Pay rise or rate rise — careful what you wish for

AS the new financial year kicks off, what would most Australians wish  for: getting a decent pay rise or not getting hit by a series of home loan interest rate rises, asks Terry McCrann.

If you are working you want a pay rise and the bigger the better.

AS the new financial year kicks off, what would most Australians wish  for: getting a decent pay rise or not getting hit by a series of home loan interest rate hikes?

Obviously — and this tends to be forgotten by the media, which sees any and all rate hikes as bad news — the answer varies from person to person. Only one-in-three adult Australians actually has a home loan for buying the house or apartment they live in — and I’m not trying to be “cute” by counting only one in a couple.

Very broadly, one in three of us (individuals or couples) are buying our home and so still have a loan; one in three own the home and have paid the loan off; and one in three are renting.

Two things are working away at the edges of those numbers. At one end, the two-thirds who own or are buying is slipping every year as first-home buyers find it tough to actually get into a home. And at the other, the percentage of investors and investors with multiple properties is rising.

But by and large there is a big chunk of people who want lower interest rates, or certainly don’t want to see rates go up sharply on their big mortgages.

There’s a big chunk of people who want to see exactly that; either to get more income on their savings, or to see the rise and rise of house prices slow to allow them to get into the market.

And there’s another chunk of people, maybe not so large, that is pretty much indifferent.

There’s similar separation in relation to pay rises. Obviously, if you are working you want one and the bigger the better. But be careful what you wish for: too big and you might be out of a job

The retirees want the exact opposite: especially if too-big pay rises are going to reignite inflation and make it harder to get by on their fixed incomes.

Interest rate rises are a two-edged sword, splitting savers and mortgagees.

It gets even more complicated and fragmented when you layer the two — pay rises and rate hikes — over each other. And in short, there’s no easy answer to my opening question; there certainly isn’t one that could be applied generally across the population.

It’s important though to think about this from a broader perspective. What, firstly, things like rate hikes and pay rises tell us about what’s going on in the economy; and then secondly, what’s good for the economy and ultimately most individual Australians and Australia overall.

By and large most Australians would understand that we do best with an economy that avoids booms and busts; or at least manages to minimise the extremes and get us through the aftermath when we get hit by one — either homegrown or imported.

So yes, we might like 10 per cent, say, annual pay rises or a low home loan rate that gets cut even lower. But that either/both are unrealistic, unsustainable and will blow up badly — and very painfully — at some point. Even if it doesn’t get quite bad as a Greece or a Venezuela.

Some increase in home loan rates — over and above the way the banks have been hiking rates to investors — would broadly balance some of those competing desires. It would also tell us that things more broadly are going pretty OK for the economy.

What we do not want to see is big rate increases or rate increases delivered rapidly — the opposite of what happened through the GFC when the RBA was slashing rates desperately.

So not only do we want to see the RBA calmly and progressively hiking (but not starting just yet), but a world economy that is growing strongly and sustainably to justify and indeed require that.

It’s a bit different and more complicated with wage hikes. Ideally we would go back to a world where wage rises ran — a little — ahead of inflation each year. But critically, that those wage rises are “paid for” by productivity gains at both the enterprise and the national economic levels.

Further, bluntly, we have to navigate our way through the destruction of “old economy” jobs from first, the shift to low-wage economies, and now (and continually into the future), the disruption of both the low-cost online producers/suppliers and robots.

So, to answer my question, and separating from your own narrow financial interest, you do really want to see some rate rises over the next year or so.

That would tell you that the economy is broadly in good shape and just as importantly, the RBA is acting to sustain that good health. Rates not going up or, worse, going down, would not be good news.

You probably do not want to see the “eight rises” suggested (not predicted) by former RBA board member John Edwards. While that could be good, it could also be pointing to a “bad ending”.

The pay rise answer is simple: if they can be afforded. By the employer. By the economy.

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Originally published as Pay rise or rate rise — careful what you wish for