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The Benefit of Monetary Policy
Hi Guys,
I would like opinion from suitably qualified individuals on the impact of some 16 interest rate rises over the past 5 years or so.
Given the following unsourced points:
There is only about 34% of the Australian workforce who have a home loan.
If we look at what happens when couples purchase a home, they are usually both working and therefore have 2 incomes.
Along comes baby no.1 and mum probably either reduces her hours or often times resignes.
Therefore the family now has a higher cost of living with a larger and more dependant family entity as well as a reduced income. (double wammy)
If we add to this the additional costs of running a household such as home insurance, maintenance on the property, increased medical expenses for mum & baby, even when they are well, and as the family grows there is more reliance on the second car to get kids to & from everything, schools, sporting events, doctors and so on. This additional running around increases the costs of the car.
All of this is incured usually at a time when the family has a reduced income.
An increase in interest rates has a reduced effect on business as this additional cost is usually passed on to the general public through higher prices.
An increase in interest rates has little effect on people who don't have a home loan as they are paying rent and and can move to cheaper accomodation if necessary.
An increase in interest rates has little effect on the elderly as many own their homes or have nearly paid them off.
However, to have a home loan (and a fairly substantial one at that) and to bear the brunt of continued interest rate increases is extremely stressful and very demoralising. You purchase your home and think that we can educate the boys and then focus on paying off the home loan. Your interest rate starts out at about 6% and 5 years later you are paying 9% to 9.5% which requires an extra $18,000 in after tax income to keep your home.
My point is that I don't believe that the home loan borrower is at fault in contributing to the increase in inflation. It requires a very substantial income to be able to fund a family of 5 with education costs as well as try to keep your home and then have plenty of disposable income on top of that to go and buy large screen TV's and all sorts of other gadgets that are surplus to day to day needs.
I am blessed that we have 2 incomes. But we would never have survived if we didn't.
Maybe a different strategy might be for the Federal Government to introduce a new surcharge whereby, instead of increasing interest rates, they increase the amount of tax that we pay, but instead of the money going to internal revenue, it goes either directly to the individuals home loan (which can't be redrawn) and if you don't have a home loan, then it could either go to a savings account that can only be used as a deposit on a home purchase. As the economy falls back into order, the Fed Gov can then ease this burden.
Your thoughts would be appreciated
Keith
I would like opinion from suitably qualified individuals on the impact of some 16 interest rate rises over the past 5 years or so.
Given the following unsourced points:
There is only about 34% of the Australian workforce who have a home loan.
If we look at what happens when couples purchase a home, they are usually both working and therefore have 2 incomes.
Along comes baby no.1 and mum probably either reduces her hours or often times resignes.
Therefore the family now has a higher cost of living with a larger and more dependant family entity as well as a reduced income. (double wammy)
If we add to this the additional costs of running a household such as home insurance, maintenance on the property, increased medical expenses for mum & baby, even when they are well, and as the family grows there is more reliance on the second car to get kids to & from everything, schools, sporting events, doctors and so on. This additional running around increases the costs of the car.
All of this is incured usually at a time when the family has a reduced income.
An increase in interest rates has a reduced effect on business as this additional cost is usually passed on to the general public through higher prices.
An increase in interest rates has little effect on people who don't have a home loan as they are paying rent and and can move to cheaper accomodation if necessary.
An increase in interest rates has little effect on the elderly as many own their homes or have nearly paid them off.
However, to have a home loan (and a fairly substantial one at that) and to bear the brunt of continued interest rate increases is extremely stressful and very demoralising. You purchase your home and think that we can educate the boys and then focus on paying off the home loan. Your interest rate starts out at about 6% and 5 years later you are paying 9% to 9.5% which requires an extra $18,000 in after tax income to keep your home.
My point is that I don't believe that the home loan borrower is at fault in contributing to the increase in inflation. It requires a very substantial income to be able to fund a family of 5 with education costs as well as try to keep your home and then have plenty of disposable income on top of that to go and buy large screen TV's and all sorts of other gadgets that are surplus to day to day needs.
I am blessed that we have 2 incomes. But we would never have survived if we didn't.
Maybe a different strategy might be for the Federal Government to introduce a new surcharge whereby, instead of increasing interest rates, they increase the amount of tax that we pay, but instead of the money going to internal revenue, it goes either directly to the individuals home loan (which can't be redrawn) and if you don't have a home loan, then it could either go to a savings account that can only be used as a deposit on a home purchase. As the economy falls back into order, the Fed Gov can then ease this burden.
Your thoughts would be appreciated
Keith
Views: 5
Replies to This Discussion
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Permalink Reply by JeffK on -
I see where you're with this - kind of like the compulsory super payments that we currently make. The biggest beneficiary from this would be the banks who, instead of wondering whether the loans would be paid off, would have a iron-clad guarantee that loan repayments would be made. They'd think all their Christmases had come at once!
Perhaps this could work, with loans that operated under this way charging a lower interest rate, due to the Super-like guaranteed payments...
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Permalink Reply by Keith Musgrave on -
Hi Guys,
I am not suggesting that it is a compulsory situation whereby money is deducted from your pay all the time. I am suggesting that when the Fed Res gets to a point whereby inflation is a problem and they need to slow things down, say once interest rates hit 7%, then a new policy is implemented whereby your salary is taxed and those funds are credited to your home loan. So instead of those with a home loan continuing to pay higher & higher interest rates with no benefit, they will have that extra money going into their home loan. TheFed is still reducing the flow of money in the economy, but those paying for it get some benefit. At this point in time, if the Fed Res increases interest rates by 0.5%, that 0.5% goes from people with a home loan to investors. At this point let me clarify that I have no formal finance qualification, only 20 years experience in the finance & banking industry.
