April 27, 2022 by Dymphna

3% mortgages – can Clive do it?

Clive Palmer is making some big promises on interest rates. Can he deliver?

So Clive Palmer is promising to keep Aussie mortgage rates at 3%.


How is he going to do that?

Well, we don’t know. He didn’t tell us. He only just came out and made this massive promise to fundamentally change the Australian mortgage market, but didn’t bother to tell us how he was going to do it.

Why get bogged down in the details?

But let’s, for arguments sake, imagine that he’s serious. How would you do it?

Well, the first way would be to nationalise the banks. It’d be to bring them all under government ownership, and abolish the private sector when it comes to the provision of credit.

You’d then change the RBA’s name to the PBOC – the People’s Bank of Clive.

Somehow I don’t imagine this is what Palmer’s planning.

The second way to do it is to just use APRA – the banking regulator – to make any mortgage over 3% illegal.

That would do it too. But if you did that, and the bank’s cost of capital rose (you know, as the RBA started raising rates), then mortgages would no longer be profitable, and banks would just exit the mortgage industry.

So that’s not going to work.

So the only practical way forward it seems to me is for the government itself to lend money to the banks.

That is, the government commits to providing the banks with capital at a rate of something like 1-2% – enough for mortgage lending at 3% to still be profitable.

And where does the government get the money from? Well, it either borrows from the market at market rates, or it gets the RBA to print it and then lend it the money at the government bond rate.

The thing here though is that if market rates and the official cash rate are higher than 2%, the government is borrowing high and lending low – it’s making a loss.

And if the government is making a loss on mortgage lending – that is, its subsidising people to buy houses – that money has to come from somewhere.

That somewhere is government borrowing.

The government would have to borrow the money.

But hang on, isn’t Clive Palmer also promising to “pay down Liberal and Labor’s debt.”

Yes. Yes he is.

But isn’t that promise at direct odds with a promise to cap mortgage rates?

Yes. Yes it is.

Seriously, I actually can’t believe that journalists report this with a straight face.

Unless you’re planning to radically overhaul the structure of the Australian economy – doing away private banks and destroying the independence of the Reserve Bank – this is a massively expensive policy.

I mean, what happens if the RBA cash rate returns to 7% where it was not that long ago.

That means that the government would be borrowing at 7+% to lend to the banks at 2%, meaning that take a hair cut of 5% on every single mortgage!

Sorry Clive. It’s just not happening.

(But you knew that, didn’t you.)