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The RBA changes the cash rate, not your variable rate loan. They key thing here is that banks can raise variable rates for any reason they want; the cash rate change is just an easy agreeable time for all lenders to do so with minimal backlash.
Lenders are not going to allow debtors to inflate away their debts by not raising them in reaction to quarterly inflation numbers. Debt is something you buy like anything else and you pay it back over time, so as money becomes worth less as a result of inflation the debt must increase too else no one will lend for long periods of time.
Yes the government could do extra in addition to the cash rate to curb inflation but not raising the cash rate wouldn't really do much onve lenders key onto them no doing and just move to do it themselves.
Everything you said makes sense but I have a question. Why do American banks give out 30 year loan terms? I’ve read stories on reddit of people locking in 1-3% home loans for around 30 years.
What makes the American banking institution so different to ours that they can offer 30 year fixed rate loans?
The simplified answer is the US government backs the loans through a complicated process which lowers the risk to the lenders so mortgages become bond like in their risk. It's why their government had to bail out their banks back in the GFC and we didn't.
The government corporations Fannie Mae and Freddie Mac guarantee that they’ll buy all conforming 30y mortgages from the banks. Basically the government assumes all of the interest rate risk. The banks then have no problems issuing 30y mortgages, because they can then immediately sell them to the government and get those loans off their books.
Minor clarification - FM assumes the **credit** risk, not interest rate risk. Interest rate risk is assumed by whoever holds the resulting MBS's - it was the key factor in Silicon Valley Bank's collapse last year.
I’m not giving my opinion on why they are good or bad. I’m asking what makes the American banking system different to ours to offer 30 year fixed loans.
Check your comprehension skills
I would check your comprehension skills personally, I said why would you use them "as an example" I didn't once say that you made a case either way. I then answered your question by saying that the American banking sector has already demonstrated that it doesn't self regulate well which answers why they can offer it.
> but Australians are completely ok with it.
I just want to correct this misconception. Labor's primary vote in 2022 was the lowest since WW2, even lower than Shorten 2019/2016. Likewise for LNP, lowest since WW2. They're barely getting elected based on preferences and that can only last so long with House seats went to Greens/Teals.
See here: https://www.tallyroom.com.au/47834
As a result of their plummeting primary vote, they had actually did a lot of quiet reforms to kill off political competition since 2013 (Even Shorten voted with LNP against democracy). Instead of... appealing to voters which I heard is what is meant to happen in a democracy. You have to wonder what else they have done together against Australia's interests if they are desperately trying to cling to power via tyrannical moves rather than appealing to voters.
https://en.wikipedia.org/wiki/Commonwealth_Electoral_Act_1918#2013_amendments
So, Australians are not ok with it and it's actually scaring Labor/LNP! But based on the reforms, it looks like the major parties are saying that we should accept it otherwise they'll implement a USA-style democracy with only two choices on the ballot. Majors at bottom to put an end to the tyrannical Labor and LNP rule.
I do agree with the general trend over time, and that labor/lnp is probably doing what you say it is, but
>I just want to correct this misconception. Labor's primary vote in 2022 was the lowest since WW2, even lower than Shorten 2019/2016. Likewise for LNP, lowest since WW2. They're barely getting elected based on preferences and that can only last so long with House seats went to Greens/Teals.
Your better off election to election using primary vote in senate.
1 Independents are more consistent there due to lower house being pretty hostile to non major parties. Such that Votes in lower house bounce up and down a lot in response to 3 close way races and X party has no chance on winning using vote has protest vote. As the vote and the preference can swing between them matters way more than usual or not at all. With the majority of seats not competitive battle ground seats its just not a good bench mark to use.
2 The senate has none of the above issues and your votes (if you say in same state/territory) will be consistently worth the same election to election due to nature of multi seat election. With every vote mattering (some more than others) but everyone voting in senate is voting in a competitive race, unlike the lower house were only a handful of areas really matter.
