Is the RBA aiming to reflate the bubble?

If you asked the RBA what they are aiming to do with yesterday’s interest rate cut you’d get a vague answer that they are only responding to the economy, not directing it. In a sense that’s true. The RBA does not force anyone to borrow money. But in reality, the rest of us see the RBA not as some uncaring and unconcerned data-driven machine but as a money tree, which is sometimes in full bloom and sometimes denuded of foliage. Thus when interest rates are high we tend to bunker down and wait for Spring. When they are low we enter a frenzied harvest and store the debt in the nearest house.

The question of who is responsible in this economic paradigm is about to become central to the future of the Australian economy.

As it cut interest rates yesterday towards record lows, the RBA said the following:

Investment in dwellings has remained subdued, though there have been some tentative signs of improvement, while non-residential building investment has also remained weak. Looking ahead, the peak in resource investment is likely to occur next year, and may be at a lower level than earlier expected. As this peak approaches it will be important that the forecast strengthening in some other components of demand starts to occur.

For a central bank that sees itself as the ghost in the machine, this is a pretty plain statement of intent vis-a-vis the housing market. They want to see investment in housing rise. So, for the rest of us, and our children, the question must be asked what precisely is being intended here?

The RBA has spent the better part of two years telling us that we are lucky to have the mining boom. It has described this as a “glass half-full” situation in which it has been necessary to have high interest rates so that we don’t all go grabbing for the money tree at once. But, it has argued, the upside is that we’ve been able to dodge the problems plaguing other Western nations of having to reduce our household debt levels, even if it is no longer wise to expand them further.

So, if the RBA is now declaring it wants to see an acceleration in housing investment, and is in full bloom vis-a-vis the cheap money to make it happen, can we rightly conclude that it’s time to reach for the machete, chain saw or combine harvester and load up on debt?

I don’t think so. In fact, the RBA’s message means something else entirely in my view. What the RBA wants to see is a rise in new home construction not established dwelling investment.

Consider, the high interest rates of the mining boom have hit two sectors harder than any other in terms of employment. Those sectors are property construction and retail. This was not coincidence. The RBA needed to see construction workers shift from building houses to building mines and raising interest rates to make it happen came with the added bonus of reducing housing construction during a time when prices were going to be under pressure anyway. Reducing supply made sense on both counts. Retail was always going to have to correct following its post-millennium debt-fuelled boom.

But now, as the mining boom approaches a peak that is much lower and sooner than anyone expected (except MB!) the RBA is intending to return many of those same construction workers and families to rebounding jobs in housing construction. It is also intending to free up extra spending money for households carrying large debt burdens and at least keep retail moving.

In short, the RBA’s intent is to boost or support demand in these sectors, as well as those that have been hurt by a high dollar.

So, does that mean it wants to re-inflate the housing market? Again, I would argue that it does not. Perhaps the worst kept secret in global markets is that overvalued Australian house prices are an economic vulnerability. The IMF has said it. The World Bank has said it. The major ratings agencies have said it. Countless warnings have been uttered. Just last week the RBA itself reiterated that:

“With demand for credit likely to remain moderate, a challenge for firms in a competitive banking environment will be to resist the pressure to ease lending standards to gain market share in the pursuit of unrealistic profit expectations…it would be undesirable if banks responded [to low credit growth] by loosening their lending standards.”

There is also the probability that a resumption of growth in house prices is simply not possible. The post-millennium housing boom was driven above all by one factor. It was funded by offshore borrowing in the banking system. That borrowing was the source for the GFC government guarantees of the banking system and has since been the focus of all of the countless warnings about Australian vulnerability mentioned above. NAB recently stated publicly that it did not think it possible for the banks to increase their borrowing offshore any more. Not only in percentage terms but the absolute levels as well.

There are, of course, local deposits to fund credit expansion. But the high savings of Australian households of the past few years are also about to come under pressure. The end of the mining boom, as well as the cut backs we are seeing in state and federal government budgets will reduce income growth. So, where are the banks going to find the money to raise lending levels?

