Shouldn’t we already be in recession?

Australia came out as one of the most sensitive in the world. Why then has our economy remained so resilient and can it continue? It can’t continue and rates need to be cut sooner or later as many of the factors that have contributed to us being resilient to higher rates are starting to wear thin.

The IMF outlined five reasons why monetary policy works best in some countries because of the structure of their housing markets. Australia comes out as very sensitive to monetary policy for all of the reasons. We have one of the lowest proportions of households on fixed mortgages in the world, we have high loan to value ratios, we have high levels of household debt, our housing supply is constrained and although there is no data, it is possible our homes are overvalued. Higher interest rates should be hitting us much harder by now.

Obviously economies are complicated and there are other factors that have kept us out of recession. However, three of the housing linked monetary policy impacts are accelerating and this could lead to a sharp, quick change in our economy’s performance. Many people are now struggling with mortgage payments, household savings are being eroded and affordable housing options are reducing even further.

The potential for a mortgage cliff was well documented, yet never occurred. In addition to very few mortgages being fixed in Australia, one main reason is that banks are well capitalised and were therefore in a position to assist mortgage holders through the transition from fixed to variable. The mortgage market is also very competitive, making banks more motivated to retain clients. Most struggling mortgage holders coming off fixed loans were offered interest only loans, extended loan terms or debt consolidation. However, there is a point at which this no longer works. Although not possible to quantify exactly, it is already impacting investment property and holiday home ownership and is likely spilling into owner-occupied housing as well.