Mortgage Rates Lying Safe At Their Historical Average

The ever-sustainable debate continues- Are the ‘bears’ right in being circumspect or the ‘bulls’ correct in being adventurous? Both stick to their principles, the fiscal atmosphere of their times notwithstanding. For instance, both the bulls and bears have remained devout followers of their ideologies despite low mortgage interest rates. The former assume that now is the time to go hook, line and sinker and the latter believe that it is good to play safe as the market may whip up a mortgage crisis anytime.

Mortgage rates not at ‘historic’ but ‘historical’ lows

Two similar sounding words have very different connotations. While ‘historic’ means ‘never-before’, ‘historical’ means ‘related to the past’. Those who feel that the mortgage rates are at ‘historic’ lows are wrong in their assumption. Quite the contrary, the rates are actually close to their ‘historical’ territory if you consider 1975-1995 as an aberration.  Before 1975, interest rates were almost always at a level ‘at or below’ present levels (with exceptions).

In fact, it is quite a surprise how Australia could survive such high interest rates for close to two decades. Such high rates for 20 years would have sounded a death-knell had the situation occurred in the last century.

I take reference from the chart here.

The “Interest rates-bond yields-inflation” connection

Partially backed by very high interest rates, bond yields had come near a region of anomalous growth- 16%- in 1980s. An examination of the gold bubble illustrates that this time was marked by very high inflation and cash rates were heightened to arrest the inflation from becoming unmanageable.

It’s not panic time by a long shot

While there is just no reason to panic due to the low mortgage rates, it is an opportune time to remind the government that monetary initiatives should run hand-in-hand with fiscal ones and even if the rates bottom out further, it will not pep up demand in any sector unless backed by fiscal initiatives.

Household debt might be distressing the government

Yes, if the consumer debt sends distress signals to the government they are right in curbing cash rates as a solution but then they will also need to keep a closer eye on inflation.

I feel that the time is more favourable for the bulls. They should go the whole hog and invest in properties, creating a diverse portfolio for themselves before a rate-correction mars their plan.

Do you think cash rates will bottom out further?