The RBA knows all of this. Its rate cuts are not aimed at firing up another round of  housing speculation. They are aimed at boosting borrowing enough to keep house prices stable, perhaps rising slightly, just enough that new homes remain attractive to prospective buyers.

Whether they succeed of course is up to you.

David Llewellyn-Smith
Latest posts by David Llewellyn-Smith (see all)


        • What about 12 months? This is idiotic. I don’t even know what you’re arguing. You can’t just point the bone at house prices and make some spooky noises.

          I’m on the record saying the RBA needs use maroprudential tools if need be to contain any pulse. And use other tools to control the currency is they can’t ease rates without firing off a frenzy.

          But I still don’t think the RBA wants to see another round of housing speculation. Rate cuts are an appropriate response to end the mining boom. Phil Lowe wrote the book on easy money and asset bubbles. We are plenty short of any concern about a worsening bubble.

  1. Let’s not forget that for most people it isn’t the price that is paid today for property that matters, but what the price is when it’s to be sold. The average property is held for about 4 years here ( NZ); I’m sure it’s something similar over there. 4 years? Even 4 months! In this economic climate? Good luck!

  2. The IMF has said it. The World Bank has said it. The major ratings agencies have said it.

    RBA hasn’t. In fact, Capt Glenn has said the opposite, using a flawed national average income figure to argue that house price to income ratios have remained stable for the last 10 years. RBA has failed to lean against asset bubble and is now in denial about its consequences.

    And a paragraph in the financial stability essay report is no substitute for hard action on the ground, via macro prudential policies.

      • Do you want him to crash housing?

        Yes. Let’s get all the unproductive investment in ticky-tacky boxes over with.

      • Well, if he bring himself to lean against asset bubble formation, what justification (monetary/mandate wise) is there for the RBA to prop up an asset bubble?

        I want the RBA to be consistent.

        • I agree Mav, but I believe the RBA want a slow melt, but they also want keep the economy ticking. IMO they will always support housing as it’s such a big part of the economy; this ship won’t change course easily. From the business we talk to, 25bps won’t cut in and probable 100bps won’t either at the moment. A Melbourne courier employing 70 drivers told me yesterday they have never seen their business so bad and worse than the GFC so RBA tinkering has lost some weight. It’s much worse out there than they admit, and the next quarter might show that up.

          • Yep, that has been my take as well.

            Monetary policy is over-rated, especially when it is pro-cyclical. This is Greenspan Stevens put all over again.. It is not going to save anybody in the real economy except the morbidly debt-laden and the banksters. I don’t know why people don’t heed the lessons from the immediate past!!

          • Also, I doubt the banks will pass on the 25bps cut to business loans. While the MSM crows about “benefits to the borrowers”, this remains the untold story.

          • This is so sad because Stevens, a few years ago, was saying that urban growth constraints were making his job difficult. Housing bubbles are impossible to control when “supply” is messed with.

            What ever happened to him?

      • removing distortions that should not be there in the first place would not be crashing housing, simply returning it to where it should be.

  3. Even suppose we were to get the ideal situation as you propose HnH what does that do for debt in this nation?

    We are just trying to restore the unsustainable. More housing construction results in more debt, more Foreign Debt in particular.
    We simply cannot continue on increasing debt as a solution to problems forever. Just at what point does the RBA (you?) propose we stop this re-fueling the economy with debt?

    • What do you want of them? Throw up their hands and let it crash? That’s just not a public policy option.

      I am not endorsing more debt. I’ve led the national media on understanding these issues and have been one of the few voices arguing for a lower dollar and export-based policies for the past four years. You know I’m your friend on the CAD.

      But I am not going to argue that authorities should throw the baby out with the bath water.

      • “You know I’m your friend on the CAD. ”
        No! Truthfully I didn’t realise. You seems to promote Govt deficits and lower interest rates which, by definition, result in higher CAD’s. Just an impression.

