How Will Mortgage Hikes Impact Business and Consumer Behaviour?

Rising mortgage rates and falling savings account rates pose a threat to Australia’s economy.

For years, the indefatigable Australian economy and its underlying model served as a shining example to countries throughout the Western world. The country is even on the cusp of breaking the Netherlands’ record of 26 recession-free years.

But is the party about to end?

Over the 2016 September quarter, Australia’s economy recorded a 0.5% contraction – the worst fall in gross domestic product since the global financial crisis.

Also, the base interest rate in Australia is at a record low of just 1.5% – down from an average peak of over 4%.

With further cuts in 2017 still a possibility, it could be that the once distant threat of recession is now looming large on the economic horizon.

How Mortgage Rates Are Rising As Lenders Prepare For A Bleak 2017

Recent growth patterns and the decidedly negative outlook for the year ahead have triggered a change in strategy among lenders, who are looking to raise additional capital before the economy begins to contract during the second half of 2017. This has manifested itself in rising fixed and variable mortgage rates, and an increased cost of borrowing to the consumer, while savings account rates have also fallen as some lenders and banks have looked to offset potential, future losses.

If more lenders follow suit and other service providers reduce their standard savings rates, it is clear that home owners will soon begin to feel the impact of a contracting and decidedly uncertain economic climate.

How Will This Impact On Businesses, Consumers, And The Marketplace?

It is clear that this strategy is targeted at individuals who boast existing cash and real estate assets, in the hope that lenders can increase their revenues without impacting too negatively on the economy. The problem is that lenders are hindering the consumers’ ability to both spend and save, particularly those that have mortgages and must commit more of their disposable income towards making repayments.

So while we may not see an obvious, adverse economic effect in the short-term, we could well see the prevailing levels of customer spending fall over time while debt begins to rise.

In terms of businesses, the increased cost of borrowing is not an issue at present as it is only applied to mortgages (while the base rate remains low). The cost of commercial loans could soon increase in line with mortgage hikes, however, meaning that entrepreneurs may find it increasingly difficult to raise funds for their venture or reinvest independently. For smaller business owners or sole traders who also have a mortgage, the initial rate increase could also impact on their ability to expand their operations over time.

With the Australian Dollar also depreciating and struggling to hold onto the gains acquired during Donald Trump’s troubled inauguration, traders have also faced a difficult opening to 2017. The main concern at present has to be the sudden and poorly communicated hike in US interest rates, however, as it can be argued that this represents the type of short-term thinking that undermines economic growth for years in the future.

About the author

Marcus graduated in Economics from the University of Sheffield before working in London in the finance sector. He now lives in Buenos Aires as a freelance writer and investor with his dog, Luna.

 

Any views or opinions expressed do not necessarily state or reflect those of CANSTAR.

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