Keep your hands up and can I see anyone who can remembers rates at 7% in the 2000s or all the way back in the 1970s?
Now can you put your hand up if you can remember a time besides present when they were at 4%?
As you can see, no one has ever experienced rates this low and from the look at long term fixed rates banks are offering well under 5%....they are going to stay this low for sometime.
You see we live in a world that is debt ridden from tip to toe. This same world was filled with people that love to spend money they don’t have and the issue with spending money you don’t have means you are effectively bringing forward the things you are going to buy in the future to today. You are having Christmas today and paying for it tomorrow.
Unfortunately due to interest, the horrible thing you have to pay when you borrow, the banks will make money from these borrowers till the day they pay every penny back. This interest further increases their future expenditure problem, as they would have been able to spend this interest in the future. There goes another Christmas.
The winners in all this are the bank, home owners through excessive rises in property prices and the businesses who did well in the boom years...which was for nearly 20 years I might add.
The losers were people who spent beyond their means and took on personal debt, anyone who did not own property or investments and those who did not own a business in these boom years.
So what is the new world?
The increase in debt has caused two major issues; firstly the world cannot afford high interest rates due to every 1% rise causing a major increase in the amount of interest we all need to pay each month. Secondly, because we have too much debt and have been scared away from taking on more...we are not spending like we used to. This reduction in spending has already caused the world to stagger it’s way through a recession. We do need to say thanks to the government for following our lead however and spending BIG to get us through it. Now they cannot have a Christmas.
So in 2015, we are all debt ridden; governments, individuals and corporations to a certain extent.
The reason I spoke about the above, is that governments are the ones who are in control of interest rates. While they are still at the mercy of the economy, in reality all the governments around the world do not want interests rates to go up. The more interest they pay, the less they can spend. The less they can spend, the less votes they win and the less votes they win.. I won’t answer that one.
Without trying to sound pessimistic, as I believe the world will be very productive long term, I do believe we are in for a long period of slow growth. Slow growth means slow employment and wage growth. If we are not earning more, we are not spending more.
On a side point however there is technology innovation happening on a grand scale. This brings opportunity to be more efficient and to drive a new round of expenditure but at cheaper prices. For example, like we have seen in Big TVs. I see the owners of smart innovative businesses will do very well in the coming years but due to capitalism the profits will stay with the owners of these businesses not the majority of the population, the worker themselves.
So what does this mean for interest rates?
If we are in a low growth world, the government know that they need to keep rates low as long as possible and that is good news for homeowners. Investors of the past few years, saw this as an opportunity to take on more debt and have geared themselves up to the eye balls.... some much wiser than others. This has pushed prices in the Sydney property market up 50% in the past five years, a ridiculous amount.
So to answer my question, will we ever see rates this low again? The truth is we might. We might this year and we may next year. When I was working in the UK in 2008, if someone had asked me if rates would still be zero effectively in 2014 I would have fell off my chair. The truth is they are today with no end in sight. Where are they going to be in 5 years? The answer is no one knows but long term interest rates do give you some insight in to what the world is thinking and that is staying low.
What should I do?
I see this an opportunity to pay your debt down as fast as possible for as long as possible on the home you live in. By paying less interest, you are freeing up more cash flow and your choice is either to spend or to save. I suggest you save.
For investment debt, you should be looking to build a buffer by saving... this will support you as much as possible when rates do finally rise and mean that you can consider further investing in the future.
The best way to save is to know exactly what you are going to spend each month and the biggest expense you have is likely to be your home loan or your kids. To protect yourself you may like to fix a portion for five years at under 5% - unheard of rates.
Secondly, Banks know rates are going to stay low and are happy to suffer a little bit to their profits by offering even bigger discounts. The discounts we are seeing today at over 1.3% to small loans was a dream two years ago to home loan borrowing. I cannot encourage borrowers enough to review their lending rates as i'm sure there are better rates out there.
There are plenty of options but I stress that just because rates are low it is not a reason to spend; it is an incentive to save or to invest wisely in to a business, property or shares.