As Australians keep entering lockdown right across the country, we may expect negative interest rates on home loans. It’s an economic consequence that may bizarrely see house prices rise even more.

When COVID first hit us in early 2020, we thought by this time we’d be at the tale of the fall out, yet here we are – from a few cases of COVID nationwide to lockdowns across the country and all the uncertainty that goes with it.

And as our circumstances evolve, so too does the outlook on interest rates. Let’s look at the Sydney lockdown as an example. A few days prior to the lockdown, futures markets were pricing multiple rate hikes for the next few years. Since the lockdown, this outlook has changed dramatically with the risk of the Delta strain moving right across Australia.

According to analysts from CBA, the nation’s economy is expected to contract by 2.7 per cent in the September quarter. To put that into perspective, throughout the entirety of the 1990s recession GDP fell by a total of 1.7 per cent. You can pick your jaw up off the floor now.

So, what does this all mean? 

A negative cash rate 

As it stands, Sydney’s lockdown is expected to last until mid-November and based on this, economists have changed their outlook, expecting rate hikes to be delayed until it least 2023.

But even before it became clear that Sydney’s lockdown would be measured in months and that it would drag significantly on the value of households, banking regulator APRA was already telling the banks to prepare for a negative RBA cash rate.

Worldwide, there is concern of economic recovery, so it’s not just the RBA that is considering a negative interest rate in the future. In Feb, the Bank of England gave their banks 6 months-notice to prepare for negative interest rates. In Japan, Denmark and Switzerland, negative interest rates are already in place.

While the effectiveness of negative interest rates on boosting economic growth is questionable and is surrounded by controversy, it remains the likely next move for central banks when the next crisis does come.

As multiple Chinese mega cities once again look to limit transportation and consider restrictions amid an outbreak of the Delta variant, the vulnerability of Australia’s and the world’s economic recovery is becoming clear.

How China influences our markets

For a long time, China has heavily influenced the Australian economy. And during the pandemic, it’s been no different. The current slowdown in China couldn’t come at a worse time.

According to CBA, up to 300,000 jobs could be lost due to Sydney’s protracted lockdown, leaving Australia an increasingly economically divided nation where some states are doing just swimmingly, while others lag behind.

Despite predictions for a strong economic rebound for December quarter, if lockdowns continue, a recession may follow. With these scenarios presenting a series of potentially extremely challenging circumstances, the prospect of the RBA turning to negative interest rates may be both a blessing and a curse – depending on your perspective.

If the RBA was to cut the cash rate below 0 per cent, it’s likely that this would not only send housing prices through the roof – so you’ll get a loan easy, but also a mountain of debt.

Skyrocketing house prices

If rates head to the lowest of lows, Aussie mortgage holders and homeowners could gain trillions of dollars’ worth of collective equity in their homes. But for first home buyers not yet in the market, it would be a real challenge to buy their first home at inflated prices.

So, if you’re in the market for a new home, the expression no time like present has never been more valid. We don’t expect house prices to slow down. If there’s anything I can do to help, I’m only a call away.