Could Australian mortgage rates fall to zero?

We had previously operated under the wrong assumption that the 30-year decline in mortgage rates had run its course given the RBA official cash rate (OCR) had little further room to fall:

That is, with the OCR hitting its lower bound, we wrongly believed that banks would have minimal ability to cut deposit and wholesale borrowing rates without compressing their net interest margins. Accordingly, we believed mortgage rates could not fall any lower.

Our assumptions were thrown out the window with the RBA’s Term Funding Facility (TFF), which has successfully driven mortgage (and other borrowing) rates lower.

The TFF was announced in March 2020 as part of a monetary policy package to reduce funding costs across the economy and to support lending. However, we were slow to register its significance.

The TFF provides low cost three-year funding for authorised deposit-taking institutions (ADIs) to support the supply of credit. And it has been highly successful in replacing relatively expensive wholesale funding with cheap funding from the RBA:

Most of the initial allocations of the TFF were drawn upon by the time the first phase of the facility closed in September. Then the RBA Board adjusted the TFF in response to economic conditions, expanding and extending the facility, and in November it lowered the interest rate on new drawings to only 0.10% (from 0.25%).

The TFF has successfully lowered mortgage borrowing rates, especially fixed mortgages:

There is also a high likelihood that Australian mortgage rates could fall lower still judging by what’s happened in Europe.

The European Central Bank started with 0.1% funding for banks in 2014. By 2016 the rate was -0.4%. And now it’s -1.0%. Yes, the central bank will pay commercial banks up to 1% if they can just find someone (anyone!!!) who will just borrow the money. 

Indeed, the nation with the the longest history of negative central bank rates – Denmark –  has begun offering homeowners 20-year loans at a fixed interest rate of zero:

Customers at the Danish home-finance unit of Nordea Bank Abp can, as of Tuesday, get the mortgages, which will carry a lower coupon than benchmark US 10-year Treasuries. At least two other banks have since said they’ll do the same…

Back in 2012, policy makers drove their main rate below zero to defend the krone’s peg to the euro. Since then, Danish homeowners have enjoyed continuous slides in borrowing costs.

The once unthinkable notion of borrowing for two decades without paying interest comes as central bankers across the globe shy away from rate hikes.

This is an amazing development that could be a harbinger of what lies ahead for Australia.

If the RBA follows Europe’s path, we could soon see the TFF providing negative interest rates and plunging fixed mortgage rates well below 2%.

The RBA put remains in play.

Unconventional Economist
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  1. Yes youse were wrong and now you’ve admitted it, we can acknowledge the best economic advisor on MB for the last 3-4 years has been Reusa who accurately predicted boom times ahead.

    So load up on debt because it’s free and you don’t even have to pay it back! How good are central banks!

    Now youse will also need to admit BTC is not a scam lol..

    • The fed broke it. Now, they own it.MEMBER

      “The Hazards of Asset Allocation in a Late-stage Major Bubble”
      By Jeremy Grantham

      “For a portfolio to avoid the worst pain of a major bubble breaking is likely the most difficult part. Every career incentive in the industry and every fault of individual human psychology will work toward sucking investors”

      “The real problem is in major bull markets that last for years. Long, slow-burning bull markets can spend many years above fair value and even two, three, or four years far above. These events can easily outlast the patience of most clients. And when price rises are very rapid, typically toward the end of a bull market, impatience is followed by anxiety and envy. As I like to say, there is nothing more supremely irritating than watching your neighbors get rich.”

      • Thanks for posting. Jeremy Grantham’s always good value

        “The single most dependable feature of the late stages of the great bubbles of history has been really crazy investor behavior, especially on the part of individuals.”

        But as he says, this bubble (‘a humdinger’) is completely without precedent, coming at a time when the underlying economy is perceived as weak.

        I’m guessing MB will come out looking OK in the end.

    • @ Haro RE the Grantham article (below)”

      “The most impressive features [of a bubble] are the intensity and enthusiasm of bulls, the breadth of coverage of stocks and the market, and, above all, the rising hostility toward bears. In 1929, to be a bear was to risk physical attack and guarantee character assassination……..The irony for bears though is that it’s exactly what we want to hear. It’s a classic precursor of the ultimate break”

    • Donald Rumsfeld

      Australian government is effectively printing hundreds of billions of dollars and injecting it into our banking system – and thats fixed things.

      No need to look into the implications of that, what the consequences or blow back will be.

      US dollar is collapsing and about to take the AUD down with it – massive disaster coming. If Iron Ore returns to trend – and it will – the AUD will fall and take the economy with it.

      A butterfly flaps its wings.

