Winners aplenty from RBA's rate rises

Greg Hoffman

April 7, 2010

Comments 10

Yesterday's interest rate rise will add $250 a year to the income of a debt-free saver with $100,000 in the bank. And that person will be $1,250 a year better off than they were six months ago, before the current interest rate tightening cycle began.

That's not a fact you'll read in many places but, as someone who's so far chosen to avoid the burden of a mortgage in my life, it gives me some cheer. Clearly I'm in the minority; the RBA's figures tell me so.

The latest statistics reveal that total housing credit is now approaching $1.1 trillion. That's more than $45,000 for every man, woman and child in this country. And the news headlines tell you the same thing: Most Aussies cringe when rates rise as their personal balance sheets carry a substantial debtload.

When I heard that our Reserve Bank Governor Glenn Stevens had appeared on daytime television last week, I took note. This was an unusual move and while ostensibly his appearance was made to mark the Reserve Bank's 50th anniversary, quite probably, Stevens had another agenda in mind.

He warned on house prices and made it clear that rates were currently on the rise. My strong suspicion is that, like the apocryphal supermodel, Stevens wouldn't get out of bed to warn on less than two interest rate rises. And we may even see twice that number from here.

Stevens made it clear to daytime television viewers that rates had been swiftly lowered to emergency levels to shepherd Australia through the financial crisis.

Nothing riskless

For a central banker, his comments about property were rather pointed: ''I think it is a mistake to assume that a riskless, easy, guaranteed way to prosperity is just to be leveraged up into property. It isn't going to be that easy ... these prices are getting quite hot.''

This is the kind of action American central bankers might have taken in 2005 or 2006 to forestall the gut-wrenching losses that ensued for American property owners.

In my book, Stevens is to be commended. In stark contrast to the famously mystical musings of Alan Greenspan, his warnings on property prices and higher interest rates have been crystal clear.

It seems that Stevens is following the course of action advocated by Martin Wolf, the Financial Times's chief economics commentator. Wolf has long exhorted central bankers to ``lean against the wind'' by raising interest rates as asset prices rise. This is in contrast to the rather narrow view of ''inflation targeting'' which is favoured by some (leaving so-called ''efficient'' asset markets to sort themselves out).

Such a policy, Wolf explained in an October column last year, ''requires judgement and will always prove controversial. Monetary and credit policies will also lose their simplicity. But it is better to be roughly right than precisely wrong.''

What should you do?

The course of action you might personally consider in light of Stevens' warnings will depend upon your individual situation. If you have a variable rate loan, it seems clear that you should currently be directing every spare cent towards paying it down in order to minimise your balance when higher rates arrive.

If you're in the savings camp and are comparing rates on various accounts and fixed deposits, you should bear in mind that shorter term rates are very likely to rise by a further 0.25% or 0.5%. And perhaps even more over the course of 2010.

For example, if I were choosing between a 3-month and 6-month term deposit, both offering the same 5 per cent annual interest rate, I'd currently opt for the 3-month alternative in the expectation that I'll be able to roll it over in a few months' time at a more advantageous rate.

These are interesting times for savers and borrowers alike. And we should all be thankful that our Reserve Bank is run by an individual who seems to have learned the lessons from the failures of his international peers. Hooray, I say.

Hooray for Glenn Stevens and for this latest interest rate rise.

This article contains general investment advice only (under AFSL 282288).
Greg Hoffman is research director of The Intelligent Investor which provides independent advice to sharemarket investors. BusinessDay readers can enjoy a free trial offer at The Intelligent Investor website.
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10 comments

i don't think 5% is a very good return, why not find better investments?

Commenter

Williarrmo

Location

Melbourne

Date and time

April 07, 2010, 2:52PM
Mr Hoffman and Mr Stevens are both to be applauded. It has taken no big genius to make money out of property for quite a while. This has led to the bubble we had to have. While I personally would liked to have seen calls for prudence and restraint made earlier, it is a classic case of better late than never. Debt slavery doesn't look so good now, does it?