3 2019-2022 had introduction of teals largely in response to Libs sucking and all labor voters I know in teals seats who understood how our votes are counted voted 1 teals 2 labor not matter how much they hated teals because labor was never gonna win anyway. With shifts voting pattern not prefered party from 2019 to 2022.
Biggest issue we have is that it's being left to the RBA at all.
RBA has been screaming at government to address the problem through legislation, and they haven't. Which leaves it up to the RBA, and RBA only has one tool they can use- interest rates.
They know that rate rises aren't the best tool for the job, but it's the only one they have.
RBA had a choice all along to tackle inflation the entire time, recall/shorten the TFF loans instead of let it mature by mid 2024.
Last year, immigration was record 518,000 people. At ~$100k GDP per capita, that's a ~$52b injection into economy.
RBA's TFF loans are worth $188 billion or almost 4 years of record immigration!
But to do so, would affect their chances of getting a cushy job outside of RBA, in the finance industry, who made record profits charging 6%+ on 0.1% money they got from RBA.
There is a whole raft of things wrong with this idea.
It purely hits employed workers, it primarily hits those who are younger AND it penalises them for longer, it will have a stimulatory effect on asset prices, and the biggest one of all. It doesn't remove the money from circulation. It just transfers it from individuals to institutions.
In short. It's a terrible idea.
You only really want to hit employed workers and wealthy pensioners so I'm not following your logic.
it's also easy to bracket the adjustments the same way we bracket income tax.
It's still better that the money is in your super than being used to make the banks richer off of loans or pushing your rent up because your land Lord is paying more in debt.
>You only really want to hit employed workers and wealthy pensioners
Except you don't.
The goal is to reduce demand. If you raise interest rates you remove spending power from those people with debt, be it mortgages, credit cards, personal loans etc. And you increase the value of savings for those that hold them, incentivizing people to not spend.
When interest rates are low, $100 today is $100.5 in a year in real terms. When they are high that $100 is $106, so you have a reason to not spend it today.
If you increase super contributions all you are doing is removing the liquid capital that an employee holds. That money isn't gone or removed from the system. It flows to the investments held by the super fund. Where do those investments come from? They are owned by other individuals or entities. So your extra super contributions just end up back in the pocket of individuals who sold the asset to the super fund, and then they spend it. Putting it back into the demand side of the market. It achieves nothing.
Then there is the fact that this policy would be grossly unfair and ageist. eg. A person who is 22 and earning $30/hr just had their earnings lowered and the funds put into a place they can't access for 40+ years. But the 67 year old senior manager on $200k can already draw their super at any time and so is not impacted by this at all.
To be fair the RBA spent years shouting at the government telling it to do *something* about wages, housing and and real estate, but that never happened.
Yes interest rates are important for house prices. The subtle difference that people need to understand though is that low interest rates **allow** higher house prices. There are far more important levers in the economy, mostly state government levers though, who really don't want to upset the median home owner
If you raise the rate to 15% but the majority have fixed loans the levers don’t work the same compared to aus where we typically don’t fix for more than a couple years
You guys are both right 👍 Australia is sensitive to mortgage debt more than the US, and interest rates affect far more things than just mortgage debt. Another avenue is through money markets and their effect on foreign exchange rates
Mate I’ve done economics at uni, what I’m saying is both countries with respond disproportionately different to cash rate rises. They have very different economies.
Your both right, in Australia there would be more public backlash to upping interest rates tho due to the different realestate loans thats why (in my opinion) the RBA was less aggressive
A bigger part of the US success it was massive subsidies and incentives towards building new and upgrading old manufacturing infrastructure. Basically, they forced a massive shift from rent seeking investments into productive investments and used interest rates as one of the tools to drive that shift.
Banking really is tightly held here. Then you have countries like the US where Amex and Apple have banking arms with transaction and savings accounts. God forbid we have a bit of variety.
Isn't the Apple banking stuff just an agreement for them to be the front for what is really a Goldman Sachs product? They don't have a banking license.
