Mortgage interest rates to stay low

RBA will leave mortgage interest rates on hold for the rest of the year.

Mr Mortgage predicts that home loan rates will stay as is till at least Feb 2011. That’s if they don’t come down. Here’s my reasoning.

One mortgage interest rate rise too many.

I said in May 2010 that the last interest rate rise was one too many. Well, the pigeons seem to have come home to roost.
The RBA seemed to want to get back to “normal interest rates ASAP. They were too hasty, but in any event, you can’t go back to a “normal” interest rate number, because the fundamentals have changed. Basically put a house is dearer now in real terms, and mortgages are relatively a bigger slice of the pay packet.

New nine year low for home loan finance as interest rates hit the fan.

The straw that broke the housing industry’s back was the May interest rise, if not the one before that. Houses prices were heading south everywhere else in Australia except Melbourne, and Sydney and to stop the Sydney home market bubble is not a good enough reason to raise rates. We are a nation, not a City-State.

Australia has a three speed real estate market.

1. Melbourne and Sydney  housing markets are defying gravity.
2. The rest of Australia, including Brisbane prices are softening, and have been for sometime, so higher interests will only push wage demands higher.
   1. You can’t use interest rates to solve over heated patches. The solution is to build more homes and quickly to dampen demand for established homes.
3. New Home Sales. New home sales have been supported by the First Home Owners Grant since 2001.
   1. That is tiny compared to the costs of building a new home and the financing costs today. It just won’t cut it going forward. A better plan would be a fixed low cost mortgage for first home buyers.
   2. The better plan is more homes, more smaller homes and quicker to market.
   3. The custom individual project home model is just not good enough and slows the whole process down. We need that for second home buyers who are moving up, but need the mass building of suburbs to get pricing down, and fix the housing shortage.
   4. The cost of new home construction is reasonable. Its the cost of land that is the deal breaker.

Australia has a two speed economy.

Mining and the rest. Miners earn on average $120,000 p.a. the rest of us earn on average $60,000 pa. You can’t resolve this and the unequal demand for housing with higher interest rates. Because to do so you are killing off the ability of non mining workers to buy a home. And if miners choose to buy investment property as a tax reduction strategy, they will lock in low fixed rates and get tax deductions on those higher rates, so the impact is reduced for them.

Banks profits suddenly shrinking

Banks have enjoyed record profits this year,but most of that was made in 2009. 2010 saw profits shrink.

Retailing is very lumpy.

The final reason is retailing is slow, and is driven buy major retailers discounting heavily. This is great for consumers, but no smaller retailers who can’t discount. The are hurting.

So that is my case for keeping mortgage  interest rates low, or even reducing them. The key to lower house prices is not higher interest rates. Its the mass production of quality but modest housing in Sydney and Melbourne to dampen the demand in those centres.

Author: Rick Adlam, Mr Mortgage

Tags: Building A New Home, first home buyers, Home Buyers, Home Loan Finance, Home loan rates, Mortgage Interest Rate, Mortgage Interest Rates, Mortgage Rates