Our economy is on the brink of something. Big changes are afoot.
The RBA is hiking interest rates higher and higher, and it is causing things that were once stable to become wobbly.
For example, home loans. They are shrinking. And that is new.
For every month over the last five years, the dollar value of owner-occupier home loans made has been higher than the amount paid off. The banks were owed more and more money. Which makes sense – inflation is rising, the population is growing, etc. You’d expect them to be lending more and more.
But in August 2026, a sudden reversal.
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Banks are still making loans but people are paying them off faster, as the next chart shows. As a result, the total stock of home loans actually shrank in the most recent month for which we have data.
The month on month change in loan to households has suddenly reversed. · APRA/Yahoo Finance
You can understand why people would want to pay off loans. Loans are getting more and more expensive to service. Not to mention that negative gearing is now available only on newly built rental properties. The cost of a loan is higher and its benefit are lower.
The stock of loans is like a bathtub. When people pay off loans that drains the bath. When people take out new loans, that fills the bath. But the housing market is slowing to a crawl, with fewer homes being bought and sold in 2026 compared to 2025. With fewer homes traded, fewer new loans need to be made. The bath is being drained.
What about deposits? Are people depositing more cash because interest rates are high, or less cash because they are broke?
The answer, for now, is that deposits are continuing to rise. We have about $1.7 trillion in deposits. The result of falling loans and rising deposits means the ratio is rising, as the next chart shows.
We have about $1.7 trillion in deposits. · APRA
This is a bit of a pickle for the RBA. Remember – after a rate hike people with cash in the bank see their interest income go up. It is only people with loans who lose spending power. Does this mean the RBA’s rate hikes have become more and more futile? Well, we must point out that monetary policy works in many ways.
A rate hike is not just about squeezing young families with mortgages. It is supposed to make the Aussie dollar more valuable, thereby making life harder for both exporters and for businesses that compete with imports.
It reduces the value of assets which makes people feel poorer and spend less – that is sometimes theoretical but probably happening right now.
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A hike also makes life harder for businesses with loans, reducing their spending power. And all those ways in which spending is weakened are meant, in turn, to make life tougher for Aussie businesses so they don’t raise prices.
If the household cashflow effect of rate rises was the only way RBA rate hikes worked, then they would be becoming more marginal and inflation could stay higher for longer.
The spillovers of a house price fall
But there is another effect that matters enormously, and it is via Australia’s favourite topic: house prices. Prices are down sharply across Australia, down 5.2 per cent nationwide since March. This is not just about Melbourne or Sydney any more.
When house prices fall, the volume traded on the market falls, and then people stop spending money in many ways: at Bunnings, on tradies, on conveyancers and real estate agents, etc. The volume of spending in that area has surprised the RBA before, when house prices fell in Melbourne and Sydney in the 2017-19 era. In 2019 the RBA Board admitted they underestimated how much effect this would have on GDP.
“We had not fully taken account of this in our forecasts of GDP and it is part of the explanation of why GDP growth has turned out to be slower than we had expected,” they said.
This time the central bank may be relying on those same effects to cool GDP and take the heat out of inflation. Because there are fewer and fewer households with big new mortgages to squeeze with interest rate rises.
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