Lately I have been chatting with people who were wondering what the fuss about interest rates is all about. Not being an economist I can’t claim to be an expert, but in this era of social media everyone is an expert in everything, right?. This is what I know …..
The Reserve Bank of Australia dropped interest rates again in August. It is now at the unprecedented rate of 1.5% and will probably stay low for some time. This is also the month that the highly respected governor of the RBA, Glenn Stevens, retired after 10 years in the role. Polls have shown that the RBA, the High Court and the ABC are Australia’s most respected and trusted institutions.
But this most trusted institution is clutching at straws and shows that adjusting interest rates is the only lever it has left to try to promote growth. Constant growth being the only strategy available to most advanced economies to keep the wheels on the global bus and keeping everyone gainfully employed.
The government dropped interest rates because inflation is well below the hoped for range of between 1-3%. Why do they want to increase inflation, which is usually seen as a bad thing? A reasonable amount of inflation is a sign of growth and an increased GDP. Without any inflation the economy is in danger of going into “deflation”.
What is deflation? Deflation is where prices and wages are diminishing instead of growing. Japan, for example, has been in deflation for over 20 years. Once a country is in deflation it is very hard to kick start the economy back into growth. In deflation, consumers are hesitant to buy and investors do not invest when they think they can get something cheaper in the future. It becomes a negative downward cycle.
The downside to lowering our rates to this level means the RBA is using all its leverage and influence early when most likely they will need all its firepower later. Most of the world is currently stagnant or in deflation already. Australia is the only OECD country that has experienced over 20 years of constant growth. Most likely we are about to join our fellow western nations in a recessionary or flat economic period. Turnbull’s talk of being agile and nimble and somehow ducking this bullet looks as bogus as everything else coming out of Canberra. This rate reduction has very little chance of making any difference at all.
What this means for property is interesting. A buoyant property market and strong construction industry is one of the only bright areas in our economy. The government is ready to sacrifice first homeowners and renters in favour of maintaining a strong real estate market. They also look to be incapable or incompetent to try anything difficult or dangerous anyway. When you couple this with the planned changes to superannuation (which will limit tax incentives for wealthy retirees) property investment will be the only area for blue sky for most people. Why would anyone leave his or her assets in managed funds or the share market with such minimal returns?
Many people are saying we are at the top of the property cycle even though talk of a bubble has magically receded. Those headlines are only dragged out to sell papers. The mainstream daily newspapers are on their last legs and will resort to anything to increase circulation. But even if the economy turns south, with these present economic conditions it is unlikely there will be a major downturn in quality property in good locations. There is just no other asset class offering the stability, returns or potential growth as what real estate does.
Similarly, some people are predicting a downturn due to uncertainties around Chinese property investment in this country. It has to be acknowledged that all of this anti-Chinese sentiment is racist dog whistling. The media complains about Chinese investors continually overbidding poor Aussie couples and families at auctions. With only a small amount of research or knowledge one would realise these buyers are either Chinese-Australian residents or Asian students buying established properties or attending auctions. Foreign investment rules already exclude non-nationals buying established properties or even attending auctions, as they cannot bid under auction conditions.
Chinese buyers are buying a lot of off-the-plan units – as they are allowed to do. There will definitely be a correction in unit prices in Sydney, Melbourne and Brisbane. The Brisbane downturn will be the highest as the Chinese are not interested in Brisbane. They are interested in Sydney and Melbourne because of the established cultural connections in these capitals and it is prestigious for wealthy Chinese to own property there. It does not matter if they stay empty and are never rented as they are purchased for other reasons.
The final point is that low interest rates are probably going to be here for a while. This will also bolster property investment. Unless the Australian economy lucks its way into another mining boom, IT start ups or agricultural produce export bonanza – property and construction is all we’ve got.