Clive Palmer’s centrepiece campaign pledge to cap homeowners’ interest rates for five years has been dismissed by economists as “radical”, “crazy” and “utterly irresponsible” even though it will probably appeal to some gullible voters.
According to the United Australia party’s website, the mining billionaire’s “economic plan for freedom and prosperity” pledges to set a maximum 3% interest rate for all home loans to head off a looming mass default as lending rates start to rise.
Wednesday’s surprisingly large 5.1% consumer price inflation figure has stoked expectations the Reserve Bank will be forced to lift its cash rate target from 0.1% when its board meets on Tuesday. Market home loans rates have been rising for months, with most fixed rates now between 3% and 5% with variable rates above 2%.
“If our interest rate for home loans doubles from 2% to 4%, 60% of all mortgages will be in default and if the interest rate goes to between 6% to 8%, as it most surely will, the default rate will be greater than 90%,” Palmer said, citing unnamed “other studies”.
Elsewhere on UAP’s website, Palmer blames the $1tn debt racked up by the Liberal and Labor governments as the trigger for the rising interest rates.
“The real estate market will then collapse and foreign buyers will flood our real estate market as they will have the money to buy up our properties,” his national policy states. “We have to stop Australians from losing their homes!”
Guardian Australia sought comment from the UAP and Craig Kelly, the ex-Liberal MP and now UAP candidate for the NSW seat of Hughes on how the rate cap would work.
News Corp tabloids cited Kelly as saying the federal government could implement the plan by selling Treasury bonds at 0.1% to 0.2% and “on-lending that cheap cash to retail banks” who would then keep the mortgage rate under 3%.
Anna Bligh, chief executive of the Australian Banking Association, called the plan “magic pudding economics” that would “wreak havoc across banking and financial services sector” if ever implemented, according to the papers.
Alan Oster, NAB’s chief economist, said his bank typically avoided comment on such policies.
“I don’t know how [Palmer] would implement it other than re-regulating rates, and that would be radically different,” Oster said. “Who knows how they would do that?”
Saul Eslake, an independent economist who formerly worked at ANZ Bank, said it was “constitutionally and legally possible” for an Australian government to impose a legislated ceiling on mortgage rates. Up until the late 1980s, such a ceiling existed, at the treasurer’s discretion.
However, Eslake said “it would be an utterly irresponsible thing for any government to seek to do”, given the different conditions more than three decades on.
Timo Henckel, from the Australian National University’s Research School of Economics, said while he had scant details, the policy “doesn’t sound workable”.
One approach could be to intervene to set “severe financial market regulation”. That would “take us back to, say, the 1970s”, and would be at odds with the liberalised capital markets that Australia now operates, he said.
The other possibility would be for the central bank to provide a standing facility to pump as much money into financial markets needed to keep interest rates at 3%, Henckel said. Such a move, though, would be a “crazy policy because there’d be so much liquidity sloshing around in the system”, resulting in more inflation.
In addition, “it would really only work if they seriously compromised the RBA’s independence … and [would] require massive legal intervention in a way that I’m not even sure they’d be able to do it”, he said.
Australia’s banks, meanwhile, rely on international capital markets to source a significant share of their own funds, and would find it harder to raise money in such a distorted system.
“They’re never going to be asked to implement it anyway so really it’s just an attention grabber in order get votes,” Henckel said. “It’s not a genuine policy.”
