posts/monetary_policy_and_mortgage_products.org

   1 #+date: 2022-05-09 18:48:00 +0800
   2 #+filetags: economics finance law Belgium Australia
   3 #+title: Monetary policy and mortgage products
   4
   5 In its latest
   6 [[https://www.rba.gov.au/publications/smp/2022/may/pdf/statement-on-monetary-policy-2022-05.pdf][statement
   7 on monetary policy]]
   8 ([[https://web.archive.org/web/20220506111153/https://www.rba.gov.au/publications/smp/2022/may/pdf/statement-on-monetary-policy-2022-05.pdf][Internet
   9 Archive]]), the Reserve Bank of Australia highlighted that households in
  10 Australia have much higher private debt than before. Total private debt
  11 is approximately [[https://stats.bis.org/statx/srs/table/f3.1][120% of
  12 GDP]]
  13 ([[https://web.archive.org/web/20220505031215/https://stats.bis.org/statx/srs/table/f3.1][Internet
  14 Archive]]), roughly double Belgium's.
  15 [[https://www.abc.net.au/news/2022-05-02/rba-will-raise-rates-but-not-to-levels-experts-are-predicting/101029534][Analysts
  16 hint this will restrict by how much the central bank will be able to
  17 raise the cash rate target]]
  18 ([[https://web.archive.org/web/20220509111508/https://www.abc.net.au/news/2022-05-02/rba-will-raise-rates-but-not-to-levels-experts-are-predicting/101029534][Internet
  19 Archive]]) to battle rising inflation in the near future.
  20
  21 Most mortgages in Australia are contracted on a variable rate, or fixed
  22 only for the short term. As such, rising interest rates not only affect
  23 people taking out new loans - they also affect the amount all other
  24 indebted households need to repay. This contrasts with Belgium for
  25 instance, where in the first 3 months of 2022
  26 [[https://www.febelfin.be/nl/press-room/ook-eerste-trimester-van-2022-record-aan-hypothecaire-kredietverlening][93.5%
  27 of mortgage contracts had a fixed term over the entire duration of the
  28 contract]]
  29 ([[https://web.archive.org/web/20220509115728/https://www.febelfin.be/nl/press-room/ook-eerste-trimester-van-2022-record-aan-hypothecaire-kredietverlening][Internet
  30 Archive]]). Only less than 1% of contracts closed in this quarter has a
  31 rate varying periodically. This despite strong consumer protections
  32 built into the Code of Economic Law
  33 [[https://www.ejustice.just.fgov.be/cgi_loi/change_lg.pl?language=nl&la=N&table_name=wet&cn=2016042201][see
  34 art VII.143, § 2 to 6 in the Flemish publication]]
  35 ([[https://web.archive.org/web/20210617021917/https://www.ejustice.just.fgov.be/cgi_loi/change_lg.pl?language=nl&la=N&table_name=wet&cn=2016042201][Internet
  36 Archive]]): few of them vary immediately upon changes in the cash rate
  37 as the minimum term between changes is at least a year, and the updated
  38 interest rate can never exceed twice the original rate.
  39
  40 In contrast, Australian mortgages are rarely offered with a fixed
  41 interest rate period beyond 2 years - 5 years is practically the most I
  42 have seen advertised. Banks can vary the rate at will - they are not
  43 mandated to link a change to a variation in the cash rate, nor do they
  44 need to stick to that variation. Rates can go as high as the banks want
  45 them to go.
  46
  47 This is a remarkable difference in the products banks in these countries
  48 make available. I wonder to what extent this will influence how high the
  49 cash rate will be allowed to rise before politicians will need to step
  50 in, if at all they will, and how it may affect the evolution of
  51 houseprices in the countries. My current bet: Australian houseprices
  52 will decline relative to Belgian ones, and the cash rate won't grow as
  53 much. (At the time of writing, the RBA has a target cash rate of 0.35%
  54 while ECB still has a target cash rate of 0.00% though.)