Three Australia’s (or a $10.90 slice of avo)

Not that long ago there were two Australia’s.

The Haves and The Have Nots.

Tall Poppies and the Rest of Us.

But now there appears to be three Australia’s.

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

Then there are the roughly one-third of Australians who are mortgage holders that are being hammered by the recent aggressive interest rate hikes, who 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.

Finally, there is the lucky one-third of households – mostly older Australians – that own their homes outright who 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’s.

Many of this lucky-third are also benefitting from higher inflation in rents given they dominate the ownership of investment properties.  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 the 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 indicates that the average young person is buying less 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 make-up.

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


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 group think 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.

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 fixed rates of around 2% to variable rates of 6% or more.

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

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

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


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