The Reserve Bank meets today as the SMH sets about scaring the pants off those borrowers who’ve paid too much for their house, telling them interest rates will rise faster than they think! But don’t panic! Dr Phil

Lowe, who’s our central bank boss, is in no hurry to raise rates.

Dr Phil does have a nice problem that could be called an embarrassment of riches, with our economy absolutely shooting the lights out. That’s why some economists are reported predicting the RBA’s call that rates won’t rise until 2023 to be more like 2022 instead.

This is really important information for anyone overborrowed or thinking about fixing their home loan rate of interest. Obviously, if that first rate rise is in late 2022 (which is my best guess), then the longer you fix, the more likely it is that you’ll miss the rises in 2023 and 2024.

This ‘rates will rise faster than you think’ story was actually covered by yours truly on December 12 last year. And you simply have to blame:

• Our spectacular success in containing the Coronavirus.
• The power of the Morrison Government and the state counterparts with their huge budget deficits to kill the recession, which was the deepest since the Great Depression.
• The record low interest rates.
• The sooner-than-expected arrival of vaccines.
• And all the above has pumped up economic growth above expectations and helped the stock market rebound, bringing both business and consumer confidence.

It was a perfect storm of great economic outcomes but there is a price for this success: with all this great economic news, the number crunchers expect inflation to start rising. And when that happens, central banks start to raise interest rates.

I jokingly call this ‘Sussan Economics’ — you know, “this goes with this, goes with this, goes with this at Sussan”, as the old advertising song went.

Here’s the thinking: record low interest rates and a big budget deficit goes with big economic growth; this goes with rising employment and falling unemployment; and it goes with FOMO — the fear of missing out — which goes with lots of homebuyers at auctions and home sales; then it goes with rising house prices, which goes with the RBA saying “enough is enough, so it’s time to raise interest rates to slow things down.”

I read about an earlier-than-expected interest rate rise on Dec 12 last year, and only modesty prevents me from telling you who wrote it. But don’t panic, it won’t be until late 2022 if this huge growth continues. (Read that story here: https://switzer.com.au/the-experts/peter-switzer/boom-on-its-way-and-interest-rates-to-rise/ )

The recent trigger for the SMH story “the largest one-month jump in house values in 17 years and a surge in new home loans has prompted warnings the property market is at risk of overheating and could force the Reserve Bank to reassess record-low interest rates.”

Sydney house prices rose by 3%, while Melbourne’s prices rose by 2.5%. Now Sydney’s median house price has reached $1,061,229, while  Melbourne’s is at $829,509.

According to CoreLogic, the national rise in February was 2.1%. This is the biggest rise since August 2003!

But don’t get too scared. To their credit, Shane Wright and Jennifer Duke (the journalists who produced this story) gave an alternative view. This is what AMP Capital’s chief economist, Shane Oliver, said:  “The acceleration in home prices is likely to be starting to concern the RBA — but with average prices only just surpassing their 2017 high, growth in housing debt remaining relatively subdued at 3.6 per cent year on year and little evidence of a significant deterioration in lending standards at present, it and APRA [the Australian Prudential Regulation Authority] are unlikely to reach for the macro-prudential lever just yet.”

I’d add that Dr Phil doesn’t want the Oz dollar to go too high because that would hurt the economic recovery. After the GFC, the huge US budget deficit pushed the greenback down and our dollar went to $US1.10. And the current US deficit is actually bigger than the one after the GFC!

I think if the RBA starts to worry about house prices rising too fast, it will get the Australian Prudential Regulatory Authority (APRA) to tell the banks to turn off the supply of easy-to-get loans, which would slow the housing market down.

My best guess is that you have two years of not having to worry about interest rate rises. But I wouldn’t bet on three! Of course, if this economic boom bounce-back ends up being even bigger than I expect, I might have to tip a mid-2022 rate rise. But that will be because our economy will be on fire and going gangbusters!