Rising interest rates a sign of economic strength not weakness

Rising interest rates are a sign that the economy is in better shape than it was before and therefore are a good sign rather than bad, but you won’t read that in the media at the moment.

That’s because there appears to be plenty of scare mongering happening in traditional and social media about the cash rate adjustment by the central back on Tuesday.

The reality is that the 0.1 cash rate that had been in place for two years was always an emergency level that was in response to the unknown economic fallout from the COVID19 pandemic at the time.

However, now that our nation is reopening to the world with a highly vaccinated population, record low unemployment, and rising inflationary pressures, which means that highly supportive monetary policy is clearly no longer needed.

History lesson

It’s vital to recognise what has happened in the past to assess what might happen in the future when it comes to inflation and monetary policy.

The Reserve Bank of Australia’s role is to steer inflation towards a target range of between two to three per cent – a goal that stubbornly wasn’t achieved for much of the past decade.

So, prior to the pandemic, interest rates were already at record lows as the Reserve tried – and ultimately failed – to increase inflation to at least two per cent.

Now, after the extraordinary economic stimulus of the past two years, as well as global factors playing a part, too, we have seen inflation soar to more than five per cent.

However, the Reserve is already on the record as saying that this in itself is not a permanent fixture, rather a temporary reaction to current economic factors that will fade over time.

That said, interest rates were always set to rise because it is a sign of economic weakness when they are at record lows – let alone at the unheard of level of 0.1 per cent of the past two years.  

One positive from rising inflation is that we are starting to see wages growth, which has been absent for years for most workers. 

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Rate rises

The vast majority of mortgage holders are well placed to finance increases to their mortgage repayments – regardless of what they might read on click-bait media or by “finfluencers” on social media.

Australia has one of the most robust banking sectors in the world – mostly because of the stringent checks and balances that borrowers have to go through to secure a property loan in the first place.

Mortgage applications have always included a buffer of about two to three percentage points above the interest rate they will be paying for their property to maintain the stability of our housing market. To put this into perspective, that is the equivalent of eight to 12 increases of 0.25 per cent. 

Likewise, households also have more savings than before with many well ahead of their mortgage repayments as well. All of these factors highlight how well-placed borrowers are to adapt to higher monthly mortgage repayments.

What does it mean for property buyers?

Property prices in some locations were already softening before it became apparent that interest rates were soon to start rising, because of the normal mechanisms of market cycles, but also because last year’s price growth was extraordinary… and it was always unsustainable.

We are now moving into more normal market conditions, where the level of supply and demand is more evenly balanced, which is a good thing for both homebuyers and investors.

For investors, in particular, there are more opportunities this year than last year to secure a strategic holding because of the increase of supply and decrease in buyer demand.

Investors will also benefit from rapidly increasing rents that are not going to change anytime soon because of the critical under supply of rental properties around the nation.

This means that investors will probably be better placed than anyone to benefit from rising interest rates, given their cash flow will be increasing strongly at the same time, too.

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