        Mav’s got it right. Lowering interest rates without all the other policies you promote is just digging a deeper and deeper hole. That hole has both practical and moral dimensions.
        We’ll never get out of it.

        • On Foreign Debt, Asset sales, and CAD’s
          I’ve been labeled ‘Don Quixote’ by many of my friends….you are of the same make-up I think.
          It requires a little insanity but it’s not such a bad badge to wear

        • As I’ve said before, my job is to judge economic decision-making within the accepted frame of reference and to point out flaws in the frame of reference itself. It’s not that hard to understand.

          • my job is to judge economic decision-making within the accepted frame of reference

            What is the “accepted” frame of reference? More importantly, is the (previously/currently) “accepted” ref. frame still appropriate?

            I continue to argue that everything changed in 2007-08, and the old “rules” no longer apply.

          • Op8, I also think there was a tectonic shift post 2007/8 that concomitant with maturation of globalisation definitely means “old rules” no longer apply.

            Trouble is I not so sure what the new rules are – I don’t think anyone does.

        • +1.
          The rate cut can only be interpreted in this way: “if you must be bad, children, keep it nice”.
          I take HnH’s point about Glenny’s recent warning to the banks about the “pursuit of unrealistic profit expectations”.
          But that was a little while back and needed to be very clearly re-stated on this occasion. Otherwise the rate cut (however modest) has all the morality of Kool-Aid.

      • no – it would be throwing out the poo the baby has left inside the bath water. if you leave it behind and refill the bath again you still have dirty water.

    • We can keep increasing debt flawse, just leave it to the ABS – we’re all $338b richer now. Spend up! Every time it get’s abit hairy, the ABS can simply revalue our assets and presto – instant wealth at the same time instantly improving the debt to liquid assets ration from 170.1% to 129.1% which means we can borrow more!!!

  4. While I don’t want to see a re-inflation in house prices, I can’t pretend that falling mortgage interest isn’t good for me – it is.

    At 5%, it would not be difficult for me to spend more on buying lunches for work (and I’m not talking about dining in a cafe while sipping lattes, I’m talking pie and can of coke style luch) each week than what it costs to service the mortgage.

    It’s also helpful in the sense that my wife and I are both public servants and Mr Newman has vowed to keep our wages below the typical rate of inflation (not that I’m expecting to see any serious general inflationary pressures any time soon, unless maybe if the dollar takes a big dive).

    One thing it has not done is tempted me to take on more debt – I see here an opportunity to clear the existing debt faster and still have a few extra bucks to throw around.

    I don’t know how many other people out there think the same way though. I still reckon it’s sending a signal to some people that now is the time to invest in property.

    Of course, if price growth now resumes thanks to falling interest rates (unless cut short by rising unemployment/recession) it will only be a matter of time before rates could never be allowed to rise back toward more historically normal levels again without actually destroying the housing market, as prices upwardly adjust to the new low levels of interest.

    A self-reinforcing cycle.

    • That’s right – but remember families that want a house are not the price-setters in this market. It is real-estate speculators that now more than ever will feel supported by the central bank put.

    • Agreed lef-tee. And your point about the timing of the cut is spot on. The housing debt double needs to be unwound, end of story. Whatever interest the RBA has in seeing this occur (the utterances hitherto emanating from its officers on this point, in combination, are at best contradictory) cutting straight after the end of the footy season, at the beginning of the “turn-around spring” was most unfortunate.
      That’s what makes this apparently insignificant cut so significant.

  5. Jumping jack flash

    “The end of the mining boom, as well as the cut backs we are seeing in state and federal government budgets will reduce income growth. So, where are the banks going to find the money to raise lending levels?”

    Not only that, but where is the public going to find the money to service the existing debt obtained during the good times? Debt is constant, it cares not for income levels. It requires service!

    I smell some big problems occurring very soon, and the message should be to shrink the debt as much as possible while there is still a sniff of the boom money wafting around – before it all heads back to wherever it came from due to our reliance on, and love for, imports.

