Let me be the last to tell you: the Reserve Bank’s decision to raise the official interest rate for the fourth time this year, taking it to 4.6 per cent, will hurt people with mortgages.
asserted
decision → let → mortgages
That rate’s the highest since 2011, and there may be another rise to go in a month’s time.
uncertain
rate → ’ → time
But it will hurt more today than it did 15 years ago.
asserted
it → hurt → ?
This is an important part of the reason owning your own home has become so hard to afford.
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owning → own → home
When interest rates go up, many would-be home owners are unable to buy, but when interest rates start coming down – bringing some relief for existing home buyers – formerly frustrated buyers surge into the market, causing another burst of rising prices.
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buyers → go → prices
According to calculations by Curtin Business School’s Professor Alan Duncan, in June 2011, the average new owner-occupier home loan was about $363,000.
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loan → accord → June
For first home buyers, the average loan has doubled from $318,000 to $610,000.
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loan → double → 610,000
This doubling in mortgage sizes and, hence, house prices, was matched by an increase in average earnings for full-time adults from $1305 to $2084.
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doubling → match → 2084
That’s only about 60 per cent.
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That → ’ → ?
Now that’s unaffordability in action.
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that → ’ → action
To put it another way, the average mortgage in 2011 was equivalent to about 5.4 years of average full-time earnings.
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mortgage → put → earnings
Today it’s closer to 6.7 years.
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it → ’ → years
If the income multiple had stayed at the 2011 level, the average mortgage would be $150,000 less that it is now.
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it → stay → level
Remember, however, that the interest rate banks charge on home loans is a margin above the Reserve’s official interest rate.
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banks → remember → rate
That is, the interest rates you and I pay always have your bank starting with the official rate, then adding a margin to cover the bank’s costs and profits.
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bank → pay → costs
But get this: the margin added by home lenders was actually a bit lower before the latest increase than it was back then, going from just over 7 per cent 15 years ago to an average rate on new owner-occupier loan of 6.24 per cent.
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it → get → cent
It may interest you to know that the fuss we make about changes in the official interest rate is not matched in other rich countries.
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we → interest → countries
That’s because home loans in Australia tend to have interest rates the banks can vary at will.
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banks → ’ → will
In other countries, mortgages tend to charge a fixed rate of interest for the length of the loan.
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mortgages → tend → loan
This means changes in the central bank’s official interest rate still flow through to home buyers but take a lot longer to be felt.
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changes → mean → buyers
So changes in the official rate don’t cause the great stir they do in Oz.
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they → cause → Oz
But that doesn’t mean other countries’ use of interest rates to control inflation is any less effective than ours is.
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ours → mean → inflation
Even so, this doesn’t seem to have prompted our Reserve Bank to have given any thought to encouraging or requiring a move to long-term mortgage rates.
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this → seem → rates
My suspicion is that it’s come to enjoy the way all the recurring fuss about interest-rate changes has thrust it to the centre of our attention.
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fuss → come → attention
But when you think about it, the strange Australian way of doing it isn’t the only weakness in the use of interest rates – “monetary policy” – to slow down or speed up “demand” – our spending on goods and services.
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way → think → goods
In theory, a change in interest rates affects the borrowing and spending of the whole economy: households and businesses alike.
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change → affect → economy
In practice, interest rates have little effect on the behaviour of businesses.
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rates → have → businesses
For them, the interest they pay is tax-deductible and there’s little sign that businesses’ decisions about investment are greatly affected by whether interest rates are a bit higher or a bit lower than they were.
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they → pay → investment
So who is greatly affected by changes in interest rates?
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who → affect → rates
One group stands head and shoulders above the rest: people with mortgages.
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group → stand → mortgages
Such people will tend to be young.
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people → tend → ?
Older people usually have smaller mortgages because they bought when house prices were lower and have had more time to pay down the principal owing.
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prices → have → principal
See what this means?
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this → see → what
Our use of interest rates to control inflation is yet another respect in which our economic system is biased against the young.
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system → control → young
All of us – including oldies like me, who paid off their mortgage years ago and now spend freely – contribute to national consumer spending, but interest rate increases hit only the third of households with mortgages, particularly big mortgages.
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increases → include → mortgages
If you think that’s unfair, you’re right.
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you → think → ?
But it’s also wildly inefficient.
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it → ’ → ?
All households spend, but only, say, a quarter of all households get punished whenever inflation’s too high.
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inflation → spend → households
And this inefficiency means the poor young mortgage holders have to be squeezed a lot harder to make up for all those who don’t have a mortgage.
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who → mean → mortgage
It surprises me that so little thought has been given to the idea that using interest rates is a dumb idea, so surely there must be some other way of controlling inflation that would be both fairer and more effective.
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that → surprise → inflation
…and 9 more, not listed.
The Aporia
