Sensitive Sydneysiders reel at rates: Terry Ryder

What is it about Sydney people that makes them so sensitive to interest rates when no one else in Australia is?

If we can believe popular analysis, interest rates cuts are like steroids to Sydney residents. They get all pumped up by them and charge around lifting things that were financially too heavy for them previously.

But the 81% of Australians who live outside Greater Sydney are immune. They’re exposed to the same stimulus but it has no visible effect on them. Curious modern phenomenon.

Anyone with a keen eye for observation and an inquiring mind – the qualities that journalists used to have, back in the day – might wonder why Canberra people, for example, have such a strong immunity to the rates steroid.

It certainly made me wonder, so I checked to make sure they have the same interest rates in the national capital as they have three hours up the road in the NSW capital. And, sure enough, they do.

And guess what else? They have the same interest rates in Melbourne, Brisbane, Perth, Darwin, Adelaide and Hobart as well. 

I had assumed rates must be much higher in all those places because, according to the latest figures from cor blimey RP Data, apartment prices are falling in Perth, Darwin, Hobart and Canberra – and have barely moved in Melbourne, Brisbane and Adelaide, whereas they’re up 10% in Sydney.

Here are some of the headlines since the RBA interest rates decision last week:

• Rate cut adds to Sydney buying frenzy
• Rate cut dangerous for property market
• Rate cut could destabilize property market
• RBA rate cut will put pressure on property market

Some of the reaction to the interest rate reduction bordered on the ludicrous. We had a slightly hysterical president of the Real Estate Institute of NSW, Malcolm Gunning, claiming the rate cut meant young people would be forced to leave Sydney. Sam White from Loan Market said the rate cut would make the market unsustainable and unaffordable.

We even had Adelaide pundits claiming the rates decisions would fire up the local property market. Why all those previous rate cuts had failed to achieve that was not explained. 

We’ve had almost four years of falling interest rates and none of those previous cuts have generated a boom in Adelaide – or anywhere else in capital city Australia, apart from Sydney - but this latest reduction is going to “fire up” the market, apparently.

So where did this notion that interest rates were the prime factor in residential real estate dynamics originate? Yes, you guessed it – it’s the love child of our under-class of chattering economists.

Watching an economist discuss real estate is like listening to a close friend of mine discuss rugby. She understands that a ball is involved but she’s never sure whether it’s round or oval - or whether you need to kick it over the bar or under it. She is sure about one thing, though - that it doesn’t make a lot of sense and far too many people are obsessed with it.

I recently spoke to a boardroom luncheon in Sydney, attended by 12 or 15 people with “economist” somewhere in their titles and all from big name companies and institutions. What they collectively knew about residential property could be written on the back of a postage stamp in crayon. In the minds of most of them, there’s a national property boom and it’s caused by low interest rates.

They’re the masters of the universe and they know close to nothing.

There’s another thought about this whole obsession with interest rates and the belief they are central to movements in property markets. Investors who are fundamentally driven by interest rate cuts are not thinking clearly. The current level of interest rates is largely irrelevant to sensible decision-making about property investment.

Anyone who borrows now to invest will face dozens of interest rate changes over the life of their loan. The current level of rates is not a core consideration. The core question for investors should be: if rates at some point rise 2 or 3 percentage points above their current levels, can I still afford the repayments?

If you’re charging around like the steroid-induced herd animals in Sydney, you’ve missed that fundamental point.

TERRY RYDER is the founder of hotspotting.com.au. You can email him or follow him on Twitter.