With the cost of living soaring and interest rates rising for the first time in more than a decade, a cap on mortgage repayments would be welcome relief for millions of borrowers. But is it possible and who would end up paying for it?
Clive Palmer’s United Australia Party (UAP) has imposed a five-year, 3% cap on mortgage interest rates as a centerpiece of its election campaign.
He has featured in much of the $16 million worth of UAP ads on Google and YouTube since the election was called, as well as on billboards and TV ads that are expected to drive the campaign’s total ad spend. of the party to 40 million dollars.
But how would that work?
Policy details are sparse and come from media questions to party leader Craig Kelly and Queensland Senate candidate Clive Palmer.
During his appearance at the National Press Club in April, Mr. Palmer spoke about interest rate regulation.
“I think we can legislate to limit mortgage lending because if you look back in 60s and 70s, that’s how interest rates worked in this country,” he said.
In that comment, Mr. Palmer is right, according to Lowy Institute principal investigator and former Reserve Bank board member Dr. John Edwards.
“We used to cap everything,” he told The Business.
Former Commonwealth Bank chief economist Michael Blythe, who now heads PinPoint Macro Analytics, also remembers the time well.
“The RBA used to control the mortgage rate, and they could tell banks how much they could lend for various purposes,” he recalled.
“In fact, mortgage rate control persisted until 1986.”
Why did the government abandon capped mortgage rates?
Why did this system end? Because there were problems. Serious ones.
First, interest rates for much of that time were not low. They were often in double digits.
This is because inflation was also often out of control (more on that later).
And if you think it’s hard to get a home loan now, try going back four decades.
“First you would ask a bank for a part and they reluctantly gave it to you, but you had to get more to buy a house,” said Dr Edwards, who bought his first home during the period.
“At that time, lawyers served as lenders to their clients.
Michael Blythe explained that banks were reluctant to lend money because the flow of funds used to secure these loans was very volatile.
With regulated banks’ deposit rates capped, non-bank lenders could step in and capture savings by offering much higher yields.
“A shortage of funds meant home loans could be ‘rationed’,” he said.
“In practice, it seems that borrowers got part of their home loans at the bank’s regulated rate and then had to shop around [owned] finance company to borrow the rest at market rates.”
Zac Gross, an economics professor at Monash University and a former Reserve Bank economist, summed up the dilemma.
Mr. Palmer’s response to this criticism at the National Press Club was to point out that his policy was aimed at existing mortgage borrowers.
“It’s not about continuing to loan out; it’s a matter that they’ve already loaned out,” he said.
Can you give banks cheap money for mortgages?
But there are ways to help banks keep mortgages at very low interest rates.
One way would be for the government to subsidize the difference between the cost to banks of raising funds through deposits and in global markets, and the ceiling on mortgages.
But, with more than $1.3 trillion in homeowner loans outstanding, Dr. Edwards said it wouldn’t come cheap.
“I think the costs would be extravagant,” he argued.
“If you want to do it for 2%, that’s $26 billion, and you want to do it for five years, well, you get well over $100 billion. And, even today, $100 billion dollars is a lot of money.”
UAP leader Craig Kelly told News Corp in a recent interview that cheap mortgages could be funded by the government by issuing bonds at 0.1 or 0.2 percent and lending that money back to banks.
The problem is that the current Australian government five-year bond rate is already above the proposed 3% cap on mortgages, and no private investor would accept such a low yield.
There is one institution that could provide this type of financing – the Reserve Bank.
In fact, he already had a similar program in place during the pandemic, which is one of the reasons why there were so many fixed mortgages available at interest rates below 2% until the end. of this program in the middle of last year.
“The [mortgage cap] would only work if banks could get funding below (and well below) the cap,” Blythe explained.
“The RBA achieved this result as part of its QE [quantitative easing] operations through the Term Funding Facility during the pandemic.
“But it was an unusual time and that shouldn’t be the norm.”
Cheap mortgages would lead to higher prices
The Reserve Bank has operated independently of the government since the early 1990s, but there is a provision in the Reserve Bank Act that allows the government to overrule its decisions and dictate policy.
This provision should probably be used to force the RBA to adopt another cheap mortgage financing program, given that it is currently battling a problem of high inflation.
“The Reserve Bank of Australia recently raised interest rates, and the reason they did so was to try to prevent the price rise that we are seeing in the Australian economy,” explained Dr. Gross, a former RBA economist.
“If the government forced them to lower interest rates to fund these cheaper mortgages, we would see higher prices in the supermarket and everywhere else in the Australian economy.”
Dr Gross said it would also likely hurt people who don’t already own a home.
“Any attempt to lower interest rates below their current historic lows will drive up house prices,” he observed.
Mr Palmer responded to inflation concerns by saying the policy would only apply to home loans and commercial loans secured by a house.
“There are other things we can do against inflation and of course that has to do with the money supply and how it is managed,” he said.
“But we’re not talking about general interest rates, we’re talking about mortgage interest rates.”
However, home loans account for around 60% of bank lending in Australia, and Dr Edwards warned the RBA may need to be more aggressive in other areas to rein in rising prices.
“If a very large part of the economy is immune to interest rate hikes, and you rely on interest rate hikes to limit demand, then interest rate hikes everywhere else must be much higher,” he said.
“So basically, however you do it, people without mortgages somehow end up paying to subsidize people who get these cheap interest rates?” I asked him.
“Absolutely,” he replied.
And Michael Blythe said it could prove unpopular with a much wider group of people than mortgage borrowers.
UAP unlikely to win seats, says Green
Ultimately, a discussion of whether a mortgage cap in 2022 would work should prove academic.
None of the main parties likely to form government – the Liberal/National Coalition or Labor – have indicated support for the idea.
And CBA election analyst Antony Green doesn’t believe the UAP will be in a strong position to push it forward.
“At most, the UAP could get a seat in the Senate,” he said.
“Clive Palmer has been a contestant for nearly a decade, and his vote has continued to decline since the days of 2013 when they secured a substantial vote in Queensland.
“I don’t think he has much of a chance of being elected.
The ABC approached the United Australia Party to comment on this story on several occasions and received no response.