I have asked you (my clients) many times if you want to know my opinion on why interest rates and house price are as they are.
The clear answer is… NO ! What we do want from you – is what should we do…
Let me go back a bit first.
Every decade has had a defining moment:
- The 70’s – oil price inflation, high unemployment and high interest rates – Whitlam and Fraser.
- The 80’s – floating the Australian Dollar – good, the wages accord – a shocker (wages went up automatically with inflation) – and interest rates hit 18%. Hawkie gets credit for both.
- The 90’s – the recession we had to have (Keating and the 18% hangover) and the GST (Howard) – interest rates fell (eventually) and house prices spiked by 10% almost overnight with the GST.
- The 00’s – shocking lending practices in the USA lead to the GFC – the defining moment, climate politics emerges, interest rates fall, house prices rise.
- The 10’s – interest rates are low – there is more money in the world than places to use it (supply and demand of money). House prices rise… and then the defining moment COVID right at the end… climate politics weaponizes…
- The 20’s – COVID COVID COVID… Governments SHUT the economy down and FLOOD the world with free money. Governments then restart the economy and supply chains cannot respond – inflation emerges, rates rise, immigration rises, transition to renewables, EVs… almost every theory about interest rates and house price go in the bin.
Once upon a time the world of interest rate and house price was so simple…
The RBA could put rates up, we felt pain, we closed our (now virtual) wallets, demand fell, house price went down.
Then, The RBA could lower rates, we opened our wallets, demand rose, house price went up.
Check the graph up to 2020 – Covid… in general the blue graph (rate) goes down and the orange graph (house price) goes up.
Covid hit, the world shut down, government gave us free money to stay home, the Reserve Bank gave us free money so that we could pay our home loans and… This is where traditional theory starts to deviate from what happens.
People wanted bigger homes (to work from home) and in the country (to stay out of cities) – house price rose off (virtually) zero rates.
Creeping into the mix though was climate economics – and ‘everything is a crisis !!’
Everything needs immediate solutions.
There is nothing a politician loves more than a crisis – I just don’t listen to a politician peddling a crisis.
Saving humanity is expensive – and I mean that. The great (politician) lie is that we can transition away from fossil fuels, and it will be cheaper.
2022 and people came back to work – supply chains started up again, people wanted to travel, and they still had free money in abundance. Too few goods were chased by too many – prices rose, inflation was off and running and the calming words of “no rate rises till 2024” became a distant memory.
I have always said “plan for 6%” – turns out we had to.
We now have wage rises of 4%. Are we really surprised we have residual inflation of 4%? (I know it is not that simple – but wage costs constitute at least 1/3 of most business costs). This is just the 80’s returning – but like fashion – never quite the same.
This time the main cost rises are coming from fuel, electricity, insurance, services, travel (and of those only travel is voluntary) – who can blame us for wanting to travel after politicians locked us up for two years.
The story of the 10’s was that there was too much money in the world and not enough demand to borrow – so the price of money chased down … and down …
The story of the 20’s is climate politics and economics … governments are borrowing eye watering amounts of money to transition away from fossil fuels, governments are also chasing workers to build renewable infrastructure.
And…The Reserve Bank is still using traditional methods to hammer normal people (and by the way – this is only the 1/3 who have home loans, but this then ricochets onto another 1/3 who rent – with landlords needing to recover costs).
Normal people by cutting back – cannot change the price of fuel, electricity, or insurance.
And normal people are getting VERY frustrated.
The UK started it … cutting back on electric vehicle mandates – because cars were becoming a plaything for the well to do (UK govt has been tossed), The French govt – tossed, The USA – right in the midst of an election where all these issues of affordability and frustration are to the fore. (migration and cost of living are common threads in a far wider field than just Australia).
You cannot save humanity while destroying the economic lives of most of it.
Now … enough background … how can you plan your own life in your own patch – for you and if you have them, your children?
Back to the Reserve Bank … they know that many Australians are at breaking point, and they know that almost exclusively that inflation is not their fault.
With inflation at 3.8% the Reserve Bank knows it can’t cut rates yet, but their other mandates are employment and the well-being of the country – so neither can they put rates up.
It is my belief that the Reserve Bank will simply hold rates where they are right now for longer, all the while throwing in plenty of scary talk about … “narrow paths” and “doing whatever is necessary”.
- So, what should you do with the limited control that you have?
- Set a budget based on right now and do whatever it takes to create savings in addition to what is necessary.
- Don’t spend those savings – keep them in your offset account.
I cannot promise that there won’t be a rainy day, but if the rainy day stays away then the savings in your offset account become the pot of gold at the end of the rainbow.
- And should you buy a house? should you keep your house? should you buy another house? (investment)…
- YES, YES and YES
Humanity always finds a way through; the crisis of a politician’s making is just the one of their own re-election.
Yes, we must transition … it will be expensive, but we will find a way.
I looked back to something similar – the Industrial Revolution – 1820 to 1850 in Britain. Wind transitioned to steam. What was old stopped existing, what was new took over – but not overnight… (In 1880!! My great great grandfather told two sons there was room for only one in the family windmill business (grinding wheat for flour). One brother could stay, one could have paid adventure to Australia. So great Grandpa Sam set sail for the colonies with his fiancé (great Grandma Annie) – and here I am today).
But … 1820 to 1850 – wind to steam… 2020 to 2050 – fossil fuels to … we don’t yet fully know, we just know we have to.
I read on an internet search … 1820 to 1850 was a time of significant social, economic and political upheaval. 30 years in a sentence! … what an understatement.
2020 to 2050 … how lucky are we to be alive amid another period of huge change … and yes there are challenges. We need to live our lives and create opportunity for our children through this period.
I was there at the start line in 1990 at the Darwin to Adelaide World Solar Challenge, I was there at the beginning of EVs and Solar Electricity (for transport). I was building Solar Electric Vehicles.
I told my students they would tell their grandchildren that they were there at beginning … the only surprise is they are telling their children. The only surprise is the pace of change.
These are exciting times, these are challenging times, so individually, accept that change is life.
And
I cannot promise that there won’t be a rainy day, but if the rainy day stays away then the savings in your offset account become the pot of gold at the end of the rainbow.
And should you buy a house? Should you keep your house? Should you buy another house (investment)?
YES, YES and YES.
And lastly back to rates; I don’t think rates will go any higher, I think it will be a while before they come down, there is reasonable certainty ahead … in my opinion.
As always if you’d like advice tailored to your own personal circumstances please call or email me anytime… It’s what I’m here for.
Alan Heath, Mortgage Broker Brisbane
