Interest rates have never been lower.

The recession, disastrous labour market conditions and worryingly low inflation has seen the Reserve Bank of Australia cut official interest rates to 0.25 per cent.

It has done this for two main reasons.

For those existing borrowers with debt, monthly interest payments have been slashed, which frees up cash flow and allows those borrowers to ramp up their spending with this surplus cash elsewhere in the economy. 

The other reason for such low interest rates is to encourage businesses and consumers to borrow more, with the debt servicing costs so low that investment, home buying and other spending is, for many, now affordable.

Many people are putting these record low interest rates into their mortgage calculators, and seeing just how cheap it is to service what might have seemed a large loan a few years ago.

For mortgages, most financial institutions are offering interest rates around or even below 2.75 per cent, with differences in terms and conditions impacting the actual rate borrowers can expect to negotiate. By way of comparison, the standard variable mortgage interest rate at the start of 2018 was around 5.25 per cent in 2011 the rate was around 7.8 per cent.

The interest only cost of a $500,000 mortgage in 2011 was $39,000 per annum; in 2018 it was $26,250 and today, that cost is just $13,750 per annum.

This shows the power of the interest rate cuts that the RBA has delivered on cash flow and borrowing capacity.

I note, by means of completeness, that house prices are 2 per cent lower now than in 2018 but are up 41 per cent from 2011 levels, whilst wages have risen 3 per cent from 2018 levels are up 25 per cent from 2011.

Not everyone can borrow in a recession

One issue with the recession is the obvious destruction in large parts of the economy. With unemployment and underemployment near 20 per cent and many businesses failing or poised to fail, a huge segment of the economy is unwilling and frankly unable to tap these incredibly favourable interest rates.

The low interest rate settings are focussed on those with an ability to borrow – those people with safe, full time jobs, with businesses that have not just survived but have flourished during the recession.

The early signs of such a pick up in borrowing is mixed, with credit growth flat-lining in recent months.

House prices are resilient

One area impacted by low interest rates is housing and house prices, which so far in the recession have been remarkably resilient.

According to the Corelogic house price series, house prices are still rising in Canberra and Hobart, they are broadly flat in Brisbane and Adelaide, have edged down a small amount in Perth and Sydney, and have been weak only in Melbourne. The Melbourne weakness is easily understood with the stringent lock down laws in place in recent months.

In regional centres, house prices have been broadly flat since the recession started.

But even in Melbourne, house prices are down just 5 per cent from the recent April peak having risen by around 10 per cent in the year to April.

There are, nonetheless, still significant downside risks to house prices.

The slump in net immigration has undermined underlying demand for dwellings. Limited demand for a given level of supply means price weakness. The fall in foreign student numbers in Australian universities is also cutting demand for dwellings. Neither of these negatives are likely to be reversed soon.

No one can be sure how long interest rates will remain at these lows. When, one day, the economy recovers, unemployment falls and inflation and wages growth lifts, interest rates will also rise and some of the monetary stimulus will fade.

That day is likely to be years not months away and even when those good times do return, it is unlikely the RBA will hike interest rates too early or two much and risk driving borrowing and the economy back into the doldrums.

Get set for a long time where interest rates will be low.v

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