An Opinion piece by Adrian Stagg
This question of where interest rates are heading is on many peoples lips right now and in truth it hasn’t been too far out of mind for at least the past 3+ years. I recall a fair amount of discussion in mid-2013 about potential interest rate rises anytime soon. Of course, as we all know now, they didn’t happen.
So, the question remains! Still without the aid of a crystal ball, I’ll stick my neck out again. Where are they headed now and what will be the effect on the property market?
For mine, I do think that there is any greater chance of official interest rate rises now than back in 2013. If they do occur at all this year, they will be modest in my view – 25 basis points at most – [ barring ‘left field’ international shock – a possibility with Trump in the White House] for the following reasons.
The Aussie Dollar
The value of the Australian dollar [at 75 cents US+ ] is still higher than preferred by the RBA and most Australian exporters, and any rise in the official interest rates would likely push it up – the RBA wants to see it go the other way. This would suggest pressure to see rates go down.
On the home front the issue of housing affordability, which has been around for some time now, is unlikely to be ignored for much longer. Both major political parties recognise the problem, although they have a different approach to offering solutions. The Libs only just squeaked back into Government last year so they may take a closer look at this, which is highly unlikely to push rates higher.
It seems that the RBA also recognises this problem and has made public suggestions about fiscal policy [rather than relying solely on monetary policy] as to how the problem can be solved, at least partially. There appears to be a reluctance on the Government’s part to use fiscal policy however as they chase their holy grail of a ‘surplus’– leaving it to the RBA to use monetary policy if they feel it’s warranted.
I think this issue will still be around at the next federal election. What’s more, it mostly applies to just Sydney & Melbourne. The huge increases in property prices that have occurred in those cities have not occurred elsewhere with many parts of the country still a little depressed – or certainly not buoyant anyway. Interest rate increases will not only exacerbate that making any recovery difficult, they will also potentially cripple large numbers of borrowers in Sydney & Melbourne. This wouldn’t be the first time that large parts of the country have been held hostage by the goings on in Sydney & Melbourne. This issue may influence lower rates or at least stabilise them.
Official rates Vs Bank rates
In recent years, the major banks have shown a preparedness to move marginally either way on rates without the lead of the RBA. I believe that there is a greater chance of this occurring than official interest rate increases. In fact it’s not entirely unlikely that the RBA reduces rates, with the banks not necessarily following in lock step.
This is because banks are facing some small increases in offshore borrowing costs as world markets adjust which they may [will] seek to pass on if market conditions allow. As the USA tightens their monetary policy it does increase the likelihood of some rate increases further admittedly but they’ll only be small. Never the less Banks are currently offering steep discounts on their standard variable rates to volume quality borrowers and they will continue to do so to protect market share despite what the published headline rate is in my view. So in my view increases will be small if any and may be in name only for some.
To Fix or not to Fix?
Just a week or so ago I received an attractive offer to fix interest rates on some of my loans.
I can only speak from my own experience but in my memory over more than 20 years the only times I’ve ever been approached to fix loans was just before interest rates fell. Could that be the case again this time? That’s what I reckon!
My thoughts on fixed interest rates haven’t changed since my comments made in July 2014 and I’m pleased that I didn’t jump into fixing my rates then. [the discussion following that article was especially pertinent]