For RBA, an increase in foreclosures the lesser of two evils

More families defaulting on their mortgages, or everyone not being able to afford bread? This is the RBA’s dilemma.

ANALYSIS

No doubt Philip Lowe would not want anyone to lose their home as a result of the Reserve Bank of Australia’s crusade against inflation. But he must know people will.

For the central bank governor and his board, an increase in foreclosures is the lesser of two evils.

“The RBA doesn’t have a choice,” said UNSW Business School’s Kristle Romero Cortés. “One family defaulting on their mortgage, compared to everyone not being able to afford bread, is what they are envisioning.”

Mr Lowe has made it clear he won’t allow the latter to occur.

“The board’s priority is to return inflation to target,” Mr Lowe said last month after hiking rates for the ninth time in nine board meetings.

Foreclosures will be most common among people in negative equity. Picture: Supplied

“High inflation makes life difficult for people and damages the functioning of the economy. And if high inflation were to become entrenched in people’s expectations, it would be very costly to reduce later.”

What Mr Lowe and the board have done since May is proving very costly for many borrowers right now.

After this tenth hike, monthly repayments on a $500,000 loan will be nearly $1000 higher than a year ago. On $1m, the total increase is nearly $2000 a month.

How many people have $2000 spare every month?

Foreclosures will be most common among people in negative equity. People who have built up a stake in their home will be able to sell to get out of arrears.

Recent research has suggested that nationally, about 120,000 households would be in negative equity now after entering into low-deposit loans near the end of the pandemic property boom. A further 300,000 are close to being in the red.

The number of defaults will be a function of how many more rate rises there are from here and how long it is before the RBA begins to cut to boost economic growth.

Before Mr Lowe’s comments on Tuesday, it looked as if there would be two further increases, then a cut in the first half of 2024.

But now, one more hike appears to be the likely outcome, according to the ASX futures market and economists (some of whom think the first cut will be later this year).

As Mr Lowe said late in 2022, these are times that are “very difficult, particularly for people without buffers, but if we manage this well, as a country, we can look forward to prosperity again. We can put that at risk, though, if we say: ‘Well, it’s all too hard. We don’t want to cause any pain for anyone’.”