Property investor predicts negative interest rates for Australian mortgage borrowers

One Sydney property investor believes the RBA will move into negative interest rates next year, which could lead to banks paying borrowers to take out home loans.

B Invested founder and property investor Nathan Birch.

The only way is down for interest rates and the RBA will soon cut them beyond zero per cent and into negative territory, according to one Sydney property investor.

B Invested buyer’s agency founder Nathan Birch, who has more than 200 properties in his own portfolio, believes average Australian borrowers may even end up being paid to borrow for a mortgage by their bank.

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He points to a consistent downward trend in official cash rates from August 2008, when the GFC saw them reduced from 7.25 per cent to just over 3 per cent in a matter of months.

“They said this was temporary at the time,” Mr Birch said.

“But if you look back now, they haven’t raised rates even once in the last 10 years.

“In fact, in February last year the RBA hinted they may raise rates around June or July but since that time, rates have actually been cut six times.”

The most recent rate cut, in November, was also the first time the RBA has not moved by 0.25 per cent; instead cutting the figure by 0.15 per cent, or 15 basis points, to sit at just 0.1 per cent.

“I believe they did this because their systems weren’t ready for a zero per cent rate,” Mr Birch said.

“Think of it like a Y2K bug, their systems weren’t designed for negative interest rates, so they cut by 15 basis points. I think they will update their systems and we will see a move into negative rates early next year.”

The Reserve Bank of Australia is expected to move into negative interest rates next year. Picture: Bianca De Marchi

Mr Birch believes another rate cut could occur as early as March, when various government coronavirus stimulus packages are due to wind up.

“In March they want to remove JobKeeper and mortgage holidays, but they will have to keep the stimulus going in some form or they’ll have to lower interest rates again.”

Negative interest rates is a new concept in Australia, but a number of other countries are already there.

Denmark, Japan, Sweden and Switzerland all have official cash rates below zero per cent.

The Jyske Bank in Denmark was the first to do negative rate home loans for borrowers, offering -0.5 per cent for mortgages with 10-year fixed-rate periods, since late 2019.

This is not a cashback deal, but rather when borrowers’ debt reduces by more than the amount they repay each month.

“We don’t give you money directly in your hand, but every month your debt is reduced by more than the amount you pay,” said Jyske’s housing economist Mikkel Høegh at the time.

Property mogul Nathan Birch speaks about why the RBA may make this unprecedented move.

Mr Høegh explained that the bank was able to do this because it borrowed money from institutional investors at a greater negative rate.

Mr Birch believes Australian banks will follow suit only when the RBA takes the official cash rate below -2 per cent, which would still be some time off.

“If the RBA starts offering -2 or -3 per cent rates to the banks, those banks can then offer -1 per cent to borrowers. There’s still a spread there so the banks can still make money.”

Some Australian banks are now offering home loan rates below 2 per cent for fixed rate home loans of three or five years.

When banks are offering fixed rate loans for cheaper than variables, it is usually a sign that rates are going to drop further.

“Banks are giving you fixed rates below 2 per cent because they want to fix you and lock you in before rates go lower,” Mr Birch said.

RBA Governor Dr Philip Lowe. Picture: Gary Ramage

While negative rates would be good news for average Aussie mortgage holders, the flip side is that if banks are paying borrowers, they will be charging savers.

And if comparisons between mortgages and savings accounts are any indicator, savers will be slugged more than borrowers will save.

“If you have $100,000 in the bank, that may become $98,000 or $99,000 after a year,” Mr Birch said.

“You will have to start paying the bank to keep your money. If that happens, people will start pulling their money out and keeping it under their mattress.”

SQM research managing director Louis Christopher believes Australia is headed for a potential move into negative interest rates in the long term but says it’s unlikely it will happen in 2021.

“The RBA can do other things apart from dropping rates and they are doing them, one is buying long term securities, both federal and state,” he said.

“However, they have somewhat cornered themselves, because everyone has taken out so much debt that it doesn’t take a lot to happen with interest rates to cause some major damage.

“If the solution is to take out even more debt, then we’re creating a bigger problem.”

Mr Christopher is forecasting government stimulus measures such as JobKeeper to be extended until at least the September quarter next year.

He believes stimulus packages and quantitative easing measures may see Australia headed for accelerated inflation, which will materialise in the housing market.

“It’s effectively electronic money printing … creating money from thin air,” he said. “People are taking out more debt to buy assets, housing prices are likely to continue to rise and people without assets are likely to fall behind.”

Originally published as Property investor predicts negative interest rates for Australian mortgage borrowers