AUSTRALIAN INTEREST RATE RISES SEEM ILLOGICAL
I am not an economist however understand the basics of our financial system. The Reserve Bank is concerned about inflation and increased consumer spending and consumer debt. By increasing interest rates, the bank has made it more difficult for those that have mortgages, particularly lower income earners and made it more difficult for new home buyers to enter the market.
This has the effect of turning potential home buyers towards more consumer spending on cars and large goods such as LCD and plasma TV sets as the vision of home or property ownership fades into the distance. This then has the effect of reducing savings and worsening inflation. If the RBA use the same logic they will increase interest rates further because of the inflation that they have caused by their increases thereby worsening the cycle.
At some stage Government and the Reserve Bank need to review exactly what tools they have at their joint disposal and come up with sophisticated strategies that address all the issues and the fundamentals of our economy. Surely the RBA has other methods of controlling consumer debt other than using the old fashioned method of continually increasing interest rates. Maybe they actually do have some persuasive powers that they could use with Government and the banking system instead of hitting everyone over the head with more costs.
September 6th, 2007 at 12:55 pm
I agree Stephen. I think the thought expressed recently that the ‘great Australian dream’ of home ownership is fading, is correct. Young people now believe that home ownership is becoming too hard because of interest rate uncertainty and are begining to believe that it will never happen for them. This is dangerous and could breed a whole generation of renters. The Banks should have a duty to combine financial counseling and mentoring with the provision of loans. This will serve to encourage home ownership as a means to compulsory saving and instill confidence in young people that can borrow with confidence if it is done responsibly.
Kevin Turner
September 6th, 2007 at 12:56 pm
Stephen,
Congratulations on your blog. The look and feel is great!
Interesting entry on Interest Rates.
Naturally the real estate industry is nervous about interest rates, for as they rise, so does the propensity for a flattening of the market.
There are many variables which need to be employed/addressed. Stamp Duty is a prime barrier/cost for the Victorian market, as much as it was for the NSW market in recent times. Still, when you look at the NSW market after the Stamp Duty changes, it flattened anyhow.
The true challenge which the reserve bank has, is making sure that the economy is strong, at the same time not compromising domestic wealth.
Given that we are used to cycles, and that the entire nation is facing an ageing population, coupled with a free thinking and somewhat selfish Generation X and Y, you cannot help but wonder what the next cycle incarnation will be, and what actions the reserve bank will take.
A tough job indeed.
Looking forward to some great discussions on here.
Cheers
Andrew