Why The RBA’s Cash Rate Rise Isn’t Scary

Why The RBA’s Cash Rate Rise Isn’t Scary

Well, it feels like the media finally got their juicy story this week with the RBA’s increase of the cash rate to 0.35% – but a healthy discussion has unfortunately been completely missed as it’s been devoid of a tonne of context.

If we look at the facts, the rate rise of 25 basis points, for a $500,000 loan will result in an extra approx. $100 per month in mortgage costs. Will that affect discretionary spending? Yes. Does that mean we should be scared? No, not if you’ve got a budget. Will this likely be the first in a string of increases? Yes, as that’s the natural economic cycle into which we’re currently entering.?

For some time now we’ve been walking, economically speaking, recovering after the tumultuous years of Covid. As a country, we’ve bounced back. Luckily in Australia our economy is particularly strong compared with markets overseas. There was a lot of cash made available with government stimulus – we were given the space and funds to heal. But we’re ready to get back on the economic treadmill, and the RBA is our trainer. Ready to turn up the pace at exactly the rate which we can handle, but enough to balance out our health. They do this so we don’t experience serious heart attack inflation.

Under the guidance of the RBA, we’re consciously equalising our access to cash against the sudden spike in inflation – felt at home (and abroad), due to external pressure largely from Covid, the war in Ukraine, and associated supply chain issues. It’s a delicate dance that – with a wider term view – not just for the nation’s balance sheet, but with our own long-term purse strings and buying power in mind, we should be grateful.

The reality is, most buyers will have leeway for an additional $100 per month in their budget, and if you don’t – you’ve got bigger issues.?

When a loan is assessed at the application stage, banks and lenders will typically include a buffer enough for a 3% increase. That’s in line with the optimum maximum rate of inflation – that’s managed by the RBA with efforts such as this increase to the cash rate.?

We recently recorded a spike at 5.1%. We’ve gotta get into shape.?

It’s important to remember then, that your loan has already been approved with consideration of whether or not you’ll be able to afford a rise. The worrying has already been done for you – all you need to do is keep up your rate of pace on the treadmill, and practice budgeting. That’s a healthy skill, always.?

It’s a shock understandably, especially for millennials or those purchasing in the last 7-8 years who will never have experienced a rate rise before. It’s easy to not know what it all means, and media scaremongering certainly isn’t helping. It must be acknowledged that pre-2010, the cash rate was 10% and above. I know when I bought my first property, my rate was 5-6%.

We’ve actually been here before, and more.?

As an investor myself, I see a lot of opportunities incoming for investors. More people will be fearful, so there will be less competition. It might be that you might see less people at housing inspections. Some people might hold off and see what the market’s doing – while they take the time to debunk all the media hype and headlines.?

I’m also seeing quite a lot of first home buyers, who couldn’t get into the market earlier because it was getting very heated and they were getting priced out at auctions. These buyers are now ready to enter the market with extra savings under their belt. They’ll be entering fresh and benefiting from further recent First Home Buyer initiatives as well. Under the right guidance, they’ll be able to focus on what’s most important in the equation – buying what you can afford.?

That’s the benefit of an investor mindset. Thinking clearly and strategically means you’ll be jumping up and down with excitement sooner, having bought a property that will work best for you.?

Either way, the change shouldn’t stop people from buying because 10-20 years ago people were still purchasing properties, and the rate of inflation was being equally managed by the RBA then.?

Healthy questions you should consider, are – have you secured a loan with still enough fat left in your borrowing potential? And, if you’re facing financial distress – have you overextended yourself in terms of debt? Or, if you’re in the market – were you hoping to purchase to your maximum limit of debt? None of these questions should have answers that pose a problem, with sound guidance from an experienced and trusted mortgage broker.

As we manage inflation though, cost of living will increase. That’s more noteworthy than a rise to the cash rate. And, it’s why the RBA made the change earlier than planned. No one wants the cost of groceries, for example, getting way out of control – ever.

What is likely is that rent will increase. The cost of cash rate rises is something investors will naturally want to distribute. Anyone renting who doesn’t own a property at the moment, will want to review their budget and plan ahead – with last year’s rents having increased by 9%, in mind. People who haven’t had wage growth will also need to recalibrate their budget to ensure a little more wiggle room month-to-month.

RBA Governor, Philip Lowe made it clear in his latest announcement – “The Board is committed to doing what is necessary to ensure that inflation in Australia returns to target over time.”?

That’s because action from the RBA, like this cash rate increase, is keeping all the different elements of our economy in check. Our unemployment rate is at an historic low of 4%, that’s expected to drop even further. We’ve gotten out of Covid and people are back to work. And, the construction industry is booming.?

People’s wages still aren’t quite high enough though to manage the recent inflation spike we’ve seen. We needed a health check.

The irony in all the media’s lamenting is that our purchasing power is already reduced – that’s the problem. And, the good news story is that we’ve had a cash rate increase to get things back into balance, so our buying power is actually stronger, sooner.

We needed to slow the tap. And, that’s something for which we should be thankful.?

A rational reception of the news really comes down to having some context.?