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Late last November, Reserve Bank Governor Philip Lowe was forced into a humiliating public apology.
After almost two years of assuring Australians that interest rates were unlikely to rise above zero until 2024, the RBA boss — having by then delivered seven consecutive rate hikes — had little option but to confront the growing tide of public anger head on.
"I'm sorry that people listened to what we've said and acted upon that and now find themselves in a position they don't want to be in," he told a Senate Estimates Committee.
On Tuesday, the 300,000 odd homebuyers who did listen to what he said will likely face a ninth rate hike, taking the official cash rate to 3.35 per cent.
For Dr Lowe, the decision he and his colleagues must make tomorrow and in coming months is, just how deep a recession are they prepared to wear?
Even if we do somehow avoid the technical definition of recession — two consecutive quarters of economic contraction — that will be little consolation for those who can no longer meet the repayments on their homes. The pain is never equally spread and, this time around, it will be younger Australians who cop it in the neck.
The betting is that our central bank will deliver another 0.25 percentage point rise. But it's not a given. At the most recent meeting in December, the RBA board considered three alternatives; keeping rates on hold, a 0.25 hike and a double hike.
Most highly paid bank economists are pushing the RBA to maintain the war against inflation and jack up borrowing costs after the December quarter inflation figures showed solid price rises in the services sector of the economy.
Source: Reserve Bank of Australia
On the far right are the small proportion of homeowners who would be better off because rates are rising. That's because they are wealthy and have little debt.
But everyone to the left is worse off. The big red bar is the 45 per cent or so who would suffer a loss of up to 20 per cent cut in spare cash which would hurt but probably wouldn't be mortal.
Head further to the left though, and the bars show borrowers who would drop between 20 per cent and 100 per cent of their spare cash. And the grey bar on the left represents those who would be well and truly under water. Obviously though, the closer you get to the grey bar, the more difficult it is to survive.
So, unless they have large savings buffers, many of those too are likely to either default, be forced to sell their homes or try to come to some sort of arrangement with their bank.
That would be chaotic and you can bet your life the graph above will be trawled over in Tuesday's meeting when board members mull over whether to push rates to 3.35 per cent.
Gathering on the mortgage cliff
There's a little detail that shouldn't be overlooked in the above graph. It relates entirely to those on owner occupier variable mortgages. So, investors aren't included. Neither are those on fixed rates.
From the middle of this year, however, a large number of fixed rate loans — many of which were taken out when the official cash rate was 0.1 per cent — will be converting to variable rates and a huge jump in repayments.
It's been dubbed the mortgage cliff.
As the pandemic lending boom gathered pace and home prices headed for the stars, new lending for housing hit record levels. So too did the demand for fixed rate mortgages which leapt to almost 40 per cent of all new housing loans, as this graph of fixed rate loans shows.
There are, however, sound reasons why the RBA should consider staying put, at least for another month.
For a start, the RBA rapidly on its own admission is running out of ammo. (More on that below). Sure, it could ape the Kiwis and continue piling on the pain to over-indebted home owners. That certainly would do a number on inflation. But homeowners would be forced to drastically rein in the spending, which would hit business profits and, ultimately, employment.
More concerning, it potentially could spark a crisis for those who lent out all the cash in the first place; our banks.
The reason? Our economy is far more sensitive to interest rate movements than almost every other developed nation, primarily because we are world leaders when it comes to household debt.
More importantly, the vast bulk of that huge debt has been sunk into real estate, which now is in the midst of one of the steepest declines in history. On top of that, unlike the rest of the world, most of those mortgages either are on variable interest rates or short term fixed rates that soon will convert to variable.
The end result? Interest rate changes have a much larger and more immediate impact on spending here than almost anywhere else.
Households under water
Last October — shortly before Dr Lowe's apology — the RBA commissioned some internal research to figure out how much pain Australian borrowers could withstand. At that stage, the official cash rate was at just 2.6 per cent.
The results sent alarm bells ringing.
If the official rate hit 3.6 per cent, it found that just over half of all homeowners on variable mortgage rates would see a more than 20 per cent reduction in spare cash flow. That's the money that's left over after the mortgage is paid.
While the whole idea of raising rates is to take cash out of the economy so that spending is cut, a hit of that magnitude on so many households is a major concern.
Particularly worrying, however, was the finding that 15 per cent of all homeowners would see their spare cash flow turn negative. In other words, they wouldn't be earning enough money to cover the mortgage, let alone buy food.
Here is the graph. It's not easy to decipher but in many ways it tells a far bleaker story than even the RBA would have us believe.
Many will be shifting from fixed rates of 2 per cent and under to variable rates of around 5.5 per cent and more, which will likely swell the amount of households who no longer can meet mortgage repayments from the 15 per cent estimate in the RBA research.
The RBA, meanwhile, remains confident — at least in public — that arrears and mortgage defaults will not become an issue, because Australian households still have large financial buffers.
That's true. There's about $270 billion in excess savings, around $110 billion of which is in mortgage offset accounts.
The problem with relying upon those numbers, however, is that those savings aren't evenly distributed. Older, more well-established households hold the bulk of those savings.
There's a widely held view among financial market economists that, having tipped the economy into recession in the middle of this year, the RBA will then be forced to cut interest rates later in the year.
What kind of apology can we expect then?