I doesn't make sense to me that increasing interest rates achieves anything. It hurts those who are not the problem.
The solution I mentioned above, means that if I have to pay higher interest rates then I will be the one to benefit. If someone doesn't have ahome loan, then it will help them get one.
Sorry guys, I could go on all day.
Cyas
Keith
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Permalink Reply by Bandwidth on -
And if I don't have a home loan and have no need for a home loan why should I pay more tax.
Under your policy I would be penalised for debt I do not have.
Home owners are an unfortunate casualty as the interest rates are increased to slow businesses down as much as consumer spending.
Tax is NOT the way to control spending
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Permalink Reply by Keith Musgrave on
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Hi Bandwidth,
I am not suggesting a new tax. What I am suggesting is, instead of the Reserve Bank increasing interest rates, they charge a levy or tax or call it what you like, but instead of the money going to internal revenue, the money that each individual pays either goes to help pay their mortgage or if you don't have a mortgage then put the money into a savings account that each of us will get the benefit directly into our own accounts. Kinda like the super surcharge except it can be accessed in certain circumstances, like when you want to buy a home you will have some savings there.
Regards
Keith
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Permalink Reply by Bandwidth on
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I hear what you are saying. What I am highlighting is what about people with no need to purchase a house, either now or in the future, BTW a levy is just a tax by a different name.
Why should people have money removed from their wages, without their choice, There are a large number of people who have their own home and substantial savings and or wealth and have created that situation with sensible investment. To remove some of their income reduces their ability to invest. How much return would you propose there be on this capital removed at point of earning. How would the levy be calculated, based on income, based on debt etc etc
What must also be remebered is trhat a number of people have purchased a "nice house in a "nice" neighbourhood with the associated overcommitment.
People make choices in life and unfortunately there are consequences. There is no easy answer to these problems but I do not believe imposing levies is the way to go.
Not going to internal revenue is a dangerous statement, I remeber that the defence force had a retirement benefit fund that was more than self sufficient and the govt raided it then they now pay the defense pensions out of the welfare budget.
Watch the "future fund" get raided in the name of "fixing the financial crisis"
Financial regulation is difficult complex and potentially dangerous.
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Permalink Reply by Matthew Reader on -
One thing to note is that we have seen rates come down 2% over the past three months, and some are predicting that rates will continue to drop very quickly over the coming 1-2 years.
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Permalink Reply by Keith Musgrave on
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I am not communicating this very well.
My point is that when the Fed Res increases interest rates they are trying to slow the flow of money in the economy by reducing the amount of money that I have to spend. Fair enough (sometimes). However, I receive no benefit from paying more interest. That money (on which I have already paid tax) has gone. I think that we should be able to devise a way where I (all home loan borrowers) get some benefit from the additional interest that we pay.
For those who have a home loan, put the increase into their home loan as a capital reduction.
For those who don't have a home loan but would like to one day, put the money into a savings account that they can access when they decide to purchase a home.
For those who don't want a home loan or are past it or whatever, put the increase into their superannuation.
I am bitter & twisted about how much interest I have paid over the past 5 years.
Bye
Keith
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Permalink Reply by Miffy on -
I know this won't be popular, but here goes...
High property prices are one of the reasons people pay so much interest, which is why it seems strange that we're all constantly rooting for a raging property market. If property prices stayed consistently low, we'd all have smaller loans to begin with, and wouldn't be able to take out equity access loans to buy stuff we don't need.
Which comes to another unpopular view of mine...
Take away all the concessions for investing in property - i.e. investment properties, not your own home. I know this means that there would be very few rental properties on the market, but it would also mean that prices would stay low and more people could own their own home. Too many boomers have bought up so many properties in Australia that younger generations can no longer afford to own their own home. Ridiculous.
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Permalink Reply by Bandwidth on
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Interesting and valid view Miffy
My thoughts
We need to be aware that one of the reasons for the current crisis is that the US govt went down the path of trying to put the lower earners into their own house and reduce their burden of supplying rental accomodation.
As far as the rental situation is concerned, the govt no longer has the capacity to supply the rental properties required by the population so they make it advantagous for the investors to fill the need. If you took away the "concessions" as was tried in the pass you would create a homeless crisis, in the short term
Using equity to purchase depreciating non capital items is an education issue. Sensible investors only use equity to purchase potentially income producing assets.
Property prices very rarely stay low as it is a supply and demand issue.
Some interesing figures from the RBA. Australians have $1,883b invested, free of debt, in their own homes nnd $629b in investment housing. The press are blaming the investors for the housing prices, is that true.
True investors, are not the one who drive the prices up as they look at the market objectively. If the return is there, in the asset class invest, if not look elsewhere.
No matter what the price of housing is there will be group of the population who will think it is too expensive, a group who think it will go down, a group who will wait and see, a group who see a house as a burden, and a group who will seize the opportunity. There may be others. People need to consider which group they belong to
I have purchased property, shares and other asset classes at all stages of the market and with proper risk management they have all done well.
We can speculate on why other's are to blame but I believe that that is just a way of justifying procrastination.
BTW over the last 10 years of ramping up my investements I have not replaced my vehicls and we use public transport to allow us to maintain one vehicle. The moral is do what is needed to move forward.
Regulation will not fix the problem it will only generate more compliance paperwork and more govt employees. Whatever rule the govt makes, astute investors will find opportunities
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