Today there are three Australias

Not that long ago there were two Australias.

1. The Haves and The Have Nots.
2. Tall Poppies and the Rest of Us.

But now there appear to be three Australias.

1. Tenants

There are roughly one-third of Australians who are tenants suffering from double-digit rental increases, while at the same time experiencing sharp falls in real wages.

2. Mortgage holders

Then there is the roughly one-third of Australians who are mortgage holders that are being hammered by the recent aggressive interest rate hikes and are also suffering from falling real wages.

This group has seen their average variable mortgage repayments increase by around one-half, shaving tens of thousands of dollars in annual disposable income from their budgets.

If that isn’t stressful enough a large share of these resetting borrowers will be unable to refinance to more competitive rates because of the Australian Prudential Regulatory Authority’s (APRA) 3% mortgage serviceability buffer.

This buffer requires prospective borrowers to be able to meet mortgage repayments at 3% above the prospective loan’s interest rate, meaning borrowers will be assessed at around 9%.

This is commonly called ‘mortgage prison’ locking in recent mortgagees into paying an exorbitant interest rate.

These mortgages were already subject to the serviceability buffer when the loan originated.

They should be free to refinance without meeting the 3% buffer all over again.

3.  Own their home outright

Finally, there is the lucky one-third of households – mostly older Australians – that own their homes outright and are unaffected by the RBA’s recent interest rate increases.

And it is the older generations that are driving Australia’s household consumption and somewhat forcing the RBA to continue to lift interest rates, which is negatively affecting the other two Australia.

Many of these lucky-third are also benefiting from higher inflation in rents given they dominate the ownership of investment properties.

A lot of these investors also own their investment properties outright.

In addition, older Australians on the aged pension also have their incomes indexed to CPI (unlike workers’ wages), meaning they are largely protected from inflation shock.

According to an analysis of seven million CBA customers’ purchasing habits, those aged under 35 increased their spending by only 3.4% in the year to March, which was less than half the rate of inflation and indicated that the average young person is buying fewer goods and services.

The age group most under pressure was 25 to 34-year-olds, whose spending remained nearly flat in value over the previous year despite a 7% increase in prices.

By contrast, spending among the over 65s climbed at a faster rate than inflation over the past year, with CBA customers over this age increasing their spending by approximately 12%.

All growth figures - as shown in our table below - are provided per person, so they are not exaggerated by the current immigration surge.
Baby boomers continue to shape our destiny and economic makeup.

It is little wonder that a Sydney beachside café can get away with charging $10.90 extra for a serving of avocado. And that excludes the toast!

Postscripts:

A note to the RBA

Increasing interest rates further will do little to reduce inflation. In fact, it will probably do the opposite.

It is time for a good hard look in the mirror and I suggest that the RBA board goes for a walk beyond the leafy and/or beachside inner suburbs and takes a hard look around.

And before I go, please step out of the groupthink loop. It is time to think outside the box!

If you don’t then you will really stuff things up – unnecessarily – for two-thirds of Australians.

Second note to the RBA

And best also to ignore the latest monthly headline CPI results.

The current headline CPI result shows a 6.8% annual increase on the year ending April 2023, which was higher than expected.

Yet if you remove volatile items - in this case, fruit/veggies and auto fuel, plus holiday travel - the current annual inflation rate is 6.5%, down from 6.9% for the year ending March.

Moreover, consumers aren’t driving inflation. Just look at the current big annual CPI increases:

• Electricity 15.2%
• Dairy etc 14.5%
• General food (whatever that is?) 11.7%
• Bread and cereals 11.4%

Discretionary consumer spending isn’t driving up these prices.

When it comes to discretionary consumer spending - on things like alcohol, tobacco and clothing - annual spending is way below the general rate of inflation.

True, spending on travel was up 11.9% over the last 12 months - but that is by the ABS’s own admission at volatile item - plus, at present, much of this increase is being generated by older Australians.

Also the monthly CPI figures from they ABS are an incomplete read - based on just one month of spending - the more accurate measure is the quarterly results.

So Mr Lowe please wait until the June Quarter results are released before you use the CPI results - as flimsy cover - to make a cash rate decision.

A note to APRA

The Australian Bankers Association released the table below showing that some 700,000 fixed-rate mortgages would expire this year across the Big Four banks alone and these borrowers will, in turn, reset from around 2% to variable rates of 6% or more.

Editor's Note: this article was originally published last year, but has been republished for the benefit of our many new subscribers.

About Michael Matusik Michael is director of independent property advisory Matusik Property Insights. He is independent, perceptive and to the point; has helped over 550 new residential developments come to fruition and writes his insightful Matusik Missive