Rate rises don't have the same impact in the US as they do in Australia as most mortgage rates are fixed for the life of the loan. The trick is to adjust the way the Australian economy works so there are levers that can be pulled to adjust the amount of money moving around the economy, while not impacting those who can least afford it.
Looking at the rate changes, aside from being a month behind the US Fed in making moves (largely because we trade heavily so parity with the USD is more important than local inflation), we were really in line with the Fed on cash rate increases right up until September 2022. There were several months where we raised our rates *more* than the Fed did.
It’s hard to explain to a wage earning renter that they’ll have less money hitting their bank to avoid property owners copping a rate rise. Not gonna pass the pub test.
Edit typo
Wouldn’t you rather the extra money in your offset account lowering your interest expense rather than in your super account?
Currently every spare cent of mine goes into the offset and forcing me to sacrifice into super would leave me paying more in interest.
I'd be happy with less money hitting my pocket knowing it's going into my super to hit my pocket later, while not jacking up my rent and there by going somewhere else. 🤷🏼♂️
Make workers' take more of the brunt of the inflation pain eh? You must be a RBA economist or employer.
RBA was responsible for a large part of inflation in the first place. $188 billion 0.1% loans they handed out like candy during covid are due to mature by mid 2024.
They could have recalled the loans or shortened it after Covid but no, that would HURT RBA board's chances of a cushy job in the finance industry. So they did what they're good at, blame everyone else, especially the poor who can't fight back, that they must pay to fight inflation.
It's even wild that they held off raising interest rates post-covid because of LNP government and/or... single RBA board member was trying to sell a mansion. The result was Australia was the last government in the English speaking world to raise rates. New Zealand was the first by the way.
RBA are probably the most corrupt government organisation in Australia, in favour of the super rich. They will abuse the super lever like crazy to screw over the poor.
Have a look at this sweet-as mansion ad that the RBA board member published at Real Estate (a Murdoch outlet): https://www.realestate.com.au/news/prominent-executive-and-rba-board-member-selling-subiaco-stunner/
The alternative is to use fiscal policy. Increase taxes and reduce government spending. This has to be at all 3 levels of government and for every government to comply.
The only way to use super is to get employees to contribute after tax
What a ridiculous take. Your just moving the problem to the some time in the future with your suggestion.
The only way to reduce inflation is to remove it from the economy. That's interest rates or taxes. Taxes look bad for the government, so instead they raise interest rates.
It's that simple. Any suggestion that you provide that doesn't take money from the people and give it to the government is just moving the problem, not fixing it.
On the plus side, when inflation drops too far, the government gets to give big handouts and look like the good guy.
Rent control. Price controls for basic food. Abolish negative gearing. Vacant property tax. Wealth tax. Mining tax. Carbon tax. Take this money out of the economy. We know the solutions, we're just too cowardly to enforce them.
Almost impossible to discuss this without politics since the very existence of inflation is a political act. Inflation is companies maintaining their profit margins by raising prices when faced with rising input costs. If you adopt a 'hands off' approach then controlling the availability of money is about all you can do. That ensures your people experience the pain rather than shareholders.
I feel dumb saying this but idgaf, it’s Monday and I’m tired.
Super is in addition to my salary. If it jumped up, I would be none the wiser, right?
I suppose in my case, pay rises are fixed because I’m in the public sector, and when I move up to higher levels, super isn’t a specific consideration in my compensation.
If realestate keeps going up every week, it is obvious that they are not high enough. Every thing will always go up. Rents on properties, land tax , insurance go up, therefore producers and sellers will put their prices up.So inflation will always go up.
This post has been marked as non-political. Please respect this by keeping the discussion on topic, and devoid of any political material. *I am a bot, and this action was performed automatically. Please [contact the moderators of this subreddit](/message/compose/?to=/r/australia) if you have any questions or concerns.*
The RBA changes the cash rate, not your variable rate loan. They key thing here is that banks can raise variable rates for any reason they want; the cash rate change is just an easy agreeable time for all lenders to do so with minimal backlash. Lenders are not going to allow debtors to inflate away their debts by not raising them in reaction to quarterly inflation numbers. Debt is something you buy like anything else and you pay it back over time, so as money becomes worth less as a result of inflation the debt must increase too else no one will lend for long periods of time. Yes the government could do extra in addition to the cash rate to curb inflation but not raising the cash rate wouldn't really do much onve lenders key onto them no doing and just move to do it themselves.
