The US Federal Reserve has announced that it will raise interest rates by 25 basis points, with fixed mortgaged costs in the US now exceeding 4%. The Bank of England, fearing inflation could hit 10% this year, has hiked rates to 0.75%. The US and UK are well behind the developing world, with interest rates in Turkey at 14% and in Brazil at 10.75%.
But our own Reserve Bank of Australia (RBA) is nowhere to be seen, with interest rates remaining at an all-time low of 0.10%. This is despite near record-low unemployment levels and the inflation genie being well out the bottle, given existing demand-side pressures coupled with supply shortages caused by Russia’s invasion of Ukraine.
The RBA’s negative real interest policy (remember, inflation is 3.5% under the current dubious recording methods) is another (underhanded) way to transfer wealth from the young to the old and wealthy — alongside our fiscal responses like JobKeeper, better described as welfare for billionaires.
As your columnist has been pointing out for well over a decade, Australia’s 20-year housing bubble boom is not a function of limited supply but of the RBA’s continued insistence of destroying the value of money.
Why? Because house prices have very little to do with supply and everything to do with demand — that is, property buyers simply bid up the price of housing depending on their capacity to pay. That capacity is almost solely based on how much banks are willing to lend, and that willingness is based on the serviceability of the mortgage. As rates drop, bank lending is based more on the same income level. It’s not a complicated concept.
Let’s go back to March 2020, when the world was (somewhat justifiably) fearing a global depression as a result of the novel coronavirus. Back then, RBA boss Philip Lowe announced that interest rates would be slashed to a historic low of 0.25% (from an already historic low). The RBA stated:
The board will not increase the cash rate target until progress is being made towards full employment and it is confident that inflation will be sustainably within the 2-3% target band.
The RBA also started its own money printing (quantitative easing) process under the guise of “providing liquidity to Australian financial markets”. These measures had the direct and immediate effect of causing an already overpriced housing sector to explode, with house prices nationally jumping by 22% in 2021, effectively locking out an entire generation from the property sector and further enriching many property owning baby boomers.
The “emergency” economic conditions used by Lowe to justify the extraordinary interest rate settings ended well over a year ago. Now we have the opposite type of emergency, with inflation exploding globally where it is now impacting consumer goods rather than just assets like property, cryptocurrencies and shares.
Inflation is well above Lowe’s desired band, while the unemployment rate fell to a 14-year low of 4.1% (with the economy basically at full employment).
So according to Lowe’s (and his predecessor Glenn Stevens’) own commentary, there is absolutely no justification for this absurd interest rate setting.
Historically, the rate of interest is set at a premium to inflation. As inflation looks set to rocket above 4%, the normalised interest rate level should be around 7%.
This would have the twin effects of rewarding responsible savers (who have seen their cash investments decimated since 2008) and of quickly adjusting the price of housing stock to a level where those aged under 40 are able to afford a property without a life of indentured servitude.
But the goal of several generations of RBA boards and governors has not been about ensuring price stability. Quite the contrary. The intent of the RBA has been and remains to ensure the housing bubble remains inflated and to ensure the wealthiest class of Australians remains completely unimpacted by economic realities.
It really annoys me that writerz of articles continue with the absolute lie about
“unemployment being the lowest it has ever been” total poppycock. Never can
one hour per week be considered as ^fully employed^. Howard used that whopper
of a lie as his get out of gaol card, and the Libs have continued the lie even when
every day we hear/read of people becoming homeless because of this gig economy.
So, please, if you decide to write an article like this be honest about the employment
rate and the “one hour put out by the Libs as full employment. No one I know could
possibly survive on a one hour per week pay packet — unless you were Harvey Norman,
or others like him. Stop feeding the lie.
You are totally right, Daibhin!! Well said!!
A shifting of the goal posts lie – perpetrated to get the un/underemployed and their bad economic PR off the books. Perpetuated by the like-minded.
Ineed. The Gig Economy (based on entirely insecure work), coupled with closed International Borders was always going to lead to lower “Headline” unemployment figures. Yet those “on paper’ results conceal a large subset of the population who need to stay on below poverty levels of Jobseeker just to keep their heads above water, and who cannot be certain they’ll even have a job in a fortnight’s time.
Adam’s article begins with this statement:
“The RBA has kept interest rates at an all-time low of 0.10% — a move that has more to do with protecting the wealthy than it does the average consumer.”
and ends with this one:
“The intent of the RBA has been and remains to ensure the housing bubble remains inflated and to ensure the wealthiest class of Australians remains completely unimpacted by economic realities.”
