Friday, August 01, 2003

Why won’t the RBA put up interest rates next week?

It sure beats me. The last couple of days have seen a rush of quasi-bad news headlines on interest rates vis a vis the Reserve Bank’s next meeting. This “bad” news is that interest rates are unlikely to go down! For whom is this a bad thing, then?

For starters, it’s certainly not bad news for me, nor for the other 28% of Australians who are renters. Like many renters, I would like to own my own place, but I have Buckley’s in the current price bubble environment. I would also equally have Buckley’s chance if mortgage lending rates were 17%, as they were in 1989. Out of these two evils (albeit they aren’t, of course, mutually exclusive), I strongly lean towards a pinpointed pricking of the bubble – which in turn should be achievable by raising rates by a relatively modest net amount.

Although Gen Xrs locked out of the property market have from time to time received sympathetic plight-pointing-out in the nation’s opinion pages, almost no one (the main exception is here, in Ken Parish’s blog) has bluntly advocated the most feasible and effective remedy for this situation – the stepped raising of interest rates by (I’m guessing) a total increment of three to five per cent.

Electoral backlash to such a rate rise is certain, but here’s the statistical rub – the 28% of Australians who rent are basically dead level with the 29% of Australians with mortgages (2001 census). The remaining 42%, who own their homes outright, would presumably not barrack with the renters when it comes to pricking the price bubble, but they are equally far from being in the same boat as those with mortgages – when (and if) the rate rise comes, home owners’ wallets won’t feel a thing.

So why is this 29% minority being so indulged? One possible answer is fairly obvious – the very term “mortgage belt” is synonymous with swinging electorates. Renters, in contrast, not only generally live in safe seats; they mostly (I would guess) live in safe seats of one party colour only – Labor.

Which fact – rather than supposed Gen X apathy – probably best explains PM Howard’s aggressive courting of the mortgage belt, despite their untaxed windfall profits being at the direct expense of Gen Xrs such as myself. Electorally, we have been subtly gerrymandered to the point of invisibility – and thus fucked over by both major parties.

Political pressures on him aside, Reserve Bank Governor Ian Macfarlane seems to be on the side of Gen Xrs. As he put it in an April 2003 speech:

rising [house] prices "make those next in the queue poorer . . . A significant rise in the real price of housing . . . makes some people better off at the expense of their children".

The dearth of current headlines flagging a rate rise, then (even in contrast to May 2003) marks a new high-water mark of obliviousness to this inter-generational fault-line. Nor, as Macfarlane’s comments could be interpreted, is this fault-line an intra-family one, capable of being resolved through voluntary wealth transfer, inter vivos or by inheritance. Given that baby boomers, already “the richest population in history” are probably yet to reach their inheritance bonanza peak, some other form of massive wealth shakedown – voluntary or otherwise – is going to have to take place long before the boomers get sent off in their pink catafalques, or otherwise fritter it all away in the meantime.

Update 4 August 2003

When the Reserve Bank board meets tomorrow, they won't be able to pretend that they missed this implicit threat today from PM John Howard - to not raise interest rates, however much economic prudence would warrant such a move. While ostensibly Howard was referring to the Productivity (sic) Commission inquiry, his RBA meeting-eve timing, and his oxymoronic reference to "valuable" tinkering at the margins leaves no doubt that the RBA's hands are tied.

Comments: Post a Comment

<< Home

This page is powered by Blogger. Isn't yours?