For richer, for poorer.
When it comes to Australians, that destiny is mostly determined by just one factor; whether or not you own property.
After four decades of rocketing housing prices, real estate has helped propel Australians into the enviable position of being amongst the richest in the world.
On the flip side, it’s saddled us with world record-breaking household debt.
Even more worryingly, it has opened an intergenerational wealth inequality chasm that now is spilling out into broader society.
If your parents didn’t own real estate, chances are you won’t either.
It also is playing an elevated role in our interest rate settings.
That’s because appreciating real estate values have become a key factor in how much we spend and where we spend it.
And when it comes to the Reserve Bank’s efforts to rein in inflation, to sop up cash out of the economy, its primary target is on mortgage repayments.
When board members sit down next month to decide whether to lash the nation with another rate hike, property prices and mortgages will be front and centre of discussions, alongside the soon-to-be-released June quarter inflation numbers.
No matter how you look at it, our real estate preoccupation has become a self-fulfilling, all-consuming obsession.
Why the RBA packs more punch
It’s not just “sticky” services inflation underpinning the calls for an August rate hike.
Foremost is that the RBA has taken a softer approach on rate hikes than most of its global counterparts which has now come back to bite.
Our official rate, at 4.35 per cent, is way below many other major economies, including the US at 5.5 per cent. Even New Zealand has maintained its official cash rate at 5.5 per cent.
The problem with that simple comparison is that it ignores the fact that rate movements here have a much bigger impact on household budgets than in any other developed country.
That’s because our mortgages have flexible rates.
Even our fixed-rate loans are for relatively short periods, unlike in America where rates are generally fixed for the life of the loan.
Rate changes here flow through quickly and in full as the graph below illustrates.
The blue bar compares official interest rate hikes. Australia’s are amongst the smallest.
But the red bar compares the impact on loan repayments. Australia’s are the biggest.
Germany and America’s rate hikes have had almost no impact on existing loans which are fixed for the life of the loan. Only new borrowers are being stung by the higher rates.
Are you feeling lucky?
It mightn’t feel like it but this week we discovered, via a study from investment bank UBS, that we were the second wealthiest people on the planet, after Luxembourg.
The reason? Ah, that’d be real estate.
If you own a house and have a bit of superannuation, it doesn’t take much to be a millionaire.
The older you are, and the longer you’ve owned a house, the wealthier you are likely to be.
In the past decade alone, the median price of a house nationally has shot from about $500,000 to $940,000.
Apartments have gone from $450,000 to $665,000.
As this chart shows, our real estate is amongst the most expensive in the world, if you compare prices to income.
The magenta bars are Australian cities and Sydney comes in as runner-up, after Hong Kong.
While it’s expensive for buyers, those windfall gains for those who already own property, have a profound effect on spending.
The more dwelling prices rise, the richer the owners feel.
And the more they tend to spend. It’s a phenomenon known as the “wealth effect”, and something the RBA has jumped on over the years in its efforts to manipulate demand.
If you suddenly find yourself piling on an extra $100,000 in a year, you’re more likely to lash out on a couple of big-ticket items.
The RBA deliberately pursued that strategy during the COVID pandemic.
When prices started to tank after the first round of rate hikes in 2022, there was a collective sigh of relief in the RBA’s Martin Place bunker.
But when they turned positive early last year, RBA officials looked on in stunned disbelief.
Older generations, buoyed by another free ride on the property freight train, reopened their wallets and continued spending, even as younger, over-indebted households struggled to make ends meet.
Property breather may halt RBA
The property market is slowing.
After almost a year and a half of consecutive monthly price gains, affordability again is becoming stretched.
The prospect of lower immigration is easing the squeeze on tight supply.
But talk of further interest rate hikes and higher borrowing costs that have constrained debt limits and evidence of a mild uptick in distressed loans are expected to weigh on prices in the next few months.
And here’s the flip side to soaring prices.
Anyone attempting to enter the Australian property market needs to mortgage their soul just to get a look in.
Unsurprisingly, our household debt levels are the highest in the world as this graph, which appears to be imitating a bowl of spaghetti, shows.
That blue pasta at the top? That’s us with household debt at 200 per cent of income.
That huge household debt has raised fears that another rate rise would be enough to detonate Michele Bullock’s dream of avoiding recession while beating inflation.
Many younger households are barely hanging on to homes they bought when rates were barely above zero during the pandemic.
Already, Melbourne real estate has begun to retreat and Sydney price gains have moderated, although the smaller capitals are still advancing at a rate of knots.
A decline in the larger capitals, however, would be welcome news at the next RBA meeting as it may help to take some steam out of the rental market.
Soaring rents have been a major component in the stubbornly high inflation that has thwarted the RBA’s best efforts to curtail consumer price increases so any significant slowing would be welcomed.
Either way, for better or worse, real estate could tip the scales.