Economists are not impressed with Clive Palmer's plan to cap home loan rates
Senate candidate Clive Palmer’s campaign promise to cap home loan rates for five years is “radical”, “crazy” and “utterly irresponsible”, economists have said. However, experts warned the plan would probably appeal to some gullible voters.
According to the United Australia party’s website, Palmer’s “economic plan for freedom and prosperity” calls for a maximum 3% interest rate for all home loans in order to prevent a mass default as interest rates rise.
This week, the Reserve Bank hiked the cash rate by 25 basis points from its historic low of 0.01%. Mortgage rates, meanwhile, have been rising for months, with most fixed rates now between 3% and 5% and variable rates about 2%, according to a report by The Guardian.
“If our interest rate for home loans doubles from 2% to 4%, 60% of all mortgages will be in default, and if the interest rate goes to between 6% to 8%, as it most surely will, the default rate will be greater than 90%,” Palmer said, citing unnamed studies.
The mining billionaire also blamed the $1 trillion debt amassed by the Liberal and Labor governments as the cause for rising interest rates, The Guardian reported.
“The real estate market will then collapse and foreign buyers will flood our real estate market as they will have money to buy up our properties,” his national policy states. “We have to stop Australians from losing their homes!”
Craig Kelly, an ex-Liberal MP now running as a UAP candidate for the NSW seat of Hughes, said the government could implement Palmer’s proposed rate cap by selling Treasury bonds at 0.1% to 0.2% and “on-lending that cheap cash to retail banks.”
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That’s fantasy, experts said. Anna Bligh, chief executive of the Australian Banking Association, called the plan “magic pudding economics” and said it would “wreak havoc across [the] banking and financial services sector” if implemented.
Independent economist Saul Eslake said it was “constitutionally and legally possible” for the government to legislate a cap on mortgage rates. Until the late 80s, such a ceiling existed at the treasurer’s discretion.
However, “it would be an utterly irresponsible thing for any government to seek to do” given the different conditions in today’s economy, Eslake told The Guardian.
Timo Henckel of the Australian National University’s Research School of Economics said the plan “doesn’t sound workable.”
Henckel said one way to implement the plan would be for the government to set “severe financial market regulation” that would “take us back to say, the 1970s.” However, he told The Guardian that such a measure would be at odds with the liberalised capital markets of modern Australia.
The other possible strategy would be for the RBA to provide a standing facility to pump whatever money is needed into the financial markets to keep interest rates at 3%, Henckel told the publication. That kind of move, though, would be a “crazy policy because there’d be so much liquidity sloshing around in the system,” causing more inflation, he said.
He also said that strategy would “really only work if they seriously compromised the RBA’s independence … and would require massive legal intervention in a way that I’m not even sure they’d be able to do it.”
Ultimately, Henckel said, Palmer’s plan was mere political theater with no real substance.
“They’re never going to be asked to implement it anyway, so it’s really just an attention grabber in order to get votes,” he told The Guardian. “It’s not a genuine policy.”
