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

A rising number of Aussies are selling homes to cope with financial stress, the Reserve Bank has warned — but most are not doing so at a loss.

They’ve also been taking on extra work to pay the bills, RBA assistant governor Chris Kent said in his Melville Lecture speech at the Australia National University in Canberra.

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

While the pressure has been building, the RBA’s evidence has showed Australians have broadly navigated the stress.

Mr Kent said mortgage arrears — the proportion of borrowers falling behind on mortgages — had increased, but remained low overall.

Yet troubled borrowers were becoming more likely to sell their homes, the RBA had heard through its engagement with the financial sector.

“Borrowers who are experiencing persistent difficulties servicing their mortgages, and with no further options to adjust their finances, may decide to sell their homes,” Mr Kent said.

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

The central bank is keenly aware of the impact, highlighting in a recent report that those sales were a last resort with a major effect on “financial and psychological well-being”.

“It is worth emphasising that the Reserve Bank Board is attuned to interest rate risk and the burden of adjustment being experienced by households and businesses with sizeable debts,” Mr Kent said.

“Australians more broadly have had to constrain their spending during the period of elevated inflation, including those people who rent and those without debts.

“While the board is well aware of variation in the circumstances facing different households and businesses, it has only one instrument, the cash rate target, to achieve its inflation and employment objectives.”

Mr Kent also knocked back ongoing speculation by economists that Australia’s economy is hit much harder by rate rises than overseas peers.

The RBA’s analysis showed “the effect of monetary policy is neither faster nor more potent in Australia than elsewhere,” he said.

“Central estimates from RBA models of how much GDP and inflation decline in response to an unanticipated increase in policy rates sit near estimates generated by models used by central banks in the United States, Euro area, United Kingdom, Canada and Sweden.”

But he acknowledged there were plenty of differences in how that flows through the economy.

Australia has a greater share of variable loans — which have interest rates that change over time — than most advanced economies.

Local banks usually assess a large interest rate buffer when lending, however, ensuring the vast majority will be able to repay their debts.

On the flip-side, higher rates in other countries like the United States led to much lower turnover in the housing market, as homeowners become less likely to refinance or move homes. That adds to the drag on the economy.

Yet higher interest rates have not hurt everyone. Savers who were badly bruised with the cash rate at emergency lows are now getting an improved return on their bank balances.

About 80 per cent of the rate hikes were passed on to bank deposits, a better rate than many other advanced economies, Mr Kent said.

Businesses are also put under pressure from higher interest rates — through paying more on their debts and through making new projects less likely.