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With a slowing in the construction property market, declining or at best flatter property asset values, recent weaker household consumption data, no growth in average wages, and no upward pressure from inflation, many analysts have been forecasting the next move in rates as being down.
Indeed some are forecasting perhaps two interest rate reductions before December 2019?
Fixed loan interest rates on offer are still attractive and the lenders are competing aggressively for good quality credit clients.
The question I would pose is that if the domestic economy is in a phase of slow growth, having been in the main propped up more recently by government spending, then would interest rate reductions necessarily have an immediate stimulatory effect in encouraging households to spend & consume?
The reason why household consumption is important is because it represents upwards of 50% of Australia’s annual gross domestic product. It’s what generally pushes our growth along.
The answer to whether rate reductions will stimulate our economy can be found in Reserve Bank data where the household debt to income ratio reached an all-time high as at November 2018’. In addition to this, more household’s with mortgages are estimated to be in mortgage stress and at a time of record low interest rates. I’d refer to the attached link from Macro Business via Digital Finance Analytics https://www.macrobusiness.com.au/2018/12/australian-mortgage-stress-hits-new-time-highs/. Head of DFA’s Martin North, also notes that underemployment is a factor which is restricting household spending and that doesn’t just impact on mortgage borrowers but on all households.
The other point to note that even though the Reserve Bank may cut rates that doesn’t necessarily mean that the full rate cut will be passed on to borrowers by the commercial banks . It depends on each of those bank’s borrowing costs.Â
I apologise for the above economic ‘mumbo jumbo’ but to summarize, it would appear that Australia’s growth is likely to be slow for some time ahead and world economic growth forecasts are similar. Interest rate cuts might not be the most effective way of stimulating growth.
On the positive side for borrowers, it would seem there is no immediate need to rush to fixing your interest rate and a competitive home loan interest rate market will see continued good offers on the table for both fixed and variable rate loan options.
Is it time to review your home loan?
Call Michael on 02 6583 2211 to have your home loan reviewed.