Friday, March 04, 2005
Aussies slammed by a quarter point rate rise

Oh please.

Finally the RBA has bitten the bullet and notched up the base rates, citing inflationary challenges. The housing market, which has powered ahead in recent years, doubling and tripling the prices in some suburbs, has been a bit more subdued of late. But there will be something of a squeeze from labour costs and from oil prices in the next few months as Europe gets to grips with a cold winter and the Americans drive around their vast country for no particular reason.

The battling Aussie looks set to feel the pain. A quarter point rise will add $30-$40 to an average mortgage per month. Despite what Peter Costello may think, most home-owners have mortgages in the region of $200-300K.

But if you go by what you read in the papers or hear on the radio, you would think the bourgeoisie were staring into the financial abyss. Aussies are 'heavily geared' because they have whacked too much on their plastic, or have re-financed their homes to cash-in on the $100K more that their house is worth.

They have bought investment homes, cars, boats, installed swimming pools, sent their kids to private schools and moved to the coast to retire early; hardly the bare-necessities of life. If now they cannot afford an extra $10 per week, bloody hell, what have they been spending it on so far? Apart from paying it off, the best way to avoid debt is to stop spending.

Howard may be proud of reigning over a low-interest rate economy that has encouraged shoppers to gorge at the trough of consumerism. But this is relatively fortuitous. We live in a time of a massively supply-side driven economy that has squeezed interest rates throughout the world since the late 90s. Australians have benefited from a global economy opening up, supplying them with a burgeoning output at an ever-reducing cost. Low inflation has kept low interest rates.

This has allowed the bourgeoisie to splurge like never before. At the same time we face a pensions crisis, as we are living longer, receiving fantastically improved and expensive health treatments and breeding less. A low interest economy has done very little to encourage us to save our cash for when we cannot work.

But much damage has already been done. For many years, in most parts of Australia housing affordibility was taken for granted. A burgeoning population and a reluctance of governments to spend their surplus tax dollars on their own tax payers (in the form of infrastructure) has inflated house prices to where it has become a social issue. Incumbent owner-occupiers have seen their wealth swell, but new entrants to the market are now finding the only places they can afford to live is 40km away from the employment centres. Perversely this creates inflationary pressures in public infrastructure provision.

I am not sure who believed Howard before the last election when he implied that interest rates wouldn't go up under the Coalition; he doesn’t exactly have unblemished relationship with ‘truth’. Setting interest rates is not part of his job, so it wasn't exactly for him to say. But this rate rise is at an awkward time for him. National output is relatively flat and certainly taking inflation and population growth into account, in real terms, personal wealth, as measured in GDP, would be negative.

But then I am not sure that the bourgeoisie will have to take little Jonny out of private school just yet.

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