A massive attack on the working class

Banks and landlords are orchestrating a huge attack on the working class in Australia.

Rents were pushed up by 14 percent around the country in the year to June. The average renter was paying an extra $3,150 per year, according to Parliamentary Library research commissioned by the Greens.

Homeowners with an average mortgage are being forced to pay $8,200 more per year due to the banks jacking up interest rates.

More than 60 percent of households are paying off a mortgage or are leasing from a private landlord. Martin North, an analyst with Digital Finance Analytics, estimates that 45 percent of borrowers (1.7 million households) are in mortgage stress and 62 percent of renters (1.9 million households) are in rental stress.

Yet the attacks continue. The rate hikes haven’t fully flowed through to borrowers yet, and rents are still climbing. In the September quarter, median asking rents for houses were up another 5.8 percent in Brisbane, 4.8 percent in Sydney and more than 2 percent in Melbourne and Perth, according to the Domain property website. Unit rents were up 6.5 percent in three months across the capital cities.

The Reserve Bank’s latest Financial Stability Review, released on 7 October, says that more than half of households with owner-occupier variable rate loans will suffer a disposable income drop of more than 20 percent over the next few years if interest rates rise by another percentage point—which they are forecast to do. That includes 15 percent of such households “whose spare cash flows would turn negative”.

“This latter group of (typically low-income, highly indebted) households would likely be forced to draw down on their stocks of saving in order to continue to meet their loan payments and essential living expenses”, the Reserve Bank notes. “Some may have a limited ability to do this, given that low-income and highly indebted households typically have lower savings buffers.”

A further 8 percent of variable rate owner-occupier borrowers would “fully exhaust their prepayment buffers within six months, even if they were to cut their real nonessential spending by a relatively extreme 80 percent”. Some 40 percent of these borrowers are in the bottom 25 percent of income earners, “so are already more vulnerable to falling behind on their loan payments”.

And almost 60 per cent of borrowers with fixed-rate loans face an increase in their minimum payments of at least 40 percent by the end of next year.

While working class borrowers and renters are drowning, the banks and landlords are swimming in it. In the year to June, landlords—the prime beneficiaries, to the tune of hundreds of thousands of dollars each, of the 21st century housing price boom—gouged an extra $7.1 billion from renters on top of their massive capital gains. It’s shameless profiteering.

The Commonwealth Bank, Australia’s biggest mortgage lender, posted an 11 percent increase in cash profits to $9.6 billion over the same period. ANZ will report its annual earnings in late October, with Westpac and National Australia Bank following in the first and second weeks of November. They are expected to post combined profits of close to $19 billion. The results come after the big four registered a 55 percent increase in after tax profits last year.

Australian banks have an average net profit margin of nearly 30 percent, which means that, for every dollar they receive in revenue, they end up with about 30 cents left after paying all their operating costs, interest payments and taxes. It’s well above average.

How do they do it? Mainly by paying much less for their own funding than they charge their customers. Banks get funding from deposits, by borrowing from other institutions and from issuing shares. But mostly it’s from deposits—about 60 percent, according to recent Reserve Bank figures.

While most deposit accounts are called savings accounts, depositors are technically loaning banks money, so banks pay interest on it. If you get a home loan from the bank, you’ll likewise pay interest—but at a much higher rate than the bank pays you. For example, the variable rate for the Commonwealth Bank’s standard NetBank Saver account is currently 1.1 percent, but its standard variable home loan rate is 7.05 percent. That’s quite a gap.

The overall difference between what banks pay in outgoing interest to gain funding and what they receive in incoming interest on loans and credit cards is called the net interest margin. This margin has been declining for most of this century. The banks nevertheless have been recording record profits because the absolute size of the loans they have issued has increased dramatically with soaring property prices. (Twenty years ago the average mortgage was around $180,000; now it’s close to $600,000.)

Now, the banks are forcing up the net interest margin to protect the value of their outstanding debts and to prepare for a period of declining loan growth. They’re doing this by lifting home loan rates faster than deposit rates.

“Recent investment bank analysis suggests banks are earning an additional $600 million a month from passing on to savers only a small amount of the rate increases since May”, Financial Review reporter Duncan Hughes noted a couple of months ago. At that stage, the Reserve Bank had lifted its cash rate by 1.25 percent. Since then, it has almost doubled.

So how much more are the banks making now? We won’t know for sure until the half yearly reports are published next May.

But what is clear now is that masses of workers are being screwed to keep bank profits soaring and property investor yields strong, while an untold number are likely to be financially ruined in the next couple of years.

“Many will need to curtail their consumption and some could, ultimately, see their savings buffers exhausted”, the Reserve Bank calmly reports. “If these households have limited ability to make other adjustments to their financial situation—e.g., by increasing their hours worked—and pressure on their finances continues, they could fall into arrears on their loan obligations. Some may eventually need to sell their homes or may even enter into foreclosure.”