How I learnt to stop worrying and love the rate rises
Five ways higher rates benefit average Aussies.
There seems to be a universal assumption that interest-rate rises are always and everywhere a bad thing for the average Australian household. They are just a punitive form of economic medicine we have to take from time-to-time on the dubious say-so of the RBA - but nobody enjoys it. Except perhaps the sadistic central bankers.
And this is probably true for anybody on an adjustable rate mortgage! That might describe the majority of finance journalists, but it is not true of all Australians.
So here are five ways higher interest rates directly help (a subset of) Australian household.1
Higher cash rate means lower house prices.
One of the most direct effects of the higher cash rate is its impact on households ability to finance the purchase of a new house. Whether you are a first time home buyer, a repeat buyer or an investor, a higher interest rate will limit what you can borrow and thus the amount you’re able to pay. Accordingly a higher cash rate leads to lower house prices. This is great news for young Australians have yet to buy their first home!
Buying in to the property market is especially hard in Australia these days and a lower price of housing is great news for these households who have up until now been locked out of owning a home.
A higher cash rate means that they will pay more on their mortgage if they are successful. But RBA calculations suggest that in the medium home buyers are better off when higher rates lower house prices.
Higher interest rates are great for savers.
Whether you are saving in your UBank account to buy a car, a house or just saving for retirement a higher interest rate will mean that you get more bang for your buck on your deposits at the bank. For anyone who has yet to take on a mortgage or has already paid theirs off, higher interest rates mean they will better be able to build their stock of savings.
Analysis of HILDA data suggest that these net-savers are less likely to own a home, less likely to be employed and consume far less than their debt ridden cousins. While there is a lot of heterogeneity in the broad category of “savers”, we should welcome the additional income to young households who haven’t yet be fortunate enough to be granted a million dollar mortgage.
Higher interest rates are great for retirees’ savings.
While a lot of Australians invest their savings in the stock market either directly or indirectly via their superannuation funds many retirees transfer their assets to less volatile forms of savings such as term deposits or cash savings in their old age. A higher interest rate greatly increases the return that retirees and pensioners receive on both these sources of savings.
It hasn’t gotten nearly as much press as the increase in mortgage rates, but the rise in interest rates for savings accounts has been just as dramatic over the past year!
Higher interest rates are great for travellers
Whenever the RBA increases the cash rate this directly affects the Australian dollar. A higher interest rate means a stronger Australian dollar. This is a great boon to anybody who wants to travel overseas. The stronger Australian dollar means that whether you are buying a pint of beer in London or a piña colada in Puerto Rico it will be cheaper for you to spend your money overseas and your holidays will be more affordable as a result.
The combination of a strong Australian dollar and a weak pound means that there has never been a better time visit the UK and enjoy some warm beer and mushy peas!
High interest rates are great for anyone who drives
Just as a stronger Australian dollar makes overseas travel cheaper it also keeps the price of imports down. And Australia imports a lot of important goods!
Our biggest single import is cars. Since the demise of the domestic automobile manufacturing industry Australia imports all of its cars. The second biggest import is refined petroleum petrol. Given that cars, and the fuel that runs them, is a non-discretionary good for the majority of households keeping their price low is important for almost all households.
Higher interest rates help do exactly that, keeping our dollar strong and the price of new cars and petrol down.
But what about my mortgage?
I write this article not because I believe that the conventional wisdom - that higher rates are a net negative for the modal household - is wrong. Obviously anyone who is paying of $100,000s of mortgage debt is going to be financially disadvantaged by higher interest rates.
But I think it’s important to keep in mind that not all Australian households are net-borrowers and that there there is nothing inherently evil about higher interest rates. There are many commentators and writers who seemingly believe that rate rises are a pure social bad. And it colours their judgement when they write about the RBA’s decisions.
There are many reasons why a positive interest rates is a good outcome, far better than a world in which rates are trapped at 0 per cent forever. High interest rates may not be here forever. We should enjoy them while we can.
Outside of the obvious benefit of a stable inflation rate!