More Doomsday Reporting and the more likely outcome for Interest Rates

In a recent article by Chris Kohler from domain.com.au it is reported that:

  • 1/3 of Australians have little to no buffer in paying their mortgages.
  • Up to 90 per cent of mortgages are variable.
  • Despite this, 37.5 per cent of property sales are first home buyers meaning they bought at the tail end of the market, with extraordinary debt exposure.
  • Wages are stagnant with some indicators that Australians are working longer to earn the same income.

So according to this article we are now relying on wage growth to avoid seeing the long awaited debt bubble burst due to increased future interest rates.

Considering economic indicators this is highly unlikely. It would be more likely that government and banks will keep interest rates low using macro-prudential measures while keeping demand for housing high to continue now slow property market growth and encourage Australians to continue borrowing using capital. At this point in time, this seems to be the only economic solution for the government while we are waiting for a future economic growth miracle.

In fact, what many economists seem to miss is that there is a widening gap between the RBA cash rate and mortgage rates.

This will allow banks to lower rates rather than increase them as is predicted by Kohler and other economists. At this point, banks are simply preparing for the inevitable and giving themselves room to move while taking a profit now, while they can. Lowering mortgage interest rates is a move preferable for banks compared with increasing mortgage defaults.

So rather than looking toward an increasing mortgage rate, we will be looking for a decreasing rate if wage growth is not forth coming.

In other words, Australians are more likely to continue to see slow growth in the property market with slightly lower mortgage interest rates. As it is highly unlikely to see wage growth – get ready to work even harder and longer to pay your mortgages.