Home > Economic policy, Oz Politics > Interest rates, part 2

Interest rates, part 2

September 3rd, 2004

As everybody knows, low interest rates are a mixed blessing for homebuyers. That’s because they have contributed (along with government policies like the reduction in capital gains tax rates) to the massive boom in house prices that has made houses just about as unaffordable now as they were in 1989 at the peak of the last interest rate cycle.

Everybody knows this except, apparently, John Howard. In his scare campaign against Labor, he calculated the impact of Labor’s peak interest rates applied to the average mortgage prevailing under the Liberals. Not surprisingly, the result is horrific. But Howard is as much to blame for this as anyone else.

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  1. gordon
    September 3rd, 2004 at 09:35 | #1

    So why doesn’t the ALP promise to do something about capital gains taxes? If it is to be part of the long-awaited tax policy, why does Latham need to make a reactive “trust me too” statement now?

  2. September 3rd, 2004 at 09:51 | #2

    Pr Q,

    Isn’t the problem with making housing affordable is that it also brings down house prices?

    Since the house owner voting population probably outnumber those who don’t, pitching to make housing affordable is not as politically appealing as pitching a housing boom. Since people don’t particularly like it if their piece of asset devalues.

    Is there any way at all to make this premise acceptable to house-owning voters?

  3. September 3rd, 2004 at 10:53 | #3

    One could make the cheeky argument that to the extent that the household sector was a net lender in previous decades, higher interest rates were actually good for net household disposable income. I wouldn’t try running that line in a campaign though!

    As for housing affordability, NZ has had no change in its (largely non-existant)capital gains tax regime and has also experienced a monster house price inflation, along with other Anglo-American economies.

  4. Jono
    September 3rd, 2004 at 11:52 | #4

    Low and stable interest rates are nothing but a blessing for home buyers. If they choose to borrow unserviceable levels of debt, then its their mistake and not the governments.

    If however there are sharp unexpected interest rate rises, they’re going to feel very angry towards those running the economy.

  5. James Farrell
    September 3rd, 2004 at 15:44 | #5

    It’s the volatility of the interest rate that matters, isn’t it? There is a certain number of houses, and a population with given income and preferences. Jointly, these fundamental data determine the monthly fee that will be paid for the use of a house. Some will pay this as rent; others as interest, the latter paying a bit extra to accumulate equity. If you have a fixed rate loan, it makes no difference whether the interest rate is low and the capitalised value high or the other way around. But people with variable interest loans are exposed to a great risk of either paying more for their accommodation than they bargained for or, or realising a capital loss if they sell. Governments should work on reducing that risk or the cost of insuring against it.

  6. Mark Upcher
    September 3rd, 2004 at 20:47 | #6

    For us arcane economists it is probably real interest rates that matter most (ie. after subtracting the rate of inflation).

  7. September 3rd, 2004 at 23:26 | #7

    Howard’s scare mogering is a nonsense,I can remember interest rates when he was treasurer.

  8. September 3rd, 2004 at 23:26 | #8

    Howard’s scare mogering is a nonsense,I can remember interest rates when he was treasurer.

  9. September 3rd, 2004 at 23:27 | #9

    Howard’s scare mogering is a nonsense,I can remember interest rates when he was treasurer.

  10. Jill Rush
    September 3rd, 2004 at 23:57 | #10

    There is a problem if house prices fall but for those selling. Private owners are not so pleased to see rising house prices raising council and water rates.

    Those on fixed incomes like retirees are horrified that they are going back into debt to meet their obligations until their offspring can reap their inheritance – if they don’t have to sell their home first to go into a nursing home – at which time they will have to pay out their debts.

    The other down side to the high cost of housing is that houses are becoming ever smaller. There may be three bedrooms but they will be poky and there won’t be a backyard or space for visitors AND the barbecue.

    As a result of these slums of the future being constructed everywhere there is less parking on the street and street trees are sacrificed to driveways. There are many fat children as there are no trees to climb in their backyard and forget about a game of cricket.

    People are frightened when the thought that even this kind of modest dwelling could be stripped from them with high interest rates.

    Affordability is an issue but there is a problem which has been greater than eight years in the making. Great buildings have been destroyed because of inadequate state and local laws. These combined with low interest rates, First Home owner’s schemes , reduced capital gains tax and baby boomers worried that if they don’t buy a house their children may never leave home, have led to a situation which is volatile.

    Howard won’t admit any of this and although to blame for much of it will look to attack as the best form of defence. He no doubt understands all too well that a lie will travel halfway around the world before the truth has even left home.

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