James Campbell: Mortgage pain likely even without Lowe expectation

Whose fault is it if you can’t pay your mortgage? Philip Lowe for making a prediction, or borrowers for running with it, asks James Campbell.

Whose fault is it if you can’t pay your mortgage?

From the way he’s being beaten up at the moment you’d think the responsibility lies at the feet of Philip Lowe for saying back in 2021 that, as things stood, he expected interest rates to stay ridiculously low until at least 2024.

This apparently gave people the green light to fill their boots on loans for real estate, loans they are now struggling to pay.

Lowe didn’t actually say rates wouldn’t go up, he said he didn’t expect them to go up until inflation had risen to its 2 to 3 per cent target range, and that as far as the bank could see, this wouldn’t happen before 2024.

For arguments sake, however, let’s assume people just heard the 2024 bit and went bananas.

Many Australians took a Reserve Bank prediction and went bananas, taking out home loans they can now no longer afford. Picture: Jonathan Ng

I might be missing something here, but surely that just means that, for many borrowers, interest rate Armageddon has arrived in 2023 rather than 2024.

Sure it’s a year earlier and hence people are understandably a bit pissed off.

But most home loans run for 25 to 30 years.

Seriously, unless they had some plan to radically increase their income between 2021 and next year, these people were always going to end up roughly where they are today.

Reserve Bank governor Philip Lowe was grilled on how many additional interest rate rises the central bank intends to deliver when he appeared before a Senate estimates committee at Parliament House in Canberra. Picture: NCA NewsWire/Gary Ramage

A more sensible criticism of Lowe than that he got his inflation bet wrong, it’s the RBA didn’t really take house prices into account when it set the price of money. .

To go back to October 2021, the year in which Lowe made his fatal prediction, the RBA reckoned inflation was “running at around 1 ¾ per cent”.

That would be the low inflation year in which the median house price in Australia’s largest city rose by 25.3 per cent.

How could it be that these two figures are so far apart?

The answer is that the RBA doesn’t include house prices, or the cost of servicing the loans taken out to pay for them, when calculating inflation.

So house prices can be galloping ahead – literally by a quarter in a year – and the central bank will consider this a low inflation environment.

Sure it will issue statements saying “it is important that lending standards are maintained and that loan serviceability buffers are appropriate”, as it did in October that year, but the price of housing doesn’t seem to have influenced how it was pricing money.

Actually, that’s not quite true.

The bank does include the cost of housing in the basket of goods that goes into the consumer price index, but only new housing.

The Reserve Bank includes the cost of housing in the consumer price index, but only new housing. Picture: Mark Evans/Getty Images

This matters because, while in the current environment house prices are flat or falling overall, the cost of new builds is soaring because so are inputs that go into them.

In other words, while your house might be worth less today than it was in 2021, the increase in the price of new builds is feeding into the inflation rate which is driving up interest rates, threatening to make your house worth even less.

Last week Lowe made it clear in his appearance at parliament that we can expect more of these interest rate rises before they start to ease some time next year.

While it was nice to see the years have not dulled Lowe’s taste for prediction, sadly for him he is unlikely to be around as Reserve Bank governor when history reveals whether they are right or not.

His term is up in September and the chance of him being offered another seven years are about as good as me being picked as his replacement.

In recent days there have been some reports of growing dissatisfaction among Labor MPs about the bank’s performance and some of them would like to see the back of him.

If that is so, it has taken them nine months to get to where the previous government was more than a year ago.

When musing last year about things he was looking forward to doing should he be re-elected, Scott Morrison was apt to list appointing a new governor of the RBA along with the two High Court judges and the head of the Fair Work Commission due to be replaced in the term of this parliament.

But as important as whoever get this job will be, its nothing compared to what they are being asked to do by the government, which could be about to change.

For years the bank has balanced its “triple mandate” which charges it with maintaining the stability of the currency of Australia; the maintenance of full employment; the economic prosperity and welfare of the people of Australia.

To what extent these three are compatible or should be prioritised is of course debatable.

The conventional view would be fighting inflation should be priority number one because high inflation erodes the ability to achieve the other two aims.

Next month the government will receive the results of the review into the bank which “involves considering how the RBA has looked at the Australian economy and made decisions about monetary policy, including which tools to use”.

Having barely defended Lowe while parliament made sport with him and the bank, Chalmers will now be under pressure to be seen to be “doing something” when this review lands.