  6. Anyone who’s been a trader will recognise where we are as the ‘no pain, no gain’ bit. That chance to reassess the original strategy and accept or reject the original premise of the position. Look at why you thought property prices would correct; what’s changed? Is the economy, here and away, better or worse than when you formulated your original views? What’s happened that you didn’t expect? A myriad of questions that formed your, my, opinion. To me, there’s nothing new, that’s better, and nothing new that wasn’t expected. I’m comfy; but I can understand that some are feeling a bit squidy in their chairs.

    • reusachtigeMEMBER

      Good point. The fact is things are worse now than when those of us who believe in the housing crash formed our opinions, far worse. So we may get a temporary uplift from the crazy last greater fools but so much is going against the bubble now that it’s life is lost.

      • “…..the crazy last greater fools…..”

        Good term. I constantly marvel at the readiness of people to fill this role, even regardless of how many lessons could have been learned from other countries.

      • “So we may get a temporary uplift from the crazy last greater fools but so much is going against the bubble now that it’s life is lost.”

        Yeah reus…but I’ve been waiting for it to come undone for 50 years! We’re now devoting more and more resources to stopping any corrections. How long more can they postpone it?

        • Until such time as a crash would be of sufficient magnitude to sway our politicians – post series of totally predictable bad choices on their part viz State Govt’s and TBTF institutions – to effectively relinquish national sovereignty viz. budget management.

          cf. the PIIGS.

          • The larger question is “to whom is this sovereignty being relinquished?”
            My bet is (and I’m a paranoid marxist, I concede) a small coterie of capitalists holding the reins of a handful of multinationals.

          • As a paranoid conservative I’m betting on the Stalinists!!! 🙂

            I guess we all fear extremism!!!!

        • Flawse, I don’t quite get the “waiting for it to come undone for 50 years”.

          There have been plenty of decades during that time, where median multiples have been around 3. I WISH they would resume that level for a little while so some more of us COULD buy a house, period. The current problem really dates especially from 1999; earlier in Sydney.

          I too “bet on the Stalinists” if there is a socio-economic meltdown, it is leftwing paranoid nonsense to think a few super wealthy capitalists WANT this to happen “so they can seize control”. Rubbish, they’ll all be swinging by the neck from lamp-posts.

    • Janet, having just read a fantastic piece on Spain:

      I rather wonder how far away we are from our own “come to Jesus moment” on house prices? You’re absolutely correct, look around the world and see Europe the train wreck, Japan the soon to be train wreck, China the train coming off the rails and we have all this debt and a currency that will pop soon enough. The ZIRPocalypse isn’t the answer. So a few or a lot of mugs will pile into property and the carnage will be spectacular and painful when the time comes for the mean reversion. Gottleibsen had an interesting piece about hidden unemployment and the falling participation rate, one wonders when the tipping point for our way of life becomes unfundable, given current debt loads and rising unemployment in a slowing economy tied to China?

  7. Watching the debate on IR’s and comments from here and other sources, I have come to the belief that the RBA has taken this cut , and will others, because it believes the adjustment from the mining investment boom’s demise will be harsh. Much harsher than is widely known or recognised and is looming now a lot closer than was previously thought.

    Statements from the RBA over the last 6 mths or so clearly outline a belief that they don’t see RE prices taking off meaningfully again in a long while. But those statements were before Olympic Dam, the IO price collapse and the deferral of several major resource projects. The RBA knew the resources investment boom was going to end, but that end has arrived a lot earlier than previously thought.

    The RBA also calls into question the official UE situation acknowledging what we all know in that the labour market is soft and can only get softer if resources are not soaking up jobs.

    So, what to do? Move the problem elsewhere is a good start. To be seen lowering rates is a good enough ploy in taking any spotlight off the RBA if the economy goes pear shape,putting it squarely back on Govt . (Lets not forget the RBA was raising IR’s right into the mouth of the GFC so they are sensitive to being caught wrong footed again).Putting more cash in consumer pockets is another good thing if the RBA sees a severe adjustment in the economy heading our way. Will there be some who take this as a signal to borrow into property- for sure. However, I think this effect will be tempered by other influences due to a) existing household debt levels b) insecurity existing in the jobs sector c) still “high” RE prices and d) the growing stock of available and shadow RE ready to hit the market(demographics at work as Australians cash in the nest egg).

