Zero Point One Four…a Very Low Pain Threshold

The big news last week was…wait for it…this announcement on the Westpac website …

‘Effective Wednesday, 19 September 2018, Westpac will be increasing our variable home loan rates by +0.14% p.a.’

That piece of news wasn’t received well …

‘New federal Treasurer Josh Frydenberg has demanded Westpac justify its out-of-cycle interest rate increase for all mortgage borrowers.’

The Australian Financial Review, 29 August 2018

‘Leigh Sales [ABC 7.30 Report] slams Westpac CEO: “Your latest profit was $4.2b, can’t you use that?”’, 30 August 2018

The reason for the rate increase?

The Sydney Morning Herald on 29 August 2018 (emphasis is mine)…

‘As the banking industry faces fierce political pressure after damning revelations at the royal commission, Westpac on Wednesday made the first lift in variable mortgage rates by a big four bank this year, blaming an increase in its wholesale funding costs.’

Surely, professional journalists and our new Treasurer know how the banks source capital to feed to debt hungry Aussie households…the same households the Government and the RBA encouraged to borrow more and more money to pump up our GDP numbers?

Judging by the news reports, the people who should know are either clueless or playing to the clueless mob.

This is an extract from an article I wrote on 27 April 2018 (emphasis is mine…)

‘As fate would have it, the tougher lending regulations are coinciding with rising offshore interest rates.

While the RBA may not be inclined to raise rates anytime soon, international markets are on the way up.

Remember, our banks source around 30% of their loan requirements from offshore…so what happens over there, matters here.

Little by little the uptick in rates will filter through to Australian mortgage rates. The truth about the “liar loans” will be exposed in a higher interest rate environment.’

And so it has come to pass. The cost of raising capital from the wholesale (international) markets has been on the rise for some time…as evidenced by LIBOR (London Interbank Offered Rate).


Source: Federal Reserve Economic Data

[Click to open in a new window]

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Cheap Money Fueled An Asset Price Boom

If we go back to 2014 — when the Aussie housing boom was starting to warm up — the LIBOR rate was around 0.3%.

It remained low — under 1% — until January 2017.

Three years of cheap money fuelled an asset price boom. Putting the debt noose around the necks of Aussie households…which, by the way, was a deliberate strategy of the RBA…shame on them.

Over the last 18 months, the cost of sourcing wholesale money has been steadily increasing.

LIBOR is currently around 2.3%…and has been at that level since late March 2018.

Which is why it was obvious to me in April 2018 that this cost would filter through to Australian mortgage rates.

But most people (which apparently includes journalists and politicians) don’t realise the funding model the banks use.

They (obviously) think the RBA cash rate is the sole influence on the cost of debt.


The RBA cash rate is a part of the cost of debt equation.

This ignorance is why the move by Westpac has been met with such venom and vitriol.

We now have Suncorp and Adelaide Bank following the Westpac lead.

With the protective cover of other banks raising rates, expect the remaining Big Three to make similar ‘rate hike’ announcements in the coming weeks.

The prospect of higher rates, according to The Weekend Australian

‘…will add fuel to falling house prices, push households further into mortgage stress and stifle retail spending.’

Time out here for a little perspective.

Folks, we’re talking about a ‘zero point one four percent ’  — 0.14% — rate rise that’s causing SOOOOO much angst.

How indebted are we for this ‘bee’s willy’ of an interest rate hike to cause such wailing and gnashing of teeth?

Talk about a very low pain threshold.

Free Report: Why Australia’s 26-Year Economic Dream Run is ending. Read now.

Deeper and Deeper Into Debt

Our inability to handle an insignificant rate increase is the end result of our prolonged economic ‘success’.

For nearly three decades we’ve gone deeper and deeper into debt to keep the GDP needle in the positive.

Governments, the RBA and banks have done all they could to encourage us to make our system so brittle and fragile.

But, we (as a society) must accept our share of the blame for not being disciplined enough to live within our means.

The cracks, in our much-loved property sector, being reported in the press have been evident to those on the ground for some time now.

I received this email from a long-time reader (a well-established home builder in Brisbane) back in July 2018…

‘As you would be aware, the heat is being applied to the banking sector through the current royal commission. This is now starting to restrict the credit flow into the building industry particularly with the instruction of the “Responsible Lending” platform to which all new loans are to confirm too.

‘We are now seeing a big drop in the enquiry for new homes and also a steady flow of contractors seeking work and regular visits from Reps. chasing work. I speak to a lot of our suppliers with most telling me that they are seeing around 40 – 50% less plans come through for quoting as compared with this time last year. We now have regular contact with suppliers wanting to know our forecast of job starts for the next 6 months – I cannot recall this ever happening in my 20 years in the industry. It appears that the armchair ride that everyone has enjoyed for years has well and truly caught most off guard through their levels of complacency.’

As rates move higher, expect to see headlines, in the months to come, about indebted home builders going to the wall.

But the dominoes do not stop falling there.

If house prices fall enough in value, the credit rating of our banks (with so much property on their balance sheets) are at risk of being downgraded.

The lower the credit rating the more it costs the downgraded institution to access capital in the wholesale markets.

The situation that’s looking likely to unfold in the next 12 months is one where households are going to dig deeper into the budget to pay off an asset that’s falling in value.

Not good for the confidence levels.

And it’s confidence that makes or breaks an economy.

Our ‘miracle’ economy has been like all others before it…Japan, Ireland, Iceland, Turkey.

Pumped up by debt to create the illusion of prosperity.

The longer the period of ‘prosperity’, the more fragile the system becomes…only requiring an interest rate ‘feather’ to tip the scales from ‘fortune to misfortune’.

Australia’s household pain threshold has been set at the very low level of…Zero Point One Four.

What an embarrassment to all the parties who’ve actively encouraged and participated in this charade of economic ‘success’.


Vern Gowdie,
Editor, The Gowdie Letter

Vern Gowdie has been involved in financial planning since 1986. In 1999, Personal Investor magazine ranked Vern as one of Australia’s Top 50 financial planners. His previous firm, Gowdie Financial Planning was recognized in 2004, 2005, 2006 & 2007, by Independent Financial Adviser (IFA) magazine as one of the top five financial planning firms in Australia. He has been writing his 'Big Picture' column for regional newspapers since 2005 and has been a commentator on financial matters for Prime Radio talkback. His contrarian views often place him at odds with the financial planning profession. Vern is is Founder and Chairman of the Gowdie Family Wealth advisory service, a monthly newsletter with a clear aim: to help you build and protect wealth for future generations of your family. He is also editor of The Gowdie Letter, which aims to help you protect and grow your wealth during the great credit contraction. To have Vern’s enlightening market critique and commentary delivered straight to your inbox, take out a free subscription to Markets and Money here. Official websites and financial eletters Vern writes for:

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