Interest rates war makes mortgage holders the new forgotten people

The average share of home repayments as a percentage of disposable income has increased from 17 per cent to 24.7 per cent, with the increases substantial across all income groups. Picture: Alan Barber

The sobering new reality for middle Australia is no longer in dispute. Mortgaged homeowners are bearing an increasingly intolerable burden in the nation’s fight against inflation.

This big squeeze being forced on to middle-income families is at its most piercing since the early 1980s. And this week’s decision by the central bank to impose yet another rate hike directly after the federal budget may not be the end of it, with predictions that the cash rate could head towards 5 per cent.

There are now 3.3 million households that may rightly feel they are standing alone in this battle. Aspiration is under attack.

Yet the Albanese government continues to respond from a defensive position. This has worked so far.

The underlying forces that kicked off the new cost-of-living crisis were largely inherited and global in nature: chiefly the Russian invasion of Ukraine last year and broken supply chains arising from the pandemic.

But with Australia having among the highest core inflation rates in the Western world, arguing about where it started is wearing thin as an excuse. It doesn’t speak to whether the government is handling it well. The new political battle is now one framed around the question of how much of the inflation problem is increasingly home-grown.

Opposition Treasury spokesman Angus Taylor’s well-rehearsed riposte that inflation is now being driven out of Canberra rather than the Kremlin may not have cut through yet, but it may begin to gain currency after this week.

This is presenting an unexpected political challenge for Anthony Albanese, who until this week had left most of the talking on the economy and inflation to his Treasurer, Jim Chalmers.

In a speech to the Sky News economic outlook conference on Friday, the Prime Minister defended the budget and Labor’s plan to deal with the “urgent” productivity challenge while warning of the grim economic outlook. He gave only a fleeting reference to mortgage pain.

“In the two budgets we have delivered, our government has focused on making sure fiscal policy works with monetary policy – not against it,” he said.

“Because we know interest rate rises put pressure on mortgage holders and small business.

“And we know inflation is regressive. It hurts those with the least, the most.”

Albanese maintains that he is applying a “balanced approach” to the problem. The risk for Labor is the perception that it made a calculated decision early on in this cycle that borrowers more than others could afford to wear the cost. And it had Reserve Bank of Australia governor Philip Lowe as the fall guy.

How long this defence will remain electorally sustainable is questionable.

While the Prime Minister and his Treasurer eschew accusations the government is adding to pressures, there appears little appetite around the cabinet table for aggressive fiscal policy intervention to assist in bringing inflation down.

At the same time, Employment and Workplace Relations Minister Tony Burke, rather than seeking to curb some of the more excessive union demands for higher wage growth, which the RBA has now identified as a risk factor without urgent productivity gains, is inviting comparisons to the Whitlam government’s labour minister, Clyde Cameron.

Labor’s political apparatus is in accord on all of this. While it rails against Lowe, it appears content to leave the work to monetary policy in the knowledge that the Reserve Bank will be cast as the villain wielding the mallet.

Lowe publicly has described the budget as having a generally neutral impact. Many economists disagree.

The point the opposition is seeking to make is that neutral isn’t good enough. The government needs to do more.

This week in a speech to an investment conference, Lowe essentially read the riot act over wages and productivity. It may have been nuanced but the underlying message is that without productivity gains, wage increases of the scale now being forecast, while demand is running strong, will almost guarantee further rate rises.

With record low productivity rates also revealed this week, the point Lowe is making is that unit labour costs (the cost of labour per unit of output) and the consumer price index are now highly correlated.

Economist Chris Richardson describes the penalty effect of Labor’s big-spending cost-of-living relief for low-income households in the budget last month as less a redistribution of wealth than a redistribution of pain.

“We are in a trade-off economy … everybody is hoping for a free lunch as we fight inflation and there isn’t one,” Richardson says this week in the wake of the 12th interest rate rise in almost as many months, amid the most rapid tightening of monetary policy in three decades.

“All you can do is shift the pain around. You can make sure the most vulnerable are protected … the budget did help to do that. Various government policies have been taking pressure off the vulnerable and wage earners … but all that adds pressure to borrowers.

“For mortgage holders, it’s the RBA or bust in terms of the inflation fight, and no one else is helping.”

The implicit conclusion is that the government has made a political decision to deliver to its core Labor constituencies knowing the risk of transferring the inflationary liability elsewhere.

Chalmers furiously defends the government’s fiscal settings, arguing that the budget had productivity and inflation as central principles. Yet he cannot deny that the cost burden is increasingly falling to one group.

The Treasurer has identified “ordinary workers” as Labor’s cause, claiming it is they who are bearing the brunt of interest rate rises.

The Coalition, by contrast, has sought to define an electoral contest for middle Australia, more specifically middle-income earners paying off their own home.

While the government can point to what it has done to help different groups at one end, there can be no argument that mortgage holders are the ones being targeted to bring inflation back under control.

The politics of this may make sense to Labor, even if the economics don’t. But it is risky.

