Reading the Tea Leaves Helps You Save on your Home Loan

Graeme Salt

Understanding what the Reserve Bank says it will do with interest rates is like trying to read tea leaves.


 


This week, the Reserve Bank issued the minutes of the Board’s Monetary Policy meeting.  The trouble is, the language it uses is not immediately understandable to Joe Blow. It’s a bit like watching a Shakespeare play – only with a bit of concentration, do you get the drift. So here is what the Bank told us – in kitchen table English.


 


“The average interest rate on all outstanding housing loans had fallen by around 15 basis points since the cash rate was reduced in August 2013.”


 


There’s heaps of competition amongst the banks. In a battle to win your business, the banks have continued dropping rates, long after the Reserve Bank stopped.


 


Australian banks and non-banks had both benefited from easier wholesale funding conditions globally. This in turn had encouraged stronger competition in lending for housing and to large businesses, but members noted that this had not, to date, led to a general easing in mortgage lending standards and policies.”


 


It’s a furphy that the banks are returning to the sloppy lending standards from before the GFC.


 


“Housing prices were continuing to increase in the larger cities and members considered that the risks associated with this trend warranted ongoing close observation.”


 


We are getting a bit concerned about house prices in some places. We keep expecting house prices to calm down. But then again, we never expected the Aussie dollar to be so strong for so long either.


 


“Accommodative monetary policy was supporting demand in some sectors of the economy, but policy also needed to be cognisant of the risks to future growth that could accompany a large further build-up in asset prices, particularly if that was associated with an increase in leverage.”


 


Us dropping rates has been great for the economy as it comes off the mining boom. But now we are getting worried that some people are borrowing easy money that could create a housing bubble.


 


Someone who is better than me at reading Reserve Bank tea leaves is respected journalist Alan Kohler. He said, “As a rule of thumb, if everyone thinks it's a bubble, it isn't one. Bubbles occur when everyone is complacent.”


 


From my years of reading the Reserve Bank tea leaves, the central bank is never complacent when it comes to the property market.


 


Get my drift?


 


Graeme Salt is a Sydney-based mortgage broker.  For a no-obligations consultation, please contact him on 02 9922 5055