Commenter

seen it coming

Location

brissy for now

Date and time

April 07, 2010, 3:12PM
Great article, and refreshing to see something published that doesn't scream about 'house prices having no ceiling' or 'rate rise pain'. Indeed most property 'investors' will ignore Steven's and put him down to being just a mere banker sitting in an ivory tower, ignoring the fact he is probably the country's leading banker and economist, and ALSO holds the keys to mortgage rates. Sure enough this article will draw numerous comments on 'housing supply' and 'negative gearing benefits' and 'overseas landlords'.

Simple fact is, as pointed out by Steven's himself, Australia is way too over leveraged on a personal/consumer debt level, and most of that debt has been channelled into a non-productive, illiquid, emotionally valued asset (housing).

At least when the bubble bursts Steven's can hand on heart say 'I tried to warn you....'.

Keep up the rate rise good work!

Commenter

KB

Location

Melb

Date and time

April 07, 2010, 4:53PM
Bravo Greg Hoffman !!!!! Finally, saw 1 article on smh which is away from the spruikers agenda.........More articles like this needed...

Commenter

Vish

Location

Sydney

Date and time

April 07, 2010, 5:45PM
My father always told me, sell property when rates are low and buy when they are high. I have so many young friends who have felt pushed by government policy to max out on mortgage debt. Now we're going to see some tears and it really didn't have to be like this. Oh, and one other thing ... I'm all for foreign investment, but some kind of residency test (as they have in Switzerland), might help the current bubble?

Commenter

Mike F

Location

Sydney

Date and time

April 07, 2010, 5:43PM
Williarrmo - 5% doesnt look so bad when it is practically risk free. You can also do better, with some at call savings accounts offering 5.85% at the moment (without taking into account any knock on from Tuesday's increase).

Commenter

BM

Location

Sydney

Date and time

April 07, 2010, 5:42PM
The same thing happened in 1987 Stock market crash. They dropped rates in a panic, then had to increase rates (The recession we had to have) Causing a general recession.

With the Commercial Property Market in the USA about to pop, and the Chinese Real Estate Bubble reigned in (No more iron ore and coal imports from Australia) looks like we are heading for a property crash,

Or is this his plan???? Property is rising from Chinese cash paying buyers, not leveraged Aussie buyers.

Get an education!!

Commenter

CPA

Location

Melbourne

Date and time

April 07, 2010, 6:40PM
mmm. Good article, nice to see some balance. Now - 5% on a term deposit is actually about 3% if you pay tax and with inflation at a reported 2.4% that means your return is 0.6%...not so good. If you then add in the opportunity cost of what you could have done with those funds then its looking even poorer. But yes - riskless you're right and a lot of superannuants are sitting on their cash - I just hope they dont get dragged into the stockmarket at the top like they did in 2007. By the way - the banks loan out your term deposit 10 fold the amount you put in to purchasers of property at inflated prices...maybe not so riskless.

Commenter

monkeyboy

Location

Sydney

Date and time

April 07, 2010, 6:23PM
How many people could afford to buy a house at any time in our history with cash. The select few who have been spoon fed by mummy and daddy. Are you one of them?
If you knew anything about economics, and I assume you do as you are normally succinct in your articles, you would know that debt is not the devil that you try and make it to be in this article. A loan to buy an asset is commonplace and you know it. The media are, in their usual way, focusing on a perceived hot issue and blowing it way out of proportion. Glenn Stevens is so rapt up in his own persona he is playing the fool AGAIN. Go look at 2007 and see how stupid his actions are.

Commenter

Gilly

Location

Melbourne

Date and time

April 07, 2010, 6:56PM
The title of this article is misleading "Winners aplenty from RBA's rate rises". Where are all these winners? Surely he is not referring to someone earning an extra $250 a year (or almost $5 a week).

Commenter

SB

Location

Sydney

Date and time

April 07, 2010, 7:12PM

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