Sign Boomers could destroy Australia’s inflation plan

One generation in particular has hoards of money and if it’s spent Australia’s entire plan to avoid a deep recession could go bust.

Since the RBA started raising rates in May of last year, Australians have seen the largest relative increase in mortgage interest repayments in Australian history by an enormous margin. Prior the current rate rise cycle, the largest increase in interest repayments was 58.5 per cent, which occurred over a six-year period between 2002 and 2008.

In the nine months since rate rises began, mortgage holders have seen their interest repayments more than double. For those previously on cheap fixed rate loans, which were written at an average of just 2 per cent throughout late 2020 and most of 2021, interest repayments have risen by up to 200 per cent when those fixed terms have expired and borrowers have rolled off onto variable rates.

A lot of Aussies are being squeezed by mortgage payments as interest rates rise. Picture: iStock.

Yet, despite this backdrop of rapidly rising mortgage servicing costs, a peak in inflationary pressures is yet to be confirmed and consumer spending has remained relatively strong.

As things currently stand, there are multiple different versions of Australia unfolding across the nation.

In one world, for highly leveraged mortgage holders, things have scarcely ever been more challenging, with a near record proportion of household income being directed to servicing debt.

In an another, Baby Boomers and older Gen X’s have managed to amass arguably the largest war chest of household savings in Australian history. But there are other demographics and other factors that could keep inflationary pressures elevated for quite some time to come.

A king’s ransom in household savings

According to data from investment bank UBS and the Australian Bureau of Statistics, since the start of the pandemic Australians aged 65 and over have amassed an additional $141 billion in savings compared with the pre-pandemic trend.

It’s a similar story for 55 to 64 age demographic, amassing an additional $51 billion compared with the pre-pandemic trend.

For younger generations, the experience has been quite a bit different. The 45 to 54 age demographic has seen their total level of savings fall $43 billion below the pre-pandemic trend.

For the savings of those aged 35 to 44, it’s been quite the rollercoaster. By mid-2021, this demographic had amassed $38 billion more in savings than the pre-pandemic trend would have suggested. But by the end of the 2021-2022 financial year, this demographic became the only one to have its overall pool of savings reduced, expending $34 billion during this period.

It’s worth noting that this data only covers up until the end of the 2021-2022 financial year, so the overwhelming majority of the RBA’s rate rises have not been taken into account, nor has the worst of the decline in inflation adjusted household purchasing power.

But despite the challenges some age demographics have faced, older Australians are sitting on savings to the tune of over $190 billion. If a significant proportion of this war chest is spent into the broader economy, it would go a long way to cancelling out the impact of rising rates on overall consumer demand in aggregate.

Changed priorities

With the psychological impact of the pandemic still a lasting legacy present in the nation’s collective consciousness, rising rates and high inflation aren’t slamming the brakes on household spending nearly as much as one might think.

Despite recent falls in housing prices, the pathway to home ownership for millions of young Australians is arguably tougher than it’s been in decades. Amid these challenging conditions, there is anecdotal evidence that members of Gen Y and Gen Z are increasingly focusing on the here and now.

Despite lowering house prices young people are facing challenges with interest rates so are choosing to spend on the here and now. Picture: Gaye Gerard

Given the challenges of lockdown and lives put on hold for the best part of two years, it’s a perfectly understandable response.

According to the Chairman of JD Sports for Australia and New Zealand, a sports shoe and apparel retailer, there is no sign of younger consumers reducing their spending, despite cost of living pressures and rising interest rates.

It’s worth noting that it’s not just younger generations pursuing what they want in the here and now, it’s a feature of modern Australia across all age and social demographics.

A peak in rates?

With inflationary pressures now entrenched at least for the time being, the estimates of the peak of the RBA’s cash rate keep getting revised higher. Back in May of last year calls of a peak 1.5 per cent to 1.65 per cent were common.

Today, two of the four major banks (NAB and ANZ) are calling a peak cash rate of 4.1 per cent, joining global banking giant Deutsche Bank in that particular camp. Canadian investment bank TD Securities recently took their cash rate peak estimate even higher than that, predicting a terminal rate of 4.35 per cent.

Considering a recent RBA analysis showed that 14.6 per cent of borrowers would find themselves with negative levels of spare cash after paying their mortgage at a 3.6 per cent cash rate, a 4.1 per cent cash rate or higher would see an even greater proportion of mortgage holders in significant difficulty.

Rising rates are likely to have a profound impact on house prices. Picture: NCA Newswire / Gaye Gerard

In time this could have major implications for the housing market. As things sit today, mortgage arrears remain near record lows and in aggregate households do have a great deal of savings.

But once you get down to a household by household level, it becomes clear that some are doing it far tougher than others. There are generally older households who are sitting on a huge war chest of savings, capable of potentially keeping inflation high for years to come if they are spent.

While on the other hand there is an increasing number of households living a hand to mouth existence, as evidenced by various reports and studies by food banks around the nation showing record levels of demand.

Ultimately, the fate of the housing market will be decided by what households in trouble choose to do. If they choose to be comfortable with their discomfort and hold on for dear life, even as their lender looms over their shoulder, it could help keep the supply of new listings on to the property market low, supporting prices.

On the other hand if these households choose to walk away, we could see house price falls re-accelerate and rising levels of risk throughout the housing market.

Tarric Brooker is a freelance journalist and social commentator | @AvidCommentator