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Speaker 1: Welcome to Ask Fear and Greed, where we take your

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Speaker 1: questions and do our best to answer them. I'm Michael Thompson,

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Speaker 1: and good afternoon, Sean Aylmer.

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Speaker 2: Good afternoon, Michael, Sean.

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Speaker 1: Today's question comes from Rachel, who has written to us

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Speaker 1: via LinkedIn, sends us a little message on LinkedIn and

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Speaker 1: you can do the same LinkedIn, Facebook, Instagram or Fear

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Speaker 1: and Greed dot com. Tod are you? Rachel says, why

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Speaker 1: aren't Australia's interest rates as volatile as other parts of

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Speaker 1: the world. She says, the US, New Zealand, other countries

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Speaker 1: we've seen big moves up, big moves down. Why does

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Speaker 1: the same not happen here. It's a good question and

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Speaker 1: it's got you know what it's got. It's got Sean

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Speaker 1: Aylmer written all over it, our resident interest rate expert.

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Speaker 2: Well, it is a great question because the actual short

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Speaker 2: answer is that policymaking from the Reserve Bank on interesst

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Speaker 2: rates in Australia is more effective than it is in

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Speaker 2: many other countries like the United Kingdom, like the United States,

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Speaker 2: like New Zealand. I suppose I've got to answer why

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Speaker 2: it's more effective. The actual short answer, I mean, it's

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Speaker 2: fairly simple. Answer is that in Australia we undertake far

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Speaker 2: more variable rate mortgages than many other economies. So in

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Speaker 2: the UK, I think the most prevalent mortgage will it

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Speaker 2: was last time I looked this might have changed in

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Speaker 2: the last six months or so, it was like a

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Speaker 2: two year fixed rate. In the US mostly two year

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Speaker 2: fixed or fixed rates, not necessarily two years in the

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Speaker 2: US can be a bit longer, actually, but fixed rates,

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Speaker 2: so when they change interest rates in the US or

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Speaker 2: the UK, it can take up the two years for

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Speaker 2: that to feed through, whereas in Australia it happens almost immediately.

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Speaker 1: Does that mean then that in say the US and

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Speaker 1: the UK, they are hitting a smaller percentage of people

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Speaker 1: than much harder And wouldn't that kind of create all

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Speaker 1: kinds of not necessarily unrest, but lack of equality, like

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Speaker 1: because here we talk about the fact that when there

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Speaker 1: are these interest rates interest rates shifts in Australia, that

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Speaker 1: it doesn't affect everybody equally, and that those with mortgages

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Speaker 1: and variable rate mortgages are affected more than others, particularly

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Speaker 1: those who don't have a mortgage at all. But here,

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Speaker 1: what you're saying it sounds like that difference would be

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Speaker 1: even more pronounced in the US and the UK definitely.

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Speaker 2: Now a few things to keep in mind. Interest rates

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Speaker 2: are transmitted through the economy, not just fire mortgage rates,

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Speaker 2: but also businesses with loans or businesses making a decision

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Speaker 2: to invest versus putting your money in a term deposit

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Speaker 2: depending on interest rates, so that plays into it a

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Speaker 2: bit as well. You will also find an Australia home

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Speaker 2: ownership is a much bigger part of the pie. So

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Speaker 2: you go to places like Switzerland, hardly anyone owns a home.

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Speaker 2: In Australia, you do own a home, and people have mortgages,

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Speaker 2: and then what's the rule of thumb. A third of

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Speaker 2: people have a mortgage, a thirty people have paid it off,

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Speaker 2: thirty people rent. So therefore, when you change interest rates,

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Speaker 2: most of that third have a variable rate mortgage, so

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Speaker 2: you're actually hitting them now. In Switzerland, for example, if

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Speaker 2: you're doing that, most people don't have a homelan, so

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Speaker 2: it doesn't transmit quite as effectively. The same in the US.

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Speaker 2: I think the same in the UK, though I can't

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Speaker 2: really speak for the UK, so the actual transmission mechanism

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Speaker 2: is more than just mortgages, but Australians like mortgages. Australians

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Speaker 2: have variable rate loans. Another thing that's worth mentioning is

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Speaker 2: that because we're more effective, our interest rates didn't ever

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Speaker 2: go as high as many of the other economies did.

