Australian mortgage rates update: Don't miss the big point
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John Clark
Dec 8, 2011, 3:03:27 AM12/8/11
to MonitoringTheMadness Google Group
Dear all,
Some time ago I predicted (if not here then in conversations with my father - no time to check the archives now) that if the RBA started to cut rates then the banks would stop passing on those rate cuts.
Today we got very strong confirmation that this prediction is coming true.
Exhibit A - Is the ANZ mad? (MacroBusiness)
Is the ANZ mad? I don't think so. I don't think they have much of a choice. If they do currently have a choice, then when/if (but I think it's more like 'when') the RBA continues to lower rates then they will soon run out of choice.
As my readers should have patently clear by now, the lower the RBA's rates go the larger is the proportion of costs due to wholesale funding costs. In otherwords, the RBA can lower rates, but beyond a certain level we will find that the banks can no longer follow the RBA because they still rely on the international debt markets for a significant chunk of their funds to dole out more loans to Aussies still queueing up to become house debt slaves - and those international debt markets aren't lowering their rates for nobody (they are doing the opposite).
If I was in debt right now, I would think it a very wise move to consider locking in the best interest rate you can find, and lock it in for the longest period you can (at least until 2016). Why? Because there is little chance that real mortgage rates will drop much further because of the above issue, but there is always the chance that rates could be forced higher if we descend (as I think we will) into GFC Round 2 - and when that happens the rates the banks will be forced to pay on their wholesale funding will go much, much higher than they currently are (even with the infuriating government guarantee).
John
Some time ago I predicted (if not here then in conversations with my father - no time to check the archives now) that if the RBA started to cut rates then the banks would stop passing on those rate cuts.
Today we got very strong confirmation that this prediction is coming true.
Exhibit A - Is the ANZ mad? (MacroBusiness)
Is the ANZ mad? I don't think so. I don't think they have much of a choice. If they do currently have a choice, then when/if (but I think it's more like 'when') the RBA continues to lower rates then they will soon run out of choice.
As my readers should have patently clear by now, the lower the RBA's rates go the larger is the proportion of costs due to wholesale funding costs. In otherwords, the RBA can lower rates, but beyond a certain level we will find that the banks can no longer follow the RBA because they still rely on the international debt markets for a significant chunk of their funds to dole out more loans to Aussies still queueing up to become house debt slaves - and those international debt markets aren't lowering their rates for nobody (they are doing the opposite).
If I was in debt right now, I would think it a very wise move to consider locking in the best interest rate you can find, and lock it in for the longest period you can (at least until 2016). Why? Because there is little chance that real mortgage rates will drop much further because of the above issue, but there is always the chance that rates could be forced higher if we descend (as I think we will) into GFC Round 2 - and when that happens the rates the banks will be forced to pay on their wholesale funding will go much, much higher than they currently are (even with the infuriating government guarantee).
John
Steven Shaw
Dec 8, 2011, 11:17:41 PM12/8/11
to monitoring...@googlegroups.com
Even more amazing is what seems to be a follow up post
David Llewellyn-Smith sums it up with "Welcome to the new governor of the Australian economy."
Also, don't miss the first comment that links to
which includes this surprising audio interview with the CEO of ANZ:
in which he says something along the lines of "the RBA movements and our movements are not connected".
John Clark
Dec 9, 2011, 3:17:33 AM12/9/11
to monitoring...@googlegroups.com
Steven,
Re: "Welcome to the new governor of the Australian economy." Yeah - that was an inspired line!
It is very true, and many of those home "owners" (more accurately "debt owners") who read this news item are probably experiencing a major world-view shakeup right now.
Unfortunately, this is just the beginning. As I have long held, the interest rate banks charge on debt is likely to diverge significantly from the RBA cash rate.
John
Re: "Welcome to the new governor of the Australian economy." Yeah - that was an inspired line!
It is very true, and many of those home "owners" (more accurately "debt owners") who read this news item are probably experiencing a major world-view shakeup right now.
Unfortunately, this is just the beginning. As I have long held, the interest rate banks charge on debt is likely to diverge significantly from the RBA cash rate.
John
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