremely low rates over the last few years.
“If that happens, most models would suggest you’d lose 15 percent to 20 percent out of housing prices in Australia—there goes $2 trillion,” Richardson said. “Markets are saying your life is about to be hell.”
Others at the event urged caution, saying the scenario is more worst case than “inevitable”.
One of them was Anna Bligh, the chief executive of Australia’s peak banking body (which is often described as a “joke” so “half-hearted” it may as well not bother), who essentially said such a thing would indeed suck because banks have worked so hard to reclaim the trust of their customers after a recent royal commission found that each of them were little more than rogue vehicles of arrant greed.
“I think [banks’] ability to hang on to [newly positive community perceptions] is going to very much depend on how they deal with those individuals, those families and those businesses who will find the next 12 to 18 months very, very stressful,” she said.
Australian households, on average, carry some of the heaviest debt burdens in the world. Earlier this month, experts flocked to warn just how serious an impact ongoing interest rate rises would have on them. One batch of analysis suggested that close to 1 million more households could find themselves in “serious” financial stress if that 3 percent rate hike pans out as it’s expected to.
Others said Australia’s housing-induced debt situation is alarming enough as it is.
One of them is Chris Martin, a senior research fellow at the University of New South Wales’s City Futures Research Centre. In early May, he pointed to data from the Bank of International Settlements, which showed credit taken out by Australian households amounts to about 120 percent of annual GDP (a lot).
“We have a big potential problem courtesy of the way we have run our housing system, for not just the last decade but for the last at least three decades,” Martin told the Guardian, referring to policies that encouraged people to take on more debt, particularly to purchase investment properties.
“Our housing system is only weakly governed by real housing policy objectives, that is, ensuring everyone can own or rent a decent affordable home. Instead, it is governed by objectives of wealth creation, and sometimes by concerns about financial system stability.”
By comparison, Australia’s household debt load is second only to the ratio seen in Switzerland, which is 130 percent of GDP, and soars well above the 75 percent average seen across other advanced economies.
Earlier this month, Australia’s central bank, the Reserve Bank of Australia, lifted the cash rate—for the first time since 2010—to 0.35 percent.
Through most of the pandemic, former prime minister Scott Morrison postured nauseatingly about how lucky Australians were to have found themselves shielded from the inflationary pressures—and Ukraine invasion-induced energy price hike—faced by much of the rest of the world.
But inflation eventually rose, without the wage increase to match, and now Australians are being warned to brace themselves for a tough shift. On Tuesday, even the banking regulator issued a warning.
“The next few years will be far from plain sailing,” said Wayne Byres, chair of the Australian Prudential Regulation Authority. “Housing loans have been, as they say, as safe as houses. That may not be the pattern in the future”.
The impacts will likely be immeasurable, and Australia’s newly-elected Labor government will be left holding the bag.
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