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Speaker 2: So New Zealand and the United States, United Kingdom, those

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Speaker 2: sorts of economies, their rates went much higher. Now they're

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Speaker 2: on the way back down. But the UK and the

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Speaker 2: US benchmark rates are four point seventy five percent. Australia

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Speaker 2: is four point three five percent. We are still lower

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Speaker 2: than what the benchmark rate for the UK and the

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Speaker 2: US is, even though they've been dropping rates. Canada, Europe

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Speaker 2: they've actually got lower rates than we do at this point.

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Speaker 2: But it is worth keeping in mind that because of

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Speaker 2: all those reasons we discussed, those rates go higher and

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Speaker 2: they go lower.

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Speaker 1: Okay, So in the end we really don't have it

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Speaker 1: too bad, do we. And we complain a lot as

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Speaker 1: well about interest rates being so high, and historically they

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Speaker 1: are not that high, are they.

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Speaker 2: No, they're very high compared to the period post of

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Speaker 2: global financial crisis, so over the last seventeen years they

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Speaker 2: are very high. For the thirty years or nineties, so

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Speaker 2: it's not thirty years, it is probably twenty years before that.

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Speaker 2: They're actually quite low, and I think over history we

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Speaker 2: will look back and think that post Global Financial Crisis,

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Speaker 2: that was the odd period. So four point three five

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Speaker 2: percent is a benchmark rate, paying six percent seven percent

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Speaker 2: for your homelan rate that's actually about normal. Might drop

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Speaker 2: a bit, but it's not going to drop much.

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Speaker 1: And the real problem is that perhaps people who entered

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Speaker 1: the mortgage market for the first time during that post

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Speaker 1: GFC period would have gotten used to that. It would

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Speaker 1: have been the only thing that they would have known

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Speaker 1: that these were these extremely low rates and suddenly feeling

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Speaker 1: like this is all it's ever going to be, and

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Speaker 1: it's not the case. We're now actually back to what

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Speaker 1: is normal.

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Speaker 2: Yeah. I mean, you're talking your own book here, Michael,

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Speaker 2: because I'm guessing that you got your first home loan

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Speaker 2: when rates were really low. Some of us little older Michael,

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Speaker 2: we knew what it was like to have high rates.

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Speaker 2: But then the Reserve Bank came in and said we're

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Speaker 2: not going to lift rates for the next three years,

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Speaker 2: and so others. A friend who lives like in my house,

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Speaker 2: you know, upped the mortgage, figuring that they wouldn't mean

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Speaker 2: we didn't think we'd have to pay extra mortgage or

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Speaker 2: like higher interest rates for a number of years, and

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Speaker 2: then of course got hit with higher interest rates and

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Speaker 2: that's hurting. Yeah.

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Speaker 1: Well, i'll tell you what we When we bought our

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Speaker 1: first place, it was in about November of twenty ten,

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Speaker 1: which I think was pretty much the month after the

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Speaker 1: final interest rate rise, and then from then on it

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Speaker 1: was just all downhill. So it was a great time

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Speaker 1: to be getting in because it was just down, down, down,

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Speaker 1: down down, like rubbing your hands together with glee. Here

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Speaker 1: we go. But it's just you needed to be a

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Speaker 1: little bit measured in that going hang on, hang on.

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Speaker 1: What goes down in this case is going to come

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Speaker 1: back up at some point and make the most of

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Speaker 1: that of those savings while they were there and try

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Speaker 1: and pay off a bit extra.

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Speaker 2: Indeed.

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Speaker 1: Anyway, look, you know what, I think we've answered Rachel's question,

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Speaker 1: And Rachel, it feels like we've answered about a dozen

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Speaker 1: of our own that we've asked each other. As we've

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Speaker 1: been we have drifted a little bit away from the

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Speaker 1: original question from Rachel, but I think we have answered

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Speaker 1: that one. So thank you Rachel for the question and

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Speaker 1: thank you Sean for answering it.

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Speaker 2: Thank you Michael, thank you Rachel.

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Speaker 1: Remember if you've got something that you would like to know,

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Speaker 1: then please send through your question on LinkedIn, on Instagram,

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Speaker 1: on Facebook, or head al on to our website Fearangreed

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Speaker 1: dot com dot au and send it on through there

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Speaker 1: and we'll pop it on the list. Michael Thompson and

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Speaker 1: this is Ask Fear and Greed