    • They were wrong on housing and H&H was also horribly wrong on Iron Ore – the $20 call. As all investors these guys also can make wrong calls.
      But when it comes to MB Fund, it is impossible and unfair to measure Fund performance over 12 months.
      The way I see it is MB Fund is down because they don’t want to gamble client’s money and your comments show that you have no idea about Macro or how funds work.
      I don’t have any money in the fund but reading Damien’s reports tells me the fund is in good hands. MYQ..

      • The90kwbeastMEMBER

        Yeah but Niko, when a monkey with a dartboard could make money in 2020, why couldn’t the MB Fund? It was an atrocious year after (thankfully) avoiding the crash, and MB was caught on the wrong side of basically every asset and FX position.

        • MB fund correctly predicted the correction in Feb/Mar but they missed, like many of us, how fast the recovery was – recovery in the markets while economies around the world still suffer.
          And this the classical problem, when monkey make money by throwing darts, you know we are in bubble territory and the problem is no one knows how long it will go for.

      • Donald Rumsfeld

        Iron ore will go to $20 – he is wrong now about iron ore vis-a-vis China in the fact that they are reliant – they absolutely are not.

        He is also wrong on MMT and money printing of the RBA pouring half a trillion into the housing market being fine – its not and the two are linked.

        DLS insiststs that the main driver of the Chinese economy is housing – and its truly beyond absurd position. Worse is his conclusion that housing is the driver for ore price fluctuations.

        The correlation with the Chinese stimulus post GFC and the same thing now (both were / are in excess of $2 trillion) – the last one lasted longer due to the capex build out to meet the demand – that is not in play this time and the ore demand to supply the steel for the stimulus is finishing and price relaxation will be fast.

        The RBA like 2010 has decided it is a permanently new price plateau and has responded with policy accordingly – half trillion money printing and bank backstop.

        This result is a collapse is demand for AUD as China retreats from Ore – that will collapse AUD FX and unleash and even greater tidal wave of inflation than was already heading.

        The Chinese are CLEARLY turning away from coal driven steel manufacturing using Australian ore towards a basket of increased supply from over 27 alternative suppliers, including their own in Simandou etc while also moving towards hydrogen to replace coal and end pollution.

        Its a 1,2 knock out blow following the grain, meat, seafood, dairy, wine, timber, coal, tourism, student collapse in Chinese export.

        Completely and utterly misread the entire situation – quite frankly no idea.

        There are at least a dozen more examples of totally lacking understanding of the situation – the worst ones being support for NBN FTTN and claims that the CBD was not Melbournes largest employer as a suburb – just shocking stuff.

        Anti-train rhetoric is pretty delusional as well.

        • In regards to geopolotics I hardly read MB – especially China articles as they are one sided. Waste of time.
          MB Fund has nothing to do with H&H’s articles on China though.

  2. We had 17% interest rates in Australia throughout 1980. What do you thinks coming for 2038? -17%

    It may not be -17% directly. It could be heaps of Money Printing ( MMT? ), Migration and -5% but one way or another, the tide swings both ways. Either way, I highly suspect growth is collapsing and however we choose to deal with this, I suspect its highly likely we will go negative at some point.

    These have been my predictions…

    Im really not proud of it because if Im right ( I hope not ) then it means some really bad things coming for Australia. You know like… Depression, Deaths and Suicides. Thats just for starters. There will be no winners.

    Oh yeah… and then there’s Covid which just did huge damage. It’ll be fun to see how this goes.

    • NoodlesRomanovMEMBER

      Help me out mate – I can’t draw the link between fertility and government bond returns.
      Haven’t the Swiss or Germans issued a 20Y bond with a negative return already?

    • Totes BeWokeMEMBER

      In terms of Australian citizens starving, don’t forget to throw Rudd’s, Turnbulls, Gillards, Twiggys, Pliberseks, Gina’s, Trigobof’s, Gerry’s, Tony Jones, Paker’s, Wilkinson’s, Murdochs, Morrison’s money in the ring.

      We’ll be taking the whole lot before anyone i love starves.

      Anyone and everyone that pushed immigration, and globalisation while it was clear there was no plan (other than enriching themselves) whatsoever for the plebs will have to surrender their wealth.

      • Really? How are you planning to achieve that one? Get your Independents in the government to do it for you?
        The reason the wealthy “invest” so much into getting the right sort of people into power is to prevent ideas like that from getting up.

        The only way that will happen, along with any other significant change, is through widespread violence. And Australians simply aren’t going there without serious collapse in living conditions first.

        • Totes BeWokeMEMBER

          “is through widespread violence. And Australians simply aren’t going there without serious collapse in living conditions first”

          Starving’s pretty serious.

