Fixing Australia’s Unfair Monetary System
With inflation once again on the rise, and the RBA wielding its single blunt weapon against it, it is easy to think the resulting pain felt by many who are least responsible and can least afford it is inevitable. But it’s not. Australia has an unfair and punitive monetary system that leaves households far more exposed to interest-rate shocks than in comparable advanced economies. It is a system that was never designed or agreed upon; rather, it was the product of inertia. In the days when a house cost three times the average income, it was bearable, but as household debt continues to climb in Australia, and as families are paying an ever-increasing share of their income on their rent or mortgage, the failings of our system are all the more glaring. When interest rates rise, it is young families with big mortgages and renters who pay the price. Those fortunate enough to own outright or have only a small mortgage are largely immune and free to carry on spending. It is a prime example of the kind of intergenerational inequity that has left young voters convinced that our political system simply does not work for them.
I have often said that it is not our job to decide what voters ought to be concerned about, but to develop compelling solutions in line with our principles that address their concerns. In this particular issue, we have a golden opportunity to do just that.
In recent years, there has been much talk about reforming the Reserve Bank by restructuring it or otherwise changing how its decisions are made, but all this amounts to tinkering at the edges. What is needed is a fundamental change to the way interest rates impact individual families and the economy as a whole. In short, we need 20-30 year fixed-rate home loans, such as they have in most advanced economies including the USA, France, Germany, Denmark, Japan, and others.
The introduction of such a scheme, whether by covered bonds (Germany and Denmark), government guarantees (USA), or direct state lending (France, Japan), would have many significant impacts on our economy. Households will be insulated from the direct effects of interest rate hikes. Instead of an instant cut to spending, rate hikes take effect through reduced lending and business investment - a far more equitable arrangement because the impact is dispersed across the economy, not dumped on indebted households. This mechanism is also slower, and larger rate hikes might be needed to achieve an equivalent result, but this is not necessarily a bad thing. It puts more of the responsibility for inflation control where it rightly belongs: with fiscal policy. Our Liberal advantage of being seen as fiscally conservative carries more weight when the electorate believes that the government, not just the RBA, is responsible for controlling inflation.
The largest beneficiaries of long-term fixed mortgages may not even be mortgage holders themselves, because renters stand to gain in two important ways. Firstly, if landlords are on long-term fixed-interest loans, they have less incentive to lift rents when interest rates rise, a phenomenon that led to massive rent increases in the years after COVID. Secondly, it removes the one structural barrier that makes long-term leases unachievable in Australia. I have written about this at length here, but in short, with more Australians having no choice other than renting, it is incumbent on us to provide policies that make renting meaningfully better in Australia, and the single best policy to achieve this is the introduction of long-term leases. Long-term leases - widespread in European cities where home ownership is a distant memory - provide renters with a sense of ownership, stability and groundedness. In other words, they make renting more like owning. But the crucial ingredient is missing in Australia: landlords could never consider offering long-term leases, because they themselves are heavily indebted and exposed to short-term interest rates. If landlords instead had the option to take out a 10-year fixed mortgage to go with their 10-year fixed lease, they could rest easy knowing the rent will always cover their repayments.
There could hardly be a more appropriate moment to introduce a policy of long-term, fixed interest home loans. It is a policy that benefits home owners, renters and landlords. Liberals love to hearken back to our origins - Menzies’ appeal to the Forgotten People. We have our Forgotten People. They are the young Australians who shoulder the burden of inflation control, who pay the price for our reliance on foreign labour, and who pay a disproportionate share of income tax. It’s all well and good to talk about aspiration, but without concrete policies that will meaningfully improve their lot in life, such talk is hollow. And if these Forgotten People are forgotten much longer, there ought to be no surprise when neglect brings forth grievance, and the merchants of grievance win the day.