The economy is still affected by the pandemic, and yet some things remain normal – rate rises make it more expensive to take out a loan and cool the housing market. The latest home loan figures should provide the Reserve Bank of Australia with enough cause to hold off on raising the cash rate next month.
To gauge the impact of the pandemic on our economy you could do worse than look at what Australians are borrowing money for when they take out a personal loan. Prior to the pandemic, Australians were about as likely to take out loans for holidays and travel as they were for furniture and household goods. But the pandemic changed all that and it has in no way returned, and perhaps may not for some time:
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Such data might suggest that consumers no longer operate as they once did and all the economic rules have changed. And yet when we look at house prices and home loan borrowing we can see clearly that some things still operate normally.
When interest rates rise, people are less likely to take out home loans.
In November not only were there fewer loans taken out than when the cash rate was 0.1%, but there were also fewer than would have been expected even before the pandemic.
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The drop in home loans has been quite dramatic. In November there were 25,930 home loans taken out by prospective owner-occupiers, some 25% less than in November 2021. That is not surprising, but it is also 5% below the number taken out in November 2019 before interest rates plunged and the Morrison government pumped up the housing market through its homebuilder program.
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No one is shocked by this development – it is what always happens when interest rates rise. And given the average discounted rate of a new home loan went from 3.45% to 5.97%, which means paying $1,136 a month more in repayments on a $750,000 loan (a 34% increase), it is little wonder that fewer people are taking out a home loan.
Incidentally $750,000 is the average home loan value in New South Wales – down around $50,000 from the recent peak:
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In all states except South Australia the average mortgage size has fallen, as in turn have average house prices.
And because the total value of housing finance across the nation is falling, house prices will continue to fall:
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This is important because the price of home loans and then house prices is the area most directly affected by the Reserve Bank and interest rates.
Clearly the 300 basis points in the cash rate increase in eight months has had an impact. And yet this is unlikely to be seen in the inflation figures, which is what the Reserve Bank is actually trying to lower.
It is rather weird that the item most directly affected by interest rate rises is not really included in the CPI bundle of goods.
The bureau of statistics does include a sort of measure of house prices in the CPI basket that accounts for 8.6% of all inflation. And so massive has been the jump in the house price item in the CPI that it alone accounted for 25% of all inflation growth in the 12 months to September last year.
That might not seem to make sense, especially given house prices across the nation are falling or barely rising.
The problem is the CPI basket measures the cost of “new dwelling purchases by owner-occupiers”. This is not house prices, but rather the cost of building a new home. And that cost is very much different from the price of houses:
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In the 12 months to September last year, the average price of dwellings across Australia rose just 1%, while the price of new dwelling purchases rose 21%.
The reason is the cost of construction inputs has risen dramatically:
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Prices for steel and timber for housing have risen by as much as 40% in the past year, and as a result the cost of building a home has soared.
For most people that is not a concern for their cost of living, and yet it has had an oversized influence on inflation. As demand for new homes continues to fall, the cost of this will eventually fall, but it will take some time to show up in the CPI figure.
Various aspects of the economy remain in flux due to the pandemic, but the fast-rising interest rates have had the impact on house prices you would expect. That impact, however, has not flowed through into official inflation as yet – but it will.
The Reserve Bank should therefore hold off on raising rates further next month. The rises are working as expected. And after taking the cash rate from 0.1% to 3.1%, allowing some time for the impact to flow through would be a sensible approach rather than continuing to hike rates to kill inflation that is already falling but might not yet be visible in official figures.
• Greg Jericho is a Guardian columnist and policy director at the Centre for Future Work
