It’s the structure
Mark Bouris takes a look at the Reserve Bank of Australia's home loan rates
Australians look at the Reserve Bank's cash rate announcement on the first Tuesday of each month and make decisions based on it. And the RBA has been charged (mainly) with keeping inflation in the 'target' range of 2 - 3 per cent.
However, key parts of this structure have been breaking down into a new order.
Part of this break down is the extent to which inflation and growth affect the general economy. That is, if there's wage inflation in Western Australian mining is there also wage inflation in Victorian manufacturing? Or, if the economy is growing at 3.5 per cent, does that mean all Australians in all industries?
Investment in mining rose by 60 per cent during the year while investment in the non-mining sectors was flat. And while the unemployment rate has remained at around 5.25 per cent for more than six months, in the March quarter there were employment increases in mining, health and public administration while there were declines in manufacturing, retail and accommodation/food.
But the RBA can only react to the averaged numbers, so many householders feel official interest rates have been raised to head-off inflation that they have not benefited from.
Perhaps the clearest sign of a structural change lies in how the major banks now react to the Reserve Bank. For 20 years the major banks set their variable rate loans according to where the RBA set the cash rate.
But lately, variable rate loans have been moving independent of the Reserve Bank.
The current average margin on variable rate loans in this country is 2.4 per cent whereas ten years ago it was around 1.4 per cent. This creates a liquidity problem.
Because the residential mortgage market is so profitable for the banks, they are now concentrating their lending in that market, to the detriment of business lending, which is less secure and more costly to distribute and manage.
This is creating a bulge in our economy: banks are pumping funds into home loans while many business owners can't get finance.
I don't advocate regulating the markets because regulators typically distort before they remedy. But there's a case for using incentives to alter the structural problems.
A first step could be to foster competition by encouraging our regional banks and foreign banks to compete in mortgage lending.
There are tax incentives that could be used and there are models where the Australian government could guarantee the small and non-banks, and not the big banks.
It doesn't matter how we get there, but we do need more competition in lending.
Competition will bring down the margins on variable rate mortgages and lure the big banks towards business lending again, where they can charge higher margins.
So, the market is actually poised to correct itself, but there has to be an incentive.
And what about the broader structural problems in the economy? Don't blame the Reserve Bank: they only have interest rates to use against a dynamic set of forces that haven't yet settled into their new shape.
* Mark Bouris is the Executive Chairman of Yellow Brick Road, a financial services company offering home loans, financial planning, accounting & tax and insurance. Email Mark on firstname.lastname@example.org any queries you may have.
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