For those of us that still have mortgages it is a happy day. For every $100,000 of mortgage outstanding we will be richer to the tune of 68 cents every day. As yet we are undecided about what to do with our windfall, but something frivolous could be on the cards.
For weeks the Reserve Bank of Australia (RBA) has indicated exactly what it was going to do. It couldn’t have telegraphed it any more if it had tried. Therefore the decision to chop interest rates by 0.25% was of little surprise to anyone, with the exception of those that were crowing for a 0.50% cut. But have no fear, because markets have already convinced themselves that a further 0.75% of rate cuts over the course of the next twelve months is almost a formality.
We don’t know for certain whether it is necessary or not. Nobody does. And even after everything has run its course nobody can say for certain whether its actions were effective or not. It’s a bit of a Y2K syndrome. Did all the billions of dollars spent on upgrading computers prior to 2000 really have any beneficial effect apart from lining the pockets of IT geeks?
What we can question is whether it is sensible for the RBA to be cutting rates while inflation remains above 5%. The RBA is in effect attempting to predict the top of the market, believing that inflation will rise a bit higher before easing back over the next 18 months or so.
Australian Mortgage Market Not as Bad as US/UK
Some commentators and analysts have also tried to use the credit problems in the US and the UK as a reason for cutting rates, arguing that it is necessary in order to prevent a freezing up of credit, a slump in the housing market, and an increase in home repossessions.
Again this seems a little disingenuous. As we mentioned on Monday, Australia hasn’t been immune from the tightening of credit markets as evidenced by our list of woe. However, some things are different.
Australian financial institutions have had to rely much less on the securitized mortgage market to raise funds to offer mortgages. This means that there is less of a ‘sausage factory’ feel to it like what you have especially in the US. There, the Savings & Loans in particular are able to offer mortgages and then quickly parcel them up and sell them onto to Freddie Mac or Fannie Mae. This means that having sold off that mortgage they can bring in the next one, and so on.
In that instance, providing Freddie Mac and Fannie Mae continue to buy the mortgages the S&L is going to keep pushing the mortgages through… until there is no more money left, which is what happened in the US recently.
Wizard Keeps Rate Rise Under Its Hat
The whacky crazy guys at Wizard Home Loans thought they could pull the wool over everyone’s eyes. At the weekend they trumpeted their intention to reduce home loan interest rates regardless of the action taken by the RBA.
However, what they weren’t so keen to announce was that it would be raising interest rates on credit card debt by 2.75%. This, the company announced would help Wizard to keep fees down.
The signal it sends is that clearly Wizard (or owner GE) is seeing some problems in the unsecured credit facilities that it is providing and therefore it needs to ramp up the margins.
