The balancing act
From time to time, I am gobsmacked by those “apparent” industry leaders and their inability to manage our economy. Recent news from the RBA in late March spoke about the central bank's fear of rising interest rates.
Aren’t these guys supposed to be the smartest of the smartest? With multiple degrees in financial markets and economics? Well, they aren’t showing it!
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We currently live (for Sydney and Melbourne at least) in one of, if not the most, expensive property markets in the world. This has been driven by our cheapest interest rates ever on record, and it’s the cheap rates which help stimulate the economy. The length of time that the low interest rates has gone on for, being years now, has given families a false sense of ‘cheap money’. Cash is being thrown around everywhere. The real economy paints a different picture with our biggest national deficit in history and it’s increasing!
As ridiculous as this sounds, there is a generation of homeowners and investors, who have never seen interest rates at 5 per cent.
Now don’t get me wrong, I don’t want to have to pay more interest than I need to, but on the reverse, higher interest rates present much better buying opportunities. And the profit in investing is all in the buy!
Ironically, the RBA is now reluctant to raise interest rates, amid fears the heavily leveraged household sector would react badly to higher borrowing costs. But hang on, isn’t the reason they are so leveraged because you reduced interest rates so low, for so long? So you gave them the noose and allowed them to irresponsibly borrow beyond their means, and as a result property prices have gone insane and are now uncontrollable by you?
Remember, I started this blog with the most intelligent people running our economy? Well I’d like a seat at this table. Here’s what I propose:
Most of the banks have increased their rates recently. This has had almost zero effect, as the general public don’t listen or don’t know what this means. The banks or APRA need to introduce postcode and property security type interest rates.
The address of the borrower is irrelevant; it’s the location of the security property and the type of the security property that needs to be considered. The banks already have limited restrictions on the LVRs for different securities and locations but not interest rates.
By doing this, we could increase interest rates for new loans in Sydney and Melbourne to slowly start to cool their markets, and reduce them in places like Perth and Darwin to further stimulate their economies and direct investors there. Brisbane, Tasmania, Canberra and Adelaide could remain as they are.
Then break these cities up even further, by increasing interest rates considerably on high-rise units in Melbourne, Docklands, Zetland, Brisbane Inner City, Gold Coast etc, to control their huge oversupply problem. If there are no buyers, developers won’t build! Simple math!
In growing regional areas, slightly reduce rates to entice activity.
It’s not rocket science!
Perhaps if this was done years ago, then thousands of investors would not have been burnt by investing in mining towns?
Now sure, there will be some lobby groups and investors screaming that it’s unfair. Ah well… better than the alternative we currently have. That being, when interest rates finally go up, Australia will have its real GFC. And when they day comes, I will be cashed up and ready!
