Reserve Bank has cut interest rates. Young people will be weeping
With the Reserve Bank cutting rates for the first time in four years, Australians fall into two camps: whoopers and weepers.
The RBA sliced the official interest rate by 0.25 of a percentage point, aiming to get the economy on an even keel. But let’s ignore the macroeconomic effects — which will hopefully be stimulatory when it comes to activity, but not prices — and focus on the raw cash-flow effects on normal punters.
Those who are whooping this afternoon are people with mortgages. Given households are trembling, banks will likely pass on mortgage relief expeditiously, and it won’t be long before the rate cuts turn into money for borrowers.
On a small mortgage, the rate cut isn’t worth much on paper. Maybe $30 a month on a $200,000 mortgage. But even a little relief is valuable to people struggling to balance the household budget.
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Many Australians, however, have mortgages that are far from small. There are plenty of Sydney families with mortgages worth more than $1-2 million, and when you’re that deep in hock to the bank, every rate cut coughs up a big chunk of disposable income. For the upwardly mobile in Mosman with $2 million mortgages, the rate cut is worth $297 a month.
So that’s the winners of today’s decision, a cut that RBA boss Michele Bullock implied might be the last for quite a while and was certainly not the beginning of a rapid fall in rates.
So what about the losers, the weepers?
We find some of them among the parents of those same mortgagees: the baby boomers who worked hard for decades to fill their superannuation and more recently moved to conservative portfolios. These people have lots of cash in interest-bearing accounts. Every rate cut — which will be passed on promptly by banks — costs them in interest payments. Some may even find their super balances stop rising as their capital returns fall below their living expenses.
But that is not the only group of losers.
The surprise losers are the most interesting group: the young people still saving for their first house. They have something in common with the baby boomers, not the elasticity of their skin but the contents of their bank accounts. Like boomers, many Gen Zs and young millennials aged 25-40 are cash-rich. They’ve been working very hard to save a house deposit and the bar keeps being raised. They’re weeping tears of frustration and rage.
The average new loan for a house in NSW is $811,000. The deposit on such a loan is more than $200,000. Nationwide, the median first home buyer deposit is $150,000. These are huge sums and very hard to save while paying rent. Every bit of interest income is manna from heaven for the hard-grinding young saver demographic, and the RBA has just taken some of that manna from them.
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The slow build-up to buying a house is even slower now, and the risk is that the RBA lights a fire under the housing market too.
There’s nothing like stacking up $300 a week in savings only to watch house prices rise by $2,000 a week, such that your deposit shrinks as a percentage of the house you wanted to buy. The response in this situation is to look farther out in the more distant suburbs, forget about the spare bedroom, and perhaps pay for a curse to be cast on the members of the RBA’s new monetary policy board.
The only solace will be if the economic effects of the cut are actually as promised and they generate actual wage gains, while the inflationary effects are also as promised and those wage gains aren’t eaten up by higher prices.
As the next chart shows, disposable incomes have been falling once you take into account interest payments and tax. The cut in rates will help lift the average disposable income a little, but very few people are average — most have debt or savings and will be whooping or weeping this evening.