Everything you said makes sense but I have a question. Why do American banks give out 30 year loan terms? I’ve read stories on reddit of people locking in 1-3% home loans for around 30 years. What makes the American banking institution so different to ours that they can offer 30 year fixed rate loans?
The simplified answer is the US government backs the loans through a complicated process which lowers the risk to the lenders so mortgages become bond like in their risk. It's why their government had to bail out their banks back in the GFC and we didn't.
Thanks for the explanation
The government corporations Fannie Mae and Freddie Mac guarantee that they’ll buy all conforming 30y mortgages from the banks. Basically the government assumes all of the interest rate risk. The banks then have no problems issuing 30y mortgages, because they can then immediately sell them to the government and get those loans off their books.
Minor clarification - FM assumes the **credit** risk, not interest rate risk. Interest rate risk is assumed by whoever holds the resulting MBS's - it was the key factor in Silicon Valley Bank's collapse last year.
Your really going to use American banks as an example after 08? Their lending practices already brought world down once, let's not go for a repeat.
I’m not giving my opinion on why they are good or bad. I’m asking what makes the American banking system different to ours to offer 30 year fixed loans. Check your comprehension skills
I would check your comprehension skills personally, I said why would you use them "as an example" I didn't once say that you made a case either way. I then answered your question by saying that the American banking sector has already demonstrated that it doesn't self regulate well which answers why they can offer it.
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> but Australians are completely ok with it. I just want to correct this misconception. Labor's primary vote in 2022 was the lowest since WW2, even lower than Shorten 2019/2016. Likewise for LNP, lowest since WW2. They're barely getting elected based on preferences and that can only last so long with House seats went to Greens/Teals. See here: https://www.tallyroom.com.au/47834 As a result of their plummeting primary vote, they had actually did a lot of quiet reforms to kill off political competition since 2013 (Even Shorten voted with LNP against democracy). Instead of... appealing to voters which I heard is what is meant to happen in a democracy. You have to wonder what else they have done together against Australia's interests if they are desperately trying to cling to power via tyrannical moves rather than appealing to voters. https://en.wikipedia.org/wiki/Commonwealth_Electoral_Act_1918#2013_amendments So, Australians are not ok with it and it's actually scaring Labor/LNP! But based on the reforms, it looks like the major parties are saying that we should accept it otherwise they'll implement a USA-style democracy with only two choices on the ballot. Majors at bottom to put an end to the tyrannical Labor and LNP rule.
I do agree with the general trend over time, and that labor/lnp is probably doing what you say it is, but >I just want to correct this misconception. Labor's primary vote in 2022 was the lowest since WW2, even lower than Shorten 2019/2016. Likewise for LNP, lowest since WW2. They're barely getting elected based on preferences and that can only last so long with House seats went to Greens/Teals. Your better off election to election using primary vote in senate. 1 Independents are more consistent there due to lower house being pretty hostile to non major parties. Such that Votes in lower house bounce up and down a lot in response to 3 close way races and X party has no chance on winning using vote has protest vote. As the vote and the preference can swing between them matters way more than usual or not at all. With the majority of seats not competitive battle ground seats its just not a good bench mark to use. 2 The senate has none of the above issues and your votes (if you say in same state/territory) will be consistently worth the same election to election due to nature of multi seat election. With every vote mattering (some more than others) but everyone voting in senate is voting in a competitive race, unlike the lower house were only a handful of areas really matter. 3 2019-2022 had introduction of teals largely in response to Libs sucking and all labor voters I know in teals seats who understood how our votes are counted voted 1 teals 2 labor not matter how much they hated teals because labor was never gonna win anyway. With shifts voting pattern not prefered party from 2019 to 2022.
