Where to with Interest Rates?
Written on the 1 October 2013 by Callum Scott
Naturally, this is having an effect on house prices. They are moving upwards, especially in NSW but elsewhere also. Self-Managed Super Funds (SMSF) are contributing to this, given that individuals can now borrow to invest in property in a tax effective way.
The fly in the ointment for the RBA is the possible formation of a “housing bubble”. In simple terms, this just means that house prices become unduly inflated because of a demand driven by overconfidence, exuberance and a belief that prices will continue to rise rapidly. “Easy money” aka low interest rates, minimal deposits on borrowing and slacker borrowing criteria can exacerbate this. And we know from experience, not just in housing, that bubbles eventually burst. An overreaction can occur again, but this time on the downside with prices and demand plummeting.
The RBA therefore wants to stimulate the economy but without creating a bubble in house prices.
A further rate cut would help reduce the dollar, encouraging exports and consequent domestic production, encourage business borrowing and expansion, flowing into employment but this risks overstimulating house prices. It’s a balancing act where the consequences of getting it wrong are profound when you look at what has happened in the past and elsewhere.
However, the modest rise in house prices that we are seeing hardly constitutes the formation of a bubble. Prices are really just playing catch up after a period of stagnation.
If we get another interest rate cut, and there is a good chance of this, it will probably be the last for some time.
Dr Callum Scott
Author: Callum Scott
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