Add CategoryMortgage holders in Sydney and Melbourne have the struggling economies of Western Australia and Queensland to thank for lower interest rates which save them hundreds of dollars each month in repayments, an analysis by SGS Economics shows.
If interest rates were set for each state and territory’s economy individually, there would be huge variances across the country, the analysis reveals. The highest interest rate would be in 3.75% in Sydney, followed by 2.25% in Melbourne.
Brisbane and Adelaide would both have an interest rate of 0.25%, the ACT would have an interest rate of 1.5%, and Perth would have an interest rate of 0.5%.
While providing a different interest rate for each state and territory is of course just hypothetical, it clearly reveals the divide in economic performance across the country.
“Sydney mortgage holders can thank the low growth in Perth and regional Queensland for keeping their mortgage rates lower,” said Terry Rawnsley, principal of SGS Economics.
In dollar terms, the difference between a 3.75% cash rate and the current 1.5% for the average borrower is pretty significant. The last time the official interest rate was 3.75% was in 2012, when the standard variable rate was 7.05% on a 30-year term.
With many home loan borrowers on a 5.25% interest rate at present, this would mean an additional $438 a month on an average $375,800 home loan if rates were to revert back to 3.75%.
After the Reserve Bank’s meeting on Tuesday (which resulted in rates being kept on hold), Governor Philip Lowe discussed the diverging performances of Australia’s various housing markets.
“Conditions in the housing market vary considerably around the country. In some markets, conditions are strong and prices are rising briskly. In other markets, prices are declining,” Lowe said.
Andrew Wilson, chief economist at the Domain Group, said it was extremely difficult to set the interest rate with mixed economic signals across the country. As a result, setting interest rates would always be based on imperfect knowledge.
“There are consequences when you have a one-size-fits-all policy like an interest rate,” he said. Among these consequences are stimulating parts of the economy that are already strong, such as the booming Sydney housing market.
“We would have interest rates under 1 per cent if it wasn’t for the Sydney housing market,” Wilson said. “Underperforming capitals are paying the price for Sydney’s price growth.”
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