(03) 9020 2905Rate cut party in … da … house! Woo-hoo! There’s nothing like the smell of a rate cut as you’re heading into winter.
The Reserve Bank has just deposited a huge wad of money into your pockets. Thanks Guv’nor Stevens! Nice guy to shout all us struggling homeowners a drink, ain’t he?
Not so fast, boys and girls. The Guv’s rate cut drink is spiked. It might as well be rohypnol. You could wake up in a year’s time and wonder why your back pocket hurts so much and your bank balance feels like it’s been violated.
The celebrations this week suggest you simply don’t get it. I think you’re all suffering a little amnesia.
Let me give you a little modern history lesson on how idiots behave. Remember last time?
The time: 2008. Global stock markets were crashing. Debt markets were imploding. The whole financial world was spurting blood like a cheap 80s horror flick. The RBA went on a rate-cutting bender, slashing rates by an unprecedented 4.25 per cent in eight months. The “official” cash rate fell from 7.25 to 3 per cent.
It delivered an extra $800 a month to a household with a $300,000, 25-year, home loan, cutting repayments from $2517 a month to $1710.
What can you buy for $800 a month? Buckets of stuff. I’ll tell you that $800 is roughly 20 slabs of beer a month, enough (after a few months) to buy tickets to somewhere in Asia for the whole family to sit by a pool, and will buy pretty much every Dora/Thomas toy/book/game that is on the market at a given moment.
Plenty of us did exactly that. And that was pretty stupid.
But some of us entered into an arena that can best be described as Dumb and Dumber meets the Twilight Zone. We made Lloyd (Jim Carrey) and Harry (Jeff Daniels) look as clever as Wall St bankers.
We got far sillier than drink ourselves into alcoholism, splurge on cheap hotels in Bali and buy the kids toys they grew bored of, on average, in six-and-a-half minutes.
Some decided to go deeper into debt. When used for pure, debt-fuelled, commercialism, that $800 a month was even more powerful.
Leveraged up, it could meet repayments on a much nicer, far more expensive, car. It funded over-the-top home extensions. And it fuelled the purchase of TVs visible from space. Gerry Harvey was laughing as only billionnaire TV salesmen could.
All fuelled by MORE debt. We wuz idiots!
While the business world was crumbling and governments were panicking, Australians continued the debt party, borrowing like a Greek Government who knew the Germans would come to save them. (Tell that to a Digger and see if they don’t call you stupid.)
I know it seems a little counter-intuitive, but rate cuts are actually BAD news. When you see a rate cut happening, you need to think why the RBA has done that.
Why? Because they’re worried about the economy. They’re scared a recession is coming. They’re worried about rising unemployment. They think that consumers are growing cobwebs on their wallets.
So, damnit, what should you do?
- Keep your home loan repayments at their current level. That way, when rates inevitably go up, you won’t feel that pain as much.
- Build a buffer for that light in the tunnel. The RBA reckons it’s a locomotive.
- Resist the urge to take on more debt, even though lower interest rates mean you could afford it. Particularly if it’s dumb debt (cars, furniture, anything you put on a credit card).
- If your home loan repayments are cut, don’t let that extra money burn a hole in your pocket that gets spent on more dinners and wardrobe upgrades.
We don’t know what the banks are going to do yet. The banks might well pass on some/most/all of the rate cuts, but the way they’ve been whingeing about their “costs of funding”, they’d be unlikely to pass on the full wad.
What a crock! Have you had a look at bank profits lately? They’re double what they were before the GFC started.
Now, that’s an idea! Use some of the savings to buy bank shares. They’re currently cheap. They make piles of money. They’re a virtual oligopoly. And they’ve got us by the balls.
Bruce Brammall is the author of Debt Man Walking (www.debtman.com.au) and a licensed financial adviser. bruce@debtman.com.au.