Mortgage rates hit 30 year low

14 October 2001

By Josh Gordon

Home lending rates will fall to their lowest level in 30 years after the Reserve Bank yesterday announced a 0.25 percentage point interest rate cut to help insulate Australia against a global economic slump.

Announcing the fifth interest rate cut this year, Reserve Bank governor Ian Macfarlane said there was a need to boost confidence after the terrorist attacks on the United States.

Official interest rates fell to 4.5 per cent - the lowest level since 1972 - and banks and other lenders said they would pass on the reduction to home buyers, meaning a drop in home loan interest rates to about 6.3 per cent.

The required monthly repayment on a typical $100,000 home loan will drop by $16, while those with a $150,000 mortgage will be able to save $24 a month, based on a 25-year loan term. But banks expect most home buyers will choose to keep paying the same amount to repay their loans faster.

The cut is also expected to encourage more activity by businesses, amid concerns from industry groups about a slowing economy.

The rate cut, just days before Prime Minister John Howard is expected to call an election, was a political gift for the government on the three-year anniversary of its 1998 election victory.

Government insiders believe this year's five rate cuts, totalling 1.5 percentage points, will boost the Coalition's chances of retaining key Victorian marginal seats containing a high proportion of home buyers, including La Trobe, Aston and McEwen. Mr Howard has told colleagues he believes low interest rates were a key reason behind the 1998 election win.

Treasurer Peter Costello said that when Labor left office in 1996, home loan rates were 10.5 per cent. An average home buyer was saving $350 a month under the Coalition, he said. "The standard mortgage rate of 6.3 per cent is the lowest rate in Australia for more than 30 years, the lowest rate since man walked on the moon," he said.

Shadow treasurer Simon Crean claimed the economy had been "mugged by the GST" and said the government had wasted the budget surplus trying to woo voters, leaving no room for extra spending at a time when the economy needed it most.

"Since the introduction of the GST, nearly 90,000 full-time jobs have been lost, growth has more than halved to just 1.4 per cent and business investment has plunged," he said.

The Australian rate cut came after the United States Federal Reserve cut its rates by half a percentage point to 2.5 per cent, in the second US rate cut since the September 11 terrorist attacks. Most other central banks around the world have cut rates by half a percentage point since the attacks.

Mr Macfarlane played down concerns the Australian rate cut would add fuel to an overheated housing market, saying a blowout in house prices was unlikely given that the economy was expected to slow and there was an over-supply of rental properties.

Mr Macfarlane said confidence would doubtlessly suffer after September 11, with share prices, company profits and business borrowing already down.

Economists were divided over whether there would be another rate cut in Australia.

Figures released by the Bureau of Statistics yesterday confirmed that Australia was in the middle of a building boom, with the number of houses, flats and townhouses approved for construction by local councils in August jumping by 17 per cent on the previous month, and 64 per cent higher than the same time last year.

Australian Chamber of Commerce and Industry chief executive Mark Paterson said the Reserve should have cut rates by half a percentage point to counter slower growth and recent job losses.

"After 12 consecutive months of falling full-time employment here in Australia and with an international recession in the offing, one can only wonder at the Reserve Bank's decision to lower rates by only 0.25 percentage points," Mr Paterson said.

Reproduced from The Australian Financial Review, 14 October 2001.