Once upon a time, not that long ago, we would “high five” each other when we secured an interest rate of 7%.
In fact, before the GFC, the cash rate set by the Reserve Bank was 7%, so if you managed to get an interest rate of less than 10% from your bank, you were pretty happy.
Of course, now, those sort of interest rates seem absurd to anyone who has started investing in the past decade but for those of us with some age on our bones they were the norm.
Sure, property prices were lower back then, but the monthly repayments still took a much larger chunk of your cash than they do today.
In essence, property has become more affordable than it was then because of the one-in-a-lifetime interest rates that are now on offer.
The Reserve Bank slashed the cash rate again in early November to just 0.1%, which means that money is cheaper than it has ever been.
Also, it said it wouldn’t increase the cash rate until inflation was comfortably within its target band of 2-3% per cent, which is likely to take a few years.
For homeowners and investors, these super-low rates can vastly reduce your mortgage payments as well as increase your cash flow.
For prospective property buyers, well, lenders are already competing for your business with some offering interest rates of just 1.99% for principal and interest repayment loans.
On top of these history-making interest rates, the Reserve Bank also announced a number of initiatives to stimulate our economy as well as jobs growth.
The main one was the introduction of a program of government bond purchases.
In particular, the Reserve intends to buy $100 billion of government bonds over the next six months, purchasing bonds issued by the Australian Government as well as by the states and territories.
This is really a roundabout way of saying they are starting quantitative easing, which is essentially printing money, with banks set to benefit the most as the major beneficiary of the system.
To explain further, Sean Callow, a senior currency strategist at Westpac, says extra debt will be issued by the Treasury in the form of bonds, and authorised investors (like large banks) will buy the debt with full knowledge that the RBA will be keen to buy it from them — so they can be confident they won’t be stuck holding debt they don’t really want.
“That means the banks will sell the bonds to the RBA, and the RBA will just credit the accounts that those banks have at the RBA,” Mr Callow says.
The basic mechanics of it, the RBA says, “We’ll buy that bond from you. And here you are, we’ve just nudged up your account by the value of that bond — $100 million or whatever.”
“Now, that money is just created.”
If this is sounding like economist talk, yes, it is. In layman’s terms it’s the government offering very cheap money for the banks so they can flood the market with cash to stimulate the economy.
With such cheap money on offer, as well as unprecedented government stimulus sloshing through our economy, there is no question that property prices are going to rise.
Those who are in the position to buy now, should do so, because property markets are about to be supercharged – perhaps like never before.