Clive Palmer says his plan to cap mortgage interest rates will “save homeownership”. Experts aren’t so sure
On the UAP website, the party says an interest rate of 4.4% would see more than three in five Australians default on their mortgages and lose their homes. At six per cent or more, that would be four in five Australians, according to UAP. No evidence was provided to support this.
“The real estate market will then collapse and foreign buyers will flood our real estate market as they will have the money to buy our properties,” reads its “National Policy.”
“We need to stop Australians from losing their homes.”
As the Reserve Bank Of Australia (RBA) lifted its official exchange rate to 0.35% in the first rise in more than a decade on Tuesday, a ceiling might look more attractive to some.
While details on UAP’s “economic plan for freedom and prosperity” are scarce, here are some of the challenges that could arise if Mr. Palmer succeeds.
1. Loans only for the rich?
As Mr Palmer – and many others – know, it is the RBA that sets the exchange rate, not the government. Banks follow the RBA baseline, setting their own rate that is competitive with other lenders, while trying to make a profit.
In a press release, the UAP says it will use “the power of the Constitution” to cap lending rates – although it is unclear how this would be done.
Legal hurdles aside, Dr Zac Gross, a lecturer in economics at Monash University, told The Feed that the policy was based on “pretty flawed economic logic”.
According to Dr Gross, capping mortgage rates would make it harder for banks to make a profit if, for example, they borrow at 4% and charge 3%.
“If banks can’t recoup their costs when they provide mortgages, they will only lend to the wealthiest households,” says Dr Gross. “It’s their safest bet.”
That would cut new homebuyers or low-income buyers out of the market, leaving them to be replaced by foreign buyers or not at all, Dr. Gross says.
And if demand drops, it could crash the market, devaluing the price of your property, he adds.
“Even if you lower your mortgage a bit, if your house is 10% less in value, you’ve probably lost more on the crash than you’re catching up with a slightly lower mortgage payment.”
2. Banks could raise rates on other loans
Dr Janine Dixon, an associate professor at Victoria University’s Center for Policy Studies, says it would also be bad for other companies and institutions.
“If banks are struggling to profit from mortgages, you may find that they are actually raising their interest rates on other types of loans,” says Associate Professor Dixon.
“And that can come at the expense of jobs and wages.”
3. Even without a general law, it would be a lot of money to generate
Details are scarce, but Dr Gross says that theoretically the interest rate differential could be paid for by the government, generated by taxpayers’ money. It would also come at a high price.
“That would be ridiculously expensive. We’re talking about $50 million a year,” says Dr. Gross.
“If we want to keep interest rates low, someone else will have to pay for it.”
Ultimately, Dr. Gross says a stable market is more desirable.
“So while no one likes to pay their mortgage in the bank, having a profitable, safe and stable banking system is much better than having a crisis-prone, crash-prone banking system.”
“And that’s exactly what you would get if you stifled the core business model of the bank.
“I guess that’s the advantage of being in a small party. No one will ever really have to test you to adopt your policies. I suspect it allows you to be a little more extravagant. “
Associate Professor Dixon says it is a “short-sighted” policy that only seeks to benefit those who already have property in their name.
“And you must ask why do we need to protect them? And at whose expense will it come?”
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