Great News! The Reserve Bank of Australia (RBA) has again left interest rates on hold…the ‘cash rate has been on hold for the past 3 months at 4.5% - this is very good news for property owners.
However don’t get too excited because it’s very possible that the big banks will raise rates independently of the RBA some time in the next six months.
Should we be critical of the big banks?
Overwhelming community opinion appears to portray banks as large uncaring bureaucracies with a licence to print money. While I’m the last one to demonstrate sympathy for the banks, let’s attempt to bring some level of objectivity to the table.
Good banks…
According to the Australian Bankers’ Association Inc, approximately eight million Australians hold shares (either directly or indirectly) in Australian banks and each year Australian banks share in excess of $9 billion in dividends with their investors. This has a domino affect because these investors spend or invest a good proportion of these dividends thus creating jobs and enhancing economic growth. Additionally well performing banks provide employment and training opportunities for many Australians AND you only have to look at the situation with US banks during the recent Global Financial Crisis to realise how important a strong financial sector is to Australia’s economy.
Bad banks…
Not that huge profits are a bad thing, however you do have to ask…how big is big enough – especially when the banks increase interest rates independently of the RBA OR fail to follow the RBA when it reduces rates.
Over the past 10 years (to 2009), BIG FOUR bank profits (profits before tax) have experienced HUGE increases, eg in 1999 ANZ was $2,162m while in 2009 the result was $4,380 ( 103% increase) with CBA, NAB and Westpac experiencing profit increases of 139%, 68% and 200% respectively – total profits of the BIG FOUR increased by 116% (Source: Historical performance – profit before tax (David Richardson in The Australia Institute March 2010)
The future?
Even if rates do rise again in the near future, it is extremely unlikely we will ever see rates as high as the mid to late 1980s and early 1990s. In fact interest rates are approaching their long-term average which is where the RBA ideally likes to see them.
The reason many Australians are concerned about rates is primarily because (in more recent times), we are used to unusually low rates. However this situation was never going to be sustainable AND according to most economists, is not good for the overall economy because it creates a false demand. – this is certainly the case with the property market.
When crunching the numbers – prior to making a property purchase decision – we always recommend adding a buffer of 1.0 to 1.5 percent to your interest rate calculation…not that we believe rates will rise that much (in fact we don’t). However, it’s always better to be safe than sorry and you MUST be as certain as possible that you will not get yourself into trouble by going into (good) debt!
This takes us back to our original question…’will the banks raise interest rates independent of the RBA?’ In attempting to answer that question, we can all speculate AND your opinion is certainly as valid as mine. For what it’s worth, I believe there will be 2 more interest rate rises of 25 basis points each over the next 6 months – one by the RBA and another by the banks (independent of the RBA). So I’m factoring a 0.5% rate rise into my (best scenario) investment calculations right now.
The bottom line is that only time will tell, however let’s revisit my opinion 6 months from now and see how close I was.