          “The reason the wealthy “invest” so much into getting the right sort of people into power”

          My list is more the “right sort of people into power”, than the real rich.

          As long as the likes of Plibersek and Rudd pay, I’m reasonably happy.

          • Totes BeWokeMEMBER

            Good comment drt. I agree.

            In fact, I reckon despite our casual demeanor in the land of plenty, it will immeasurably change as we FINALLY start to realise what Australia’s elite have done to us, and we’ll then see what a group of diverse angry talented desperate people are capable of.

            I give it 40 to 50 years max.

      • lolololol. No Totes, you won’t be taking anyones wealth. The wheel is turning and we’re heading back to a prettier version of the 1800s and just like then, there will be plenty of plebs willing to enforce the law for a dime.

        • Totes BeWokeMEMBER

          I don’t think it’s going to be like that this time.

          We’re entitled, and if we are suddenly poor, you’ll see violence from every day people the world’s never seen before.

          I think by the time this unfolds in any meaningful way, I’ll be long gone, but as long as the wealth that the dirty grubs are taking for themselves at the expense to the rest right now, is taken, it’s a good thing.

      • rob barrattMEMBER

        Surrender wealth? Ahem.
        1) Buy citizenship in convenient country.
        2) Sell assets & transfer cash.
        3) Build luxury Yacht.
        4) Sail away (hired crew of course).
        It’s all in the timing, and the wealthy are the best timers in the business.

        • Totes BeWokeMEMBER

          I watch the world, and I wonder why someone with $10m, or $10b, would trade their freedom for $50b.

          If you can help me out with that, I could understand this better.

          Not that it really matters, there’ll be ways for future Australians to bring the people and the money home.

    • Interest rates have been steadily declining since inflation rate targeting was introduced at those 17% days. This is because to increase the money supply more loans need to be drawn. To be able to draw these loans the interest rate must reduce. The only way to continue along the current path without some MAJOR change to the financial/monetary system is for interest rates to continue their steady decline, all the way past zero and into negative.
      So either negative rates, or major upheaval.

  3. This site needs a new segment.

    Bull Runs with Reus

    An interactive segment, with Q&A property investment advice instructions, love life, money, wine, and society. He can also give weather reports too.

    Paid subscriptions should be distinct for his segment, and a daily graph for who’s a better earner.

    • After Running with the Bulls in Pamplona ,

      Running with Reausa,

      Would be the endorphin hit I’m craving,

      My mouth is moistened just imagining the Afterparties-

    • Not sure if serious?
      But assuming so, no-one is giving out -ve rate unsecured loans. It is LITERALLY a licence to print unlimited money for the borrower. At least requiring security limits the ability to print money.

      Edit: At least not to the plebs. I’m sure banks and such will Literally be paid to lend money on.


        Haven’t you heard?: Henceforce, no “asset” should be allowed to fail ever again, as decreed by the Very Big and Competent Union of Central Banksters and Other Associated Grifters. Thus, as there is never to be any downside risk, ever again, no loans can or should be considered at all risky (unless you are short, in which case, you need a lobotomy).

  4. New Zealand’s housing bubble …as interest rates normalize …

    … Are the housing markets grossly excessive pricing and lending ‘multiple stretch’ risks adequately understood ? …

    Affordability crunch: Will house prices hit a limit ? … Miriam Bell … Stuff NZ

    … extract …

    … CoreLogic head of research Nick Goodall said on Tuesday that the potential flow-on impact of such strong growth would eventually be outright unaffordability, which would reduce the pool of buyers able to borrow enough to participate in the market.

    Long-time housing affordability campaigner Hugh Pavletich agreed, saying housing in New Zealand was already severely unaffordable and 2021 was likely to be crunch time for the market.

    “When Ireland’s housing market crashed in 2007, the house price to income ratio was about 4.7 across the metro areas. In New Zealand it is now hitting the 8.0 mark, although some markets are more unaffordable than others, with Auckland at 8.6 for example.”

