Wednesday, August 5, 2009

Paying the price of keeping our wealth

Interest rates are near zero per cent in countries like the US and Japan. Our rates at the current 3 per cent are higher than that in New Zealand but not as high as China, Brazil and Iceland. So why are Australians paying some of the highest interest rates in the world?

Well, Australia has always had high interest rates relative to other OECD countries but in this instance there’s a very specific reason - house prices.

The global financial crisis started an unprecedented collapse in property prices around the world (some might say it was the other way around – an unprecedented collapse in property prices started the global financial crisis). In most places they’re still falling, but not here, they’ve recovered the small amount they lost last year. The Australian Bureau of Statistics has just reported that house prices grew 4.2 per cent in the June Quarter. This is a monthly, seasonally adjusted figure so it’s a little unreliable but still impressive none the less.

If our house prices were under the same downward pressure that other economies are experiencing, the reserve bank would almost certainly be cutting rates to somewhere closer to 2 per cent.

So we’re lucky, we get to hang onto our wealth. “Our houses have kept their value, but the price of hanging on to that wealth is higher mortgages rates and kids who never leave home because they can’t afford to buy a house.”

(source: Business Spectator, 5 August 2009)

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