Interest rates will be lower in next decade than in recent past: Macquarie Group's Brian Redican

Home buyers and investors can look forward to lower interest rates over the next decade, according to Macquarie Group senior economist Brian Redican.

“Interest rates should be lower over the next 10 years than they have been over the last 15,” he has told delegates at WBP Property Group’s 2012 Melbourne Property Outlook breakfast today.

A reduction in rates, Redican says, will deliver a significant boost to the Victorian housing market increasing the level of “effective demand”, that is the number of people who are able and willing to buy property.

Redican expects house prices to fall by about 5% in Melbourne during 2012 but says further rate cuts should stabilise the market in 2013.

Redican says interest rates in Australia are currently low compared with what they have been historically in the country, but high relative to other first-world economies such as the US, UK and Canada.

He is critical of the Reserve Bank for not being “pre-emptive” enough when it comes to reducing interest rates and says the RBA is far too focused on mitigating impact of the mining boom, which only employs 10% of the workforce, when setting its interest rates policy.

However, the sectors of the economy that are struggling at present – manufacturing, construction and retailing – employ about 30% of the workforce and will force the RBA’s hand, he says.

“The RBA is a reluctant rate cutter due to the mining boom, but it will be forced to cut interest rates over the next few years,” Redican says.

He presented a series of slides that showed how structurally the economy had shifted during the past two decades – for example unemployment fell 7% from 11% in the early 1990s to 4% just before the GFC, while household debt-to-income ratios increased from 50% to 150% as Australians invested in property and other assets to double their wealth.

However, these changes cannot be repeated – for example, unemployment cannot fall another 7%.

He also expects consumer spending – which grew at around 4% annually between 1993 and 2008 – to return to the 2% annual growth trend pre-1993, meaning interest rates do not need to be as high as they are to curtail spending.