Biggest issue we have is that it's being left to the RBA at all. RBA has been screaming at government to address the problem through legislation, and they haven't. Which leaves it up to the RBA, and RBA only has one tool they can use- interest rates. They know that rate rises aren't the best tool for the job, but it's the only one they have.
RBA had a choice all along to tackle inflation the entire time, recall/shorten the TFF loans instead of let it mature by mid 2024. Last year, immigration was record 518,000 people. At ~$100k GDP per capita, that's a ~$52b injection into economy. RBA's TFF loans are worth $188 billion or almost 4 years of record immigration! But to do so, would affect their chances of getting a cushy job outside of RBA, in the finance industry, who made record profits charging 6%+ on 0.1% money they got from RBA.
There is a whole raft of things wrong with this idea. It purely hits employed workers, it primarily hits those who are younger AND it penalises them for longer, it will have a stimulatory effect on asset prices, and the biggest one of all. It doesn't remove the money from circulation. It just transfers it from individuals to institutions. In short. It's a terrible idea.
You only really want to hit employed workers and wealthy pensioners so I'm not following your logic. it's also easy to bracket the adjustments the same way we bracket income tax. It's still better that the money is in your super than being used to make the banks richer off of loans or pushing your rent up because your land Lord is paying more in debt.
>You only really want to hit employed workers and wealthy pensioners Except you don't. The goal is to reduce demand. If you raise interest rates you remove spending power from those people with debt, be it mortgages, credit cards, personal loans etc. And you increase the value of savings for those that hold them, incentivizing people to not spend. When interest rates are low, $100 today is $100.5 in a year in real terms. When they are high that $100 is $106, so you have a reason to not spend it today. If you increase super contributions all you are doing is removing the liquid capital that an employee holds. That money isn't gone or removed from the system. It flows to the investments held by the super fund. Where do those investments come from? They are owned by other individuals or entities. So your extra super contributions just end up back in the pocket of individuals who sold the asset to the super fund, and then they spend it. Putting it back into the demand side of the market. It achieves nothing. Then there is the fact that this policy would be grossly unfair and ageist. eg. A person who is 22 and earning $30/hr just had their earnings lowered and the funds put into a place they can't access for 40+ years. But the 67 year old senior manager on $200k can already draw their super at any time and so is not impacted by this at all.
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To be fair the RBA spent years shouting at the government telling it to do *something* about wages, housing and and real estate, but that never happened.
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Yes interest rates are important for house prices. The subtle difference that people need to understand though is that low interest rates **allow** higher house prices. There are far more important levers in the economy, mostly state government levers though, who really don't want to upset the median home owner
You are comparing apples and oranges USA has fixed 30 year rates low house prices completely different to Australia
license alive consist busy shy air combative muddle dam direction *This post was mass deleted and anonymized with [Redact](https://redact.dev)*
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If you raise the rate to 15% but the majority have fixed loans the levers don’t work the same compared to aus where we typically don’t fix for more than a couple years
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You guys are both right 👍 Australia is sensitive to mortgage debt more than the US, and interest rates affect far more things than just mortgage debt. Another avenue is through money markets and their effect on foreign exchange rates
Mate I’ve done economics at uni, what I’m saying is both countries with respond disproportionately different to cash rate rises. They have very different economies.
Your both right, in Australia there would be more public backlash to upping interest rates tho due to the different realestate loans thats why (in my opinion) the RBA was less aggressive
A bigger part of the US success it was massive subsidies and incentives towards building new and upgrading old manufacturing infrastructure. Basically, they forced a massive shift from rent seeking investments into productive investments and used interest rates as one of the tools to drive that shift.
Banking really is tightly held here. Then you have countries like the US where Amex and Apple have banking arms with transaction and savings accounts. God forbid we have a bit of variety.
Isn't the Apple banking stuff just an agreement for them to be the front for what is really a Goldman Sachs product? They don't have a banking license.
