RBA’s Chris Kent says Australia is as hard hit by rising interest rates as other countries

A growing number of Australians are selling homes to cope with financial stress, but many are not doing so at a loss, the Reserve Bank has warned.

They are also taking on extra work to pay the bills, RBA deputy governor Chris Kent told the Melville Conference at the Australian National University in Canberra.

The RBA has kept a close eye on the pain felt by borrowers after severely tightening interest rates from 2022 to combat inflation.

As the pressure mounted, the RBA’s evidence showed Australians were largely recovering from the stress.

Mr Kent said mortgage arrears – the proportion of borrowers who are behind on their mortgages – had risen but remained low overall.

But he had heard that problem borrowers were more likely to sell their homes thanks to the RBA’s relationship with the financial sector.

“Borrowers who have persistent difficulty paying their mortgage and have no other options to adjust their finances may decide to sell their home,” Mr Kent said.

“Our contact with lenders suggests that more households are making this very difficult decision while it is less costly financially, given the low share of mortgages currently in negative equity of less than 1 per cent.”

The central bank is keenly aware of this impact and in its latest report emphasized that these sales are a last resort with a major impact on “financial and psychological well-being”.

“It is worth emphasizing that the Central Bank Board is prepared to address interest rate risk and the adjustment burden experienced by households and businesses with large debts,” Mr Kent said.

“Australians more broadly, including those renting and those without debt, have had to restrict their spending during a period of high inflation.

“While the Board recognizes the diversity of conditions facing different households and businesses, it has only one tool at its disposal to achieve its inflation and employment targets: the cash rate target.”

Mr Kent also pushed back on economists’ speculation that the Australian economy was hit harder by interest rate rises than its counterparts overseas.

The RBA’s analysis showed that “the impact of monetary policy is neither faster nor stronger in Australia than elsewhere”.

“Central forecasts from RBA models for how much GDP and inflation will fall in response to an unexpected rise in policy rates remain close to those produced by models used by central banks in the United States, the Eurozone, the United Kingdom, Canada and Sweden.”

But he also acknowledged that there are many differences in how this flows through the economy.

Australia has a higher share of variable loans with interest rates changing over time than most developed economies.

Local banks often consider a large interest rate buffer when making loans, but this ensures that the vast majority will be able to repay their loans.

On the other hand, higher rates in other countries, such as the United States, have led to much lower turnover in the housing market as homeowners become less likely to refinance or move their homes. This increases the pressure on the economy.

But high interest rates didn’t hurt everyone. Savers who were badly hit by cash rates at emergency lows are now getting a better return on their bank balances.

Mr Kent said about 80 per cent of interest rate increases were reflected in bank deposits, a better rate than in many other developed economies.

Businesses are also under pressure from higher interest rates, paying down more on debt and reducing the likelihood of new projects.