Now, considering that we live in a free-market capitalist society, surely we are not meant to be surprised by any of that!!?? This is how a free-market capitalist system is meant to operate. If we want a different (not to mention, fairer) approach then a completely different system is required.
It really IS that simple.
Vote as if your future and that of your children (if any, x 2) depended on it.
This ponzi scheme is legal and fully supported by all at the expense of the young.
Climate change isn’t all that important either……….according to the Murdoch media.
We may not be surprised, but Adam Schwab is describing a situation which is NOT a free-market capitalist society. Keeping interest rates artificially low and the housing bubble inflated are consistent with manipulating the market in order to keep various electors happy and others out of the market altogether; the ‘market’ is closed, not ‘free’. Apologists for pure capitalism don’t contend that anyone should be ‘unimpacted by economic realities’; it’s convenient to excuse poverty, low wages, unemployment or business failure by referring to the ‘realities’ of the market rather than manipulative government or central bank policies. Do you remember Joe Hockey telling people who could not afford things to ‘get a better job’? The capitalism of today is better described as crony capitalism, which is based on rent-seeking, not the ‘free market’.
Actually that is not how a free market Capitalist system is meant to operate. A free market does not artificially manipulate either capacity constraints on buyers or supply constraints to maintain value. A free market Capitalist society should experience booms and busts.
Free-Market Capitalism or “Can do Capitalism” as Morrison likes to describe the economy – lex, ‘fecal excrement called by any other name smells just as rotten‘, (apologies to Shakespeare).
Also, lex, I clearly recall when this neo-liberal rort was being foisted up us some 40 or so years ago, being absolutely re-assured, ‘hand-on-heart’, that under this new ‘you-beaut’ economic model, booms and busts would be a thing of the past. This reassurance was a given, as in a free-market economy there were ‘automatic stabilizers’, (you know, lex, the ‘invisible guiding hand of the market’), that magically brought the economy back into equilibrium at the first sign that something might be causing trouble. We were told this lie right up until the Global Financial Crisis struck some 15 or so years ago.
Rational Expectations Theory (hard version) and Efficient Markets Hypothesis (Fama) have a lot to answer for …
The story of Snow White and the Seven Dwarfs has more credibility than this (so-called) economic theory.
There are always Booms and Busts and there always will be (and should be even if they are painful – it gets rid of the rubbish out of the markets). The challenge ahead is how the past QE will impact markets as they wind it back. Nobody, and I mean nobody, knows how this is going to end but I suspect it will be a very large bust. Bond markets fall as interest rates rise and Stock Markets globally are overvalued (Sans Australia but we are panic merchants and always overdo any correction) as is Real Estate globally (but especially in Australia). It’s not going to be pretty methinks.
The reason for inflation? Global supply chain issues, and a war, what does an interest rate rise do? Hits those who still have to pay for all their needs (not wants) and have less left over. Wage growth is non existent, and who knows what the inflation numbers will be next print – the petrol price rise is a proxy rate rise anyway
I suspect the RBA has been captured by the government. They won’t dare do the right thing and harm the the coalitions electoral prospects.
“ and of quickly adjusting the price of housing stock to a level where those aged under 40 are able to afford a property without a life of indentured servitude.”
No, the recent acquirers of a mortgage at low rates would be forced to sell, since low wages growth would mean they could no longer service the mortgage at your suggested 7% RBA interest-rate setting. And Oz’s increasingly casualized and underemployed workforce could not service mortgage rates c.10% either.
The current inflation still looks to be a transitory phenomenon – Bill Mitchell – Modern Monetary Theory (economicoutlook.net)
Thank you for the link. A comprehensive, convincing argument that we are seeing “transient” inflation that will resolve without interest rate hikes.
As to your comment – higher interest rates will force many people to sell, that is part of the reason house prices will come down so quickly.
Negative equity and forced to sell – could get very messy indeed, with a lot of lives ruined in the process.
That is what happens when you don’t accrue enough of a deposit for the property you purchase. First Home Buyers should start small ( Apartment or Townhouse) and further out from the CBD, focus on serious debt reduction and then slowly trade up but always keeping debt within your means. Property is never worth what you think it is. It is only worth what someone is prepared to pay for it.
Low Deposits and high debt caused by unrealistic expectations are the most significant risk factors facing First Home Buyers.