    While there are differences between Ireland’s pre-crash market and New Zealand’s market, New Zealand’s was currently a bubble and heading towards a crash, he said. … read more via hyperlink above …
    … Subsequently … the Central Bank of Ireland imposed a general DTI (debt to income) cap of 3.5 times gross annual household income … as the Banks research found excessive multiple mortgage lending a substantially greater problem than high LVR (loan to value) lending …

    Mortgage Measures – Central Bank of Ireland . mortgage measures are aimed,-income (LTI) limits.
    Treasuries Breaching 1% on Democratic Win May Just Be the Start … Emily Barrett, John Ainge, Ruth Carson … Bloomberg
    … h/t todays Interest Co NZ Morning Briefing …

  5. Alarmingly slow to recognise the implications of the TFF. I am usually late to the party but even I could see it was just a giant government subsidy/bail out for banks which would be a game changer at least for the foreseeable future. And I don’t they to make a living analysing this stuff.
    Too much cash in the fund waiting waiting to be deployed when an opportunity arose. The opportunity arose courtesy of the virus the virologists/strategists here expatiate on regularly. bu the cash remained intact.
    Too much time spent “analysing” (aka extrapolating today’s events as though there will be no change, pushback, adaptation or adjustment by individuals or industry or government) COVID, amazing temporary zero immigration and private health insurance and very little on economics and policy and its macro effect on the economy.

    • Jumping jack flash

      The banks must be paid their interest. It doesn’t matter how. The government can pay the interest, and the banks can lend the money to the people at lower rates. It makes sense to do this now that owning debt is pretty much mandatory.

  6. happy valleyMEMBER

    The RBA will do anything to destroy savers and retail depositors and to prop up the immaculate conception housing price bubble created in self-interest.

  7. Arthur Schopenhauer

    In the Danish case, 20 year loans at 0% interest. That’s $1,000,000 with 240 monthly payments. Or $4167 per month. What monthly payment will the average Aussie bear?

    On the plus side, there will be no more negative gearing, as there are no interest expenses.

    • TailorTrashMEMBER

      Can someone explain for my simple mind what is the logic here

      I borrow a million dollars in to days dollars from the bank and pay them back over 20 years in tomorrows ( worth less ) dollars . Unless they can at some stage claim the
      ( inflated hopefully ) house how does the bank make money ? Are their fees that can contribute to the profit ?

        • TailorTrashMEMBER

          Or do they know the gig is up and just create the million dollars on paper but take back the payments in actual earned ( if that’s possible ) money from the punters

          I have difficulty understanding this new business
          model where such old fashioned concepts as
          DCF and NPV have no place . But then it’s houses and they are now the real generators of wealth so maybe I’m just a dinosaur .

          • There’s a (paraphrased) money shot right there – “They just create a million dollars on paper then take back the payments in Actual Earned money from the punters”. “Usually with Interest”.

        • Bulls win in overtime

          You can’t compare Danish banks to Australian, it’s an apples and oranges comparison. Danish banks do not operate the same way as ours. They don’t take deposits or raise capital to fund loans. All mortgages are funded by issuing matching bonds to investors, and they just charge a fee for the matchmaking. So the actual rates are almost irrelevant to the bank.

        • The reserve bank is lending money to the banks at -VE rates. ie the bank borrows 100, pays back 99 at -1%.
          The Reserve bank is PAYING the banks to lend you money for nothing, not sure about the chicks for free though.

          • That ain’t working, that’s the way you do it. Haha.

            Apparently it was a song about Motley Crue..and a sales rep in a whitegoods store was watching them on MTV and he copied down what he said verbatim. Ha.

      • With rising house prices, the net effect is the rba needs to print more money for the banks to ‘borrow’.
        With negative wholesale interest rates, the banks are given bonus $ for said borrowing.

  8. To me this all just indicates how broken the system is. Maybe they can keep it all afloat for another decade or more, who knows, but nobody can say this system is healthy with a straight face. It’s broken as hell. Glad I’ve moved most of my capital over to the crypto financial system which operates on a much more sensible and logical basis.

      • I don’t feel it so risky any more. At least in the case of BTC. As the market cap goes above a trillion it will mean more and more big money will be capable of moving in. And it’s clear they want to.

        Even people who bought at the top a few years ago have now almost doubled their money in 3 years.

        • If big money moves in in a serious way the price will explode. Unlike gold there is no supply response to increasing prices. The btc that exist are it, forever.

          • Also, once CBDC’s start hitting the scene, it will be much easier for people to transfer their wealth between digital currencies and therefore into Bitcoin. Because one thing we know for sure, CBDC’s are not going to hold their value for very long. Especially when government’s will find it much easier to create and distribute money.

          • CBDC’s are a nothing. They already exist. The whole raison d’etre of crypto is that it is decentralised with no central authority. The banking system has had perfectly workable digital currency my entire working life. Actually, make that my entire life in all likelihood.

      • Fist system is great as a transactional tool. It has always been horrible as a store of value. The collapse of the inflation rate has just made this more obvious without deeper investigation.
        The wealthy don’t just leave cash lying around, they buy stuff with it. Shares, yachts, vintage cars, property, gold and on and on.
        All these things are much better stores of value than fiat.

