It's a tap, not a spanking.
After months of warning about the danger of excess debt, Reserve Bank Governor, Ian Macfarlane, has finally raised interest rates. It’s not much, just a quarter of one%, sort of like a warning tap given to a toddler. Behave yourself – or, for your own sake, you’ll get a real smack.
The average home loan repayment will increase by $27 a month. Even for borrowers who are extended to their maximum, it won’t hurt too much. It should, however, get their attention.
As much as Treasurer Peter Costello wants to keep reminding us that interest rates are “historically low”, he doesn’t want to remind us that debt is historically high. Nor that it’s never been harder for first home buyers. The increase in property prices has more than wiped out the benefit of low interest rates. Instead of paying 13% on a loan of $100,000, many borrowers now pay 6.5% on loans of $300,000.
First home buyers have been elbowed aside by investors rushing to get into the property market. “Turn $7,900 into $225,000 in three months,” screams a headline for another get-rich seminar currently doing the rounds of the cities. There is no shortage of pied pipers ready to lead investors to the promised land of property wealth. Henry Kaye might have gone quiet, but there’s plenty of others stepping in to fill his salesman’s shoes.
Ian Macfarlane and his team at the Reserve Bank are not salespeople chasing big bucks from the property market. Nor are they incumbent politicians who double the good news and halve the bad news. The advice of the Reserve Bank is good advice, free from selfish motives. Unfortunately, not being salespeople, they don’t deliver their wisdom with the same fervour as property spruikers.
Investors who have ignored the warnings won’t be hurt much by this rise. But it should make them think. The next time a real estate agent urges them to “grab a great deal” – or a property spruiker urges them to pay thousands for “investing secrets”, they might shy away from more debt.
If not, they’ll get more than just a warning tap. Interest rates will go up again, prices will fall and thousands of investors will get a real spanking.
*Neil Jenman is a real estate authority and author.
