Before interest rates fall…

What the Treasurer must do before the next RBA meeting.

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Some weeks, not much happens.

This week… isn't one of those weeks.

We've had AI-based volatility, which I wrote about earlier in the week.

We've had inflation numbers out, which have something for everyone in terms of the potential impact on interest rates.

We've had confirmation that Chemist Warehouse will be reverse-listed on the ASX through Sigma Healthcare Ltd (ASX: SIG).

And we've had more lobbying by Super funds against the changes to superannuation taxation which would, among other things, increase the tax on funds with balances above $3 million, but also apply that to unrealised gains, and that threshold is not indexed.

Oh, and it's only Thursday!

Speaking of which, a quick shout-out: we're broadcasting another LIVE episode of Motley Fool TV, tonight at 7pm AEDT.

And… it's a fair bet that some or all of the above – and more – will be on the agenda. 

If you haven't seen Motley Fool TV before, my boss – Motley Fool General Manager Adam Surplice – and I spend an hour talking about the big finance and investing news and topics of interest, and take questions from our viewers.

And did I mention that it's live, free, and available to everyone?

All you need to do is click on this link or the image below at 7pm AEDT today. Or, even better, click on the link now and click 'Notify Me' so YouTube will remind you when we're about to kick off!

So, there's a lot to be said about this week's news, and I'll do that live tonight, but I wanted to cover something else, here. Something that I think is even more consequential.

It's a topic I've covered before, but it's getting more urgent by the day.

See, the RBA might be as little as three weeks away from cutting interest rates.

And, when it does – whenever that is – borrowers will then be able to borrow more.

Which… will put upward pressure on house prices.

Now, that's great if you want to sell (though you'll be buying again in the same market).

And it's good for property investors.

But you know who it's not great for? Anyone trying to get into the housing market.

Sure, their borrowing capacity will improve with lower rates, but so will everyone else's.

The result? Higher prices.

What should be an economic benefit of lower rates – less pressure on mortgage repayments and more money in the economy – will be consumed by 30 years of home loan repayments instead.

Unless, that is, the Treasurer acts.

With a stroke of a pen, Treasurer Chalmers could stop house prices from rising as a result of falling rates and help businesses (and support employment) by making sure the saving from lower rates is largely spent on consumption instead.

And no, not through price caps or rent caps or anything similarly wrong-headed.

The Treasurer can simply instruct the banking regulator, APRA, to increase the lending buffer as rates fall.

See, currently there's a 3% buffer that the regulator makes banks add to their variable rates to make sure lending is prudent.

Let's – for the sake of simplicity – assume that the current variable mortgage rate is 6.5%.

Presently, banks are required to assess borrowers at 3% above the marginal rate. So, 9.5%.

And if variable rates fall, say, 1% over the next year to 5.5%, then the banks would use 8.5% instead (and prices would rise).

But if APRA increases the lending buffer to 4% at the same time, borrowers would still be assessed at 9.5%.

Their borrowing capacity wouldn't increase but their repayments would be lower. A win-win for the borrower and the economy.

The elephant in the room? Property investors would be unhappy that their prices weren't growing as quickly, and I don't take that lightly.

But as a trade-off to help young, first-home buyers enter the market, I reckon that's an easy decision.

After all, residential property is shelter first and an investment second. And as a social good, a higher proportion of Australians owning their own homes is something to pursue with vigour for the financial and emotional benefits it brings them, and the country.

It really is that simple. All that's required is for the Treasurer to make the call on behalf of our young people who are otherwise going to be saddled with three decades of higher repayments.

Treasurer Chalmers, over to you.

(And I'm not sure the Treasurer will be tuning in to Motley Fool TV tonight, but I hope you will. Here's the link, again. See you at 7pm AEDT tonight.)

Fool on!

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Motley Fool contributor Scott Phillips has no position in any of the stocks mentioned. The Motley Fool Australia's parent company Motley Fool Holdings Inc. has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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