        • Agree, I think have a small amount of cash on hand like $20-$30k or maybe up to $50k (in times of unemployment being high) but the rest just sink into valuables or assets. That’s how I’m playing it now.

          • What does the fact that there is no way ever I would say $20-30k is a small amount of cash but will happily gamble 10 times that on crypto say about me? The struggles of self reflection.

        • Donald Rumsfeld

          Inflation rate has collapsed – CPI has tripled. Cost of living from food, education, health, utilities and housing is now rising at the fastest rate in human history – faster than during the 1980’s when interest rates went to 17% to curb “inflation”.

          Inflation is an entirely captured and broken metric.

          House prices tripled in ten years. To claim there is little inflation is the greatest lie in modern history.

          They took steak out of the basket of goods and services because it was reclassified as a luxury item and replaced beef with “mince”.

          T-shirts are $2 and a 65 inch flat tv can be had for $400 – while a single capsicum from Coles costs $4.50 = 1% inflation

          Absurd drivel.

          • The worst you can say about the inflation rate is that it is rigged.

            The best you can say about it is that it is inaccurate. It is an estimation at best and not in any sense scientifically calculated.

            Also, the inflation rate is different for different people. It all depends on what your priorities are in life, what stage of life you are in, whether you have kids, etc, etc… Different types of people pay for different things and so have different experiences of the rate of inflation. Some will say it is much higher because the things they focus on keep ratcheting up every year. It’s time to do away with the nonsense that there is one inflation rate for everyone.

          • Alright, just for you Donny, The collapse of WAGE INFLATION has made this more obvious. At least to a person capable of thought.

          • That’s right Mike, those with middle class aspirations and a family will say inflation is much higher. Used to drive me nuts watching real estate inflation and to be told inflation is low. Lol

          • Jumping jack flash

            Agree. CPI is useless, it was broken a long time ago.

            That said, if they want to fix their failed economic experiment of the debt ponzi New Economy, they need some serious price inflation which will feed into wage inflation, which can be transformed into debt and attached to houses, and if the debt expands quickly enough, it will allow the next cycle of price inflation, wage inflation, and debt inflation. In that order.

            If they can’t achieve this, then we continue the slow melt which requires high immigration to steal wages from and expand debt very, very slowly that way: The debt growth is insufficient to counter the decline caused by the existing debt and we sink lower. More stimulus, wage theft, and wilder economic contortions are required to keep things running.

        • All these things are much better stores of value than fiat.

          Simple fact is most people don’t generate enough surplus to “need” significant stores of value. They spend everything they earn, give or take a few years.

          • Jumping jack flash

            Agree. What happens to the ~36 billion in super withdrawals?
            I will be watching keenly to see the resulting amazing savings rate during COVID turn around over the next few months.

            My opinion is the money is being used to obtain debt – which is what needs to be done to fix thing.

          • I would argue that is because there is no realistic store of value for the average person. They are forced to spend because cash is trash and putting their savings in the bank hasn’t been helping for a long time.

          • “Shares, yachts, vintage cars, property, gold […]”

            Shares and gold are easily accessible to pretty much anyone. Someone sleeping in a bus stop could feasibly have a share portfolio and a gold stash.
            Property somewhat less so because almost everyone needs to borrow to buy it and that demands a minimum level of income and wealth.

            Again, the problem is most people don’t have a surplus, not for initial investment, and definitely not to HODL when bad things start happening. Most of our social security systems have been rebuilt to ensure people are basically rendered destitute before they start receiving any assistance.

          • Jumping jack flash

            36 billion super dollars ploughed into shares and gold? Maybe.
            Its not what im seeing but maybe some people are doing it. Maybe they’re buying btc?
            In any case theres a heap of stimulus cash sloshing around at the moment. Im sure our planet-sized brain leaders are hoping that debt gets a good kick along. And it surely is, but is it enough to become self sustaining and achieve the state of infinite perpetual growth?

  9. Jumping jack flash

    “The European Central Bank started with 0.1% funding for banks in 2014. By 2016 the rate was -0.4%. And now it’s -1.0%. Yes, the central bank will pay commercial banks up to 1% if they can just find someone (anyone!!!) who will just borrow the money. ”

    This is how it works, the central bank pays banks the money to cover part of the interest, and more than likely they don’t use real money to pay the banks, they use debt they create themselves.

    And if banks offer negative mortgage rates to the people, like that Scandinavian bank everyone likes, it is simply a loss-leading product and will be paid for by the profits created by their other products.
    A bank sells debt, it isn’t too much different to a shop selling anything else, except debt looks, smells, and tastes like real money, but debt is certainly not the same as real money because debt costs money while it exists.

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