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Thread: Seperation of mortgage bond rates is on the radar.

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    Site Caretaker Dave A's Avatar
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    Seperation of mortgage bond rates is on the radar.

    I have absolutely no idea if this might ever come to pass, but the subject certainly deserves some discussion.

    Tito Mboweni is reported to have mentioned that the possibility of having a different interest rate base for mortgages has "entered his radar screen".
    South African Reserve Bank Governor Tito Mboweni says the bank has had a strategy meeting at which the matter of delinking the mortgage system from prime interest rates was discussed.

    ----

    Mboweni was asked whether consideration had been given to a tiered increase in interest rates to stem inflation but boost spending on good debt such as home loans in particular.

    Mboweni said South Africa had an inflation targeting framework where the central bank targeted inflation directly, but it was measured on CPIX - consumer price inflation minus mortgage costs.

    "But maybe we didn't think through this thing very well at the beginning ... because whenever we implement monetary policy changes the first impact is on mortgages and we ... within that we should investigate the possibility of approaching the mortgage interest rates ... so that (the mortgage system) becomes independent of the volatility of prime interest rates."

    Noting that there were "so many people" with no assets or property who now wanted to get into the South African property market, he said the volatility of interest rates "is not of assistance to them at all".

    "That has entered my radar screen," he said, acknowledging that the bank had held a strategy meeting at the weekend at which the matter had been discussed.
    full story from Fin24 here
    Good idea, bad idea?

    One thing that occurs to me is it might make non-mortgage rates more volatile.
    The trouble with opportunity is it normally comes dressed up as work.

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    just me duncan drennan's Avatar
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    Nice for home owners, bad for business owners?

    I'm not sure what the percentages of private debt are, but if mortgage credit is a significant portion, and they try to create stability there, then the rest of private credit will have to carry the brunt of inflation.

    That means overdrafts, business loans, etc. etc. I'm guessing those with large consumer credit, or large business loans would feel the punch the most.

    The question is whether it really makes a difference for the people they are trying to help get "good" credit. Our society seems quite American like in that regard, and better (or more stable) mortgage rates will just mean people are spending the excess on some other (higher, more voltatile) credit.
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    Site Caretaker Dave A's Avatar
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    Well. Tito's definitely preparing us for some pain.
    "Consumer spending through credit card lending has recorded year-on-year growth of 38.6 per cent to a level of 36.9 billion rand at the end of July 2006, while the growth in instalment-sales debtors has also continued unabated, growing by 18.8 per cent, to a level of 201,6 billion rand over the same period, he said.

    ----

    "This high rate of credit extension has become a major cause for concern for the Bank. The high levels of credit extension have resulted in record levels of household debt, which have reached levels of almost 70 per cent of household disposable income.
    from Business report here
    Maybe he's trying to find a way of attacking the more "volatile" forms of credit. The problem I see is that people that are over extended are generally pretty well locked in regardless of the form of credit.
    The trouble with opportunity is it normally comes dressed up as work.

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    Site Caretaker Dave A's Avatar
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    This article from Fin24 gives a better understanding of the mechanics.

    As usual, for me the punchline is at the bottom.
    Again, I hear the sceptics saying that there's a need to differentiate between different forms of credit, and that fixed assets such as houses are "good". But the monetarists taught us that all forms of printing money - and that's what credit extension is - can be inflationary when it's excessive. And at a 30% annual rate, the pace of SA's mortgage extension is excessive.
    I'm afraid the idea of sheltering mortgages might appeal to the bleeding hearts club trying to protect the "common man", but the reality is that different forms of credit already attract different levels of interest loading.

    And this interest spike is going to bite everyone regardless. I don't think it's a good time to start tampering with the rules of the game. The risk of unintended consequences that may be even more damaging are too high for a rush job on this.
    The trouble with opportunity is it normally comes dressed up as work.

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