The Australian Economic Rule of Three

Following the Reserve Bank of Australia ’s 12th interest rate rise in 14 months, Governor Philip Lowe appears to have not only lost patience with inflation but is rapidly losing the ability to control it using an outdated method to combat persistent inflation and rising labour costs. And with the RBA’s inflation-fighting credibility on the line, it is no wonder the media are having a field day reporting on claims that the pain being felt among the Australian working population is solely the RBA’s fault.

This media storm is fuelled by Australia’s fixation on interest rates, due to the importance we Australians place on property ownership. And who can blame us, Australian house values have increased by an average of over 400% over the last 30 years! Unfortunately, this fixation with property is punishing a select group of Australians, which leads me to what I have coined – The Australian Economic Rule of Three.

Broadly speaking, you can divide the Australian adult population into three categories:

• Pre-Mortgage – those currently working full time without any sizeable debt.
• Mortgage – full-time workers either saving for a deposit or those already holding a sizeable property mortgage; and
• Post-Mortgage – late career workers and retirees who have a small or no mortgage.

Pre-mortgage workers are those we see filling restaurants and bars mid-week, enjoying domestic and international holiday travel, and living what appears to be, from the outside, a carefree life. And who can blame them, according the CoreLogic’s national Home Value Index, the median dwelling price for our combined capital cities now sits at ~$870,000, requiring a ~$174,000 deposit in addition to ~$47,000 in stamp duty (Victoria) totalling an eye watering and seemingly unachievable $221,000 in savings to own 20% of the “Australian Dream”. This cohort are disillusioned with the idea of owning property and have decided to (consciously or not) fill their lives with experiences.

The next cohort are mortgage holders and those saving to enter the property market. A cohort curbing their discretionary spending who are bearing the brunt of Governor Lowe’s impatience with inflation. Contextually speaking, at the end of 2022, the average Australian mortgage was $601,797, based on lending indicators from the Australian Bureau of Statistics (ABS). Using the current average variable rate of 6.12% p.a. and assuming a 25-year loan term, this mortgage has an initial monthly repayment of $3,700 which is steadily increasing every time the RBA meet – rapidly eroding this cohort’s confidence in consumer spending and quality of life.

Post-mortgage beneficiaries are those who have paid off their mortgage(s) to outrightly own property assets and benefited from the recent surge in property valuations. They may have divested property assets, and/or have accrued wealth over their working years, and now have access to a pool of funds sitting in the Australian banking system generating more interest than they have for the past 10 years. This is the segment of the Australian population we see alongside the pre-mortgage workers, filling the restaurants and (wine) bars, and fuelling the international travel boom – what can only be described as “why not” spending.

Using this method to group the Australian population, it is clearly evident that the RBA is unable to impact two of the three groups with interest rate rises to curb their inflation fuelling spending.

The infographic below, provides further evidence supporting this theory with those aged over 55 spending like there's no tomorrow, while those aged between 25-39, with the highest level of mortgage debt, are being the most responsible. Notably, Australians aged 18 to 24 have sustained their spending in real terms. With many in this age group still living with their parents, they have a lower exposure to rent and mortgage interest rate pressures. The next age group is a different story. As Australians aged 25 to 29 move out and establish their lives with rent and home ownership, they make the largest reductions in expenditure compared with other age groups.

The RBA’s major problem is that this continued spending is fuelling inflation, and the RBA is powerless to control it. The only factors that could curb their spending would be a rise in unemployment, which would have a severely detrimental effect on the Pre-Mortgage Workers, further disillusioning the “great Australian dream” of property ownership, and a recession for the Post-Mortgage Beneficiaries – neither of which any Australian wants.

There’s no denying the RBA has an unenviable task in trying to control rising inflation – and it’s hard to see any policy that they could use to bring inflation under control that doesn’t involve taking money out of the economy. Outside of higher interest rates, spending cuts, or a higher level of forced savings, there seems limited options unless the post-mortgage cohort curb their spending.