Central to Albanese and Chalmers’ broader political strategy is the belief and hope that the government can continue to avoid any blame or complicity in this great gamble.

This week Chalmers sought to drive a wedge between the government and the RBA, barely able to contain his irritation.

“I do expect that there will be a lot of Australians who will find this decision difficult to understand and difficult to cop,” Chalmers said on Tuesday following the RBA announcement.

“The Reserve Bank’s job is to squash inflation without crunching the economy. And they will have lots of opportunities of course to explain and defend the decision that they’ve taken today.”

But Chalmers’ veiled criticism of Lowe ignores the task the RBA has been handed. It is getting little if any help from the government in the fight.

Growing resentment will surely make it more difficult for Labor to avoid blame the longer the pain goes on and the more it defers to ideologically driven remedies to cost-of-living pressures through its wages and industrial relations agenda.

There will always be winners and losers from an acute inflation problem. Yet Albanese and Chalmers clearly have concluded that cutting back spending or raising taxes is not a political option they are willing to entertain. Labor is not helping the situation with its submissions on the national wage case.

This has reduced the ability of the system to spread the pain more evenly.

With the solution too narrowly focused, using Richardson’s “RBA or bust” analysis, it may well end up being mortgage holders that go bust.

The question is whether or when there is an electoral awakening in the mortgage belt, a silent group of Australians who swung behind Albanese last year to deliver Labor government on the promise of safe economic management and real wage rises, only to be hit with 11 successive interest rate rises since the election and a fall in their living standards.

Labor appears to have adopted a political strategy of blaming Lowe for 12 months in the belief that by now there would be signs of improvement and the worst of it was over.

That has not happened. And it is unclear what the Albanese strategy is from here. The risk of recession is now greater.

With unit labour costs now a significant problem, Burke’s claims that the proposed industrial relations reforms for “same job same pay” won’t have a negative productivity impact are strongly disputed by employers.

Taylor accuses Labor of not fully understanding how the economy works.

He cites the national accounts figures released on Wednesday, a day after the rate hike, that showed the economy grinding to a halt and productivity plunging by 4.6 per cent in the year to March, the largest single drop on record.

Lowe has repeated his warnings that the wage growth trajectory is unsustainable without measures to address the productivity decline.

This is a problem for which the government cannot avoid responsibility. Yet it has no short-term fix on offer.

As Finance Minister Katy Gallagher said this week, this is not something that can be solved quickly.

Chalmers has said that while productivity is important, it is only one of the government’s priorities. Ahead of this, it appears, is delivering on an election commitment to real wages.

The Treasurer is clearly frustrated. There is a re-emerging of traditional class war tendencies in the government’s rhetorical response, with the ACTU delivering the attack lines that suggest businesses are blaming workers for the rate increases.

Firing a warning shot at landlords over rents this week, the Treasurer also has drawn a line between two competing constituencies.

While there is no question that rents are rising rapidly, they are not rising as fast as mortgage repayments. This is emerging as a new electoral battleground.

One Labor source told The Australian that they were deeply concerned about a shifting mood in mortgage belt seats and believed the latest rate rise could be the beginning of political trouble for the government.

“This rate rise might be the one that counts,” the source said.

Analysis by the Australian National University revealed this week by The Australian shows that rent costs as a share of income has not risen during the past five years. On the contrary, they are now lower than before the Covid-19 pandemic.

The author of the analysis, Ben Phillips, explains that for low-income households, rental cost as a percentage of disposable income has declined slightly due to lower rent increases in the years 2019 to 2021, combined with strong income increases, lower unemployment rates and increases in indexed welfare payments.

“Housing costs for low-income households overall have remained stable while other income groups have seen significant overall increases in housing costs,” he says.

“This is due to greater likelihood of renting (lower cost increases or reductions) and income growth being higher for low-income households mostly thanks to welfare payment increases.

“It still remains the case that low-income households pay a greater share of income on housing than any other group.”

Mortgage costs, on the other hand, have risen significantly.

The ANU analysis shows overall mortgage costs as a share of income are at their highest since 1984, with “a very sharp increase in the last two years obviously related to sharp increases in interest rates but also higher average debt levels”.

The average share of home repayments as a percentage of disposable income has increased from 17 per cent to 24.7 per cent, with the increases substantial across all income groups.

Although few low-income households have a mortgage.

This is where the Coalition seeks political opportunity in the belief that at some point the electoral dial will start turning against the government.

“Middle-income mortgage holders are the new forgotten people,” a senior Liberal MP says, referencing Robert Menzies’ campaign slogan of 1942. “These are the people we need to represent as a party.”

At the heart of the Coalition‘s campaign will be the notion of aspiration. Home ownership is central to this argument.

Although the argument may well shift from assisting people to buy their first home to protecting those who have one from losing it.

Yet the Coalition must tread carefully. It can’t argue at the same time that workers don’t deserve a pay rise.

One thing is clear, however. Without a plan to address the cocktail of policies that could add to the inflationary problem, the government’s political strategy will come under increasing pressure.