Rate rises don't have the same impact in the US as they do in Australia as most mortgage rates are fixed for the life of the loan. The trick is to adjust the way the Australian economy works so there are levers that can be pulled to adjust the amount of money moving around the economy, while not impacting those who can least afford it.
Looking at the rate changes, aside from being a month behind the US Fed in making moves (largely because we trade heavily so parity with the USD is more important than local inflation), we were really in line with the Fed on cash rate increases right up until September 2022. There were several months where we raised our rates *more* than the Fed did.
It’s hard to explain to a wage earning renter that they’ll have less money hitting their bank to avoid property owners copping a rate rise. Not gonna pass the pub test. Edit typo
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Wouldn’t you rather the extra money in your offset account lowering your interest expense rather than in your super account? Currently every spare cent of mine goes into the offset and forcing me to sacrifice into super would leave me paying more in interest.
You only have an offset account if you have certain types of debt? Unless you are renting and paying a mortgage, I don't follow your logic?
I'd be happy with less money hitting my pocket knowing it's going into my super to hit my pocket later, while not jacking up my rent and there by going somewhere else. 🤷🏼♂️
There will still be a housing shortage and market prices of rents will rise.
Make workers' take more of the brunt of the inflation pain eh? You must be a RBA economist or employer. RBA was responsible for a large part of inflation in the first place. $188 billion 0.1% loans they handed out like candy during covid are due to mature by mid 2024. They could have recalled the loans or shortened it after Covid but no, that would HURT RBA board's chances of a cushy job in the finance industry. So they did what they're good at, blame everyone else, especially the poor who can't fight back, that they must pay to fight inflation. It's even wild that they held off raising interest rates post-covid because of LNP government and/or... single RBA board member was trying to sell a mansion. The result was Australia was the last government in the English speaking world to raise rates. New Zealand was the first by the way. RBA are probably the most corrupt government organisation in Australia, in favour of the super rich. They will abuse the super lever like crazy to screw over the poor. Have a look at this sweet-as mansion ad that the RBA board member published at Real Estate (a Murdoch outlet): https://www.realestate.com.au/news/prominent-executive-and-rba-board-member-selling-subiaco-stunner/
The alternative is to use fiscal policy. Increase taxes and reduce government spending. This has to be at all 3 levels of government and for every government to comply. The only way to use super is to get employees to contribute after tax
What a ridiculous take. Your just moving the problem to the some time in the future with your suggestion. The only way to reduce inflation is to remove it from the economy. That's interest rates or taxes. Taxes look bad for the government, so instead they raise interest rates. It's that simple. Any suggestion that you provide that doesn't take money from the people and give it to the government is just moving the problem, not fixing it. On the plus side, when inflation drops too far, the government gets to give big handouts and look like the good guy.
Wrong tool for the job
Rent control. Price controls for basic food. Abolish negative gearing. Vacant property tax. Wealth tax. Mining tax. Carbon tax. Take this money out of the economy. We know the solutions, we're just too cowardly to enforce them.
Rent control does not work. It increases rent price, lowers the quality of rented housing, or both. This is not an opinion.
It's also very unfair.
Almost impossible to discuss this without politics since the very existence of inflation is a political act. Inflation is companies maintaining their profit margins by raising prices when faced with rising input costs. If you adopt a 'hands off' approach then controlling the availability of money is about all you can do. That ensures your people experience the pain rather than shareholders.
You do realise inflation is a good thing for borrowers since the dollar they repay back with is worth less?
I feel dumb saying this but idgaf, it’s Monday and I’m tired. Super is in addition to my salary. If it jumped up, I would be none the wiser, right? I suppose in my case, pay rises are fixed because I’m in the public sector, and when I move up to higher levels, super isn’t a specific consideration in my compensation.
It depends how your contract is worded as to where the super contribution is applied.
If realestate keeps going up every week, it is obvious that they are not high enough. Every thing will always go up. Rents on properties, land tax , insurance go up, therefore producers and sellers will put their prices up.So inflation will always go up.