Pain points

Labor must be prepared to cut spending in next month’s budget in order to ease the pain on middle income households. By Nick Cater.

The Treasurer’s promise of a bread-and-butter budget tells us less than we deserve to know about next month’s financial statement. Does he mean bread, as in a $2.20 soft-white sandwich loaf or as in fresh-baked rye sourdough at $8.50?

Was it butter, as in $3.60 Woolworths home-brand, or Paris Creek biodynamic organic butter at $8.69 from Harris Farm? The price difference of almost 300 per cent says much about the economic gulf between two Australias. No prizes for guessing which part will cop the biggest thrashing from rising interest rates. It’s not called the mortgage belt for nothing.

In Oran Park in Sydney’s outer west, just 8 per cent of homes are owned outright, and 54 per cent of homes have a mortgage attached. In Mosman, deep in teal country on Sydney’s north shore, barely a quarter of households (26 per cent) are paying off their homes while 37 per cent own their homes outright. Indeed, the 2021 census tells us 478 lucky Mosman households have paid off their mortgages in the past 10 years. The sly redistribution of wealth from the asset poor to the asset rich is one of the less equitable consequences of keeping interest rates low in an unprecedented period of monetary expansion.

Raising interest rates is a blunt tool to control inflation, but the only one available when we lack the courage to cut public spending. Think of the response to inflation as a legalised form of torture – deliberate application of pain for as long as it takes to reduce spending. Since politicians are reluctant to take the electoral pain that comes from cutting budgets, families must be tied on the rack and stretched.

What’s more, the pain is unequally distributed. The first Australians to be hurt will be those living in the 3.2 million households with a mortgage. The owners of the 1.5 million or so mortgaged investment properties are next, many on less-than-stellar incomes saving for retirement. Punishing those saving for their own homes or retirement is a perverse but unavoidable consequence of applying the monetary sledgehammer. Life won’t be easy either in Australia’s 2.8 million rented homes as owners seek to pass on the costs. Among those who have paid off their homes, predominantly Australians over 55, the pain will be hardly felt.

One small step on the RBA’s overnight cash rate is one giant leap towards impoverishment for those paying mortgages. Raising the target cash rate from 0.1 per cent in April to 2.35 per cent this month takes the increase in monthly repayments to about 14 per cent since April. The 6 per cent interest rates the banks forecast could be with us by Christmas mean repayments will have increased by 40 per cent in nine months. The average borrower in NSW will pay about $1400 more each month than before the election. When you add electricity, food and fuel costs, something has to give. That something will be discretionary spending, certain to drop sharply in the mortgage belt, even as it continues to bounce along in wealthier suburbs.

The gap between haves and have-nots will widen. Before recent rate rises, housing costs absorbed 15.5 per cent of gross household income for families with mortgages compared to 3 per cent for those without a mortgage. For those in private rented accommodation it was 20 per cent. The effects of mortgage rate increases are deeply regressive. For those with a mortgage in the lowest income quintile, average housing costs were $376 a week before the recent increases, 27 per cent of the household budget.

It raises the prospect of a two-speed economy in which the laptop class hovers calmly above the sacrifice of fellow Australians, just as it did during lockdowns and vaccine mandates.

Modelling by Roy Morgan shows almost one in five home borrowers were classified as at risk of mortgage stress in the three months to July. It forecast a rise in interest of a further 1 per cent will push 1.1 million homebuyers into the at-risk category, close to one in five of those on a mortgage. Half will be classified as extremely at risk. The latest survey from Compass Polling shows inflation anxiety has shifted to food and the cost of keeping a roof over one’s head. Food is now the number one cost-of-living concern for those over 55, up from third place in April. Electricity prices are in second place with petrol and diesel third. For those under 54, rising rents and mortgages cause the most pain. In the 18-34 age group, 40 per cent nominate housing prices as their biggest inflationary concern and 23 per cent say food, with fuel a distant third.

Next month’s budget is a chance for Labor to press the reset button: Jim Chalmers must ignore the burning sensation of the $50bn of unexpected revenue smoking his pocket and use it to pay down national debt. It may be too much to hope Labor will break the habits of a lifetime by making serious cuts to spending. But sharing the pain is the kindest thing it could do to ease the burden on the middle-income households in less-fashionable streets it feigns to represent.