    • What can I say, but well put ! “.. the adjustment from the mining investment boom’s demise will be harsh. Much harsher than is widely known or recognised..” The RBA, and the RBNZ of course 🙂 may be many things, but in possession of more information than most, certainly is one of them.

    • To be seen lowering rates is a good enough ploy in taking any spotlight off the RBA if the economy goes pear shape,putting it squarely back on Govt.

      It is a good enough ploy if Capt Glenn were a pollie or RBA was a political party. But he is an unelected official with a million $ taxpayer funded salary. We don’t get a chance at “Regime change” every 3 years.

      It isn’t the job of the RBA to shift blame elsewhere. If it does, we might as well hand control of monetary policy back to the pollies and save some taxpayer $$s.

      • Can’t argue with your sentiments Mav. But the RBA is as “political” as any other elite and powerful group of officials. That they are unelected could even make them more political, serving their appointers.

        Handing control of IR’s back to politicians/Govt would be a disaster. We have seen how weak they can be when tempted to serve mates and votes are at stake.

        While flawed, the current system is about all we have that is close to being truly “independent”. Our challenge is reading the tea leaves working out what really motivates their actions.

      • Mav, it’s worth recalling the interview/s (can’t recall where) in which Stevens admitted to how deeply he’d felt the front page criticisms he attracted in early-mid 2008 –

        Don’t ever think that these “independent” bureaucrats are not driven by ego, just as much as any of us, if not significantly the moreso due to their rank and position.

        Having felt the sting of widespread personal attacks for having (appeared to) get it so wrong in 2008, if I were Stevens, and saw a looming SHTF moment coming again, I too would be strongly inclined to act in such a way as to be positioned to plausibly shift blame to anywhere but myself when/if that happened.

        • Aren’t the circumstances on which Glenny might base his hunch about “the looming SHTF moment” similar to the ones we had 1 year, or 2 years ago?
          Or are we meant to take the statements about the premature end, and diminished scale, of the mining boom REALLY seriously. I think “the boom will end next year” is centralbankerese for “the boom ended yesterday, and probably earlier”.

          • ” I think “the boom will end next year” is centralbankerese for “the boom ended yesterday, and probably earlier”.”

            Good point, something akin to the “official denial” that confirms the fact.

  8. Stevens is on record as saying that the RBA does not want a continuation of the housing bubble, and that they only started the recent cutting cycle once they thought that cuts wouldn’t re-inflate housing. Why does everyone think they want re-inflate the bubble? It couldn’t be further from the truth.

    In Stevens’ words:

    “The intended effect of recent policy actions is certainly not to pump up speculative demand for assets. As it happens, our judgement is that the risk of re-igniting a boom in borrowing and prices is not very high, and this was a key consideration in decisions to lower interest rates over the past eight months”.

    Truth is, even if they wanted to re-inflate housing, they couldn’t. House prices were driven by global, once in a lifetime forces which have since past; not monetary policy decisions.

    • Glen wants a slow melt for sure, and it’s now up to the pollies for some policy to stop the capital flow into they have the courage however?

      lets see what this looks like in 6/12 months, but the housing sprukers are winning at the moment.

      • The housing spruikers are idiots. They are effectively betting against the central bank.

          • EX-freakin-ZACTLY.

            Stevens worked this out in around 2006; Don Brash at the RBNZ worked this out in 1996. When the elasticity of housing supply is reduced by regulations and red tape and urban planning, there is nothing a Central Bank can do to prevent economic catastrophe. Leaning against the housing bubble kills the productive sector. Easing sets the bubble inflating crazily again. Nothing actually kills it until total catastrophe occurs.

            Stevens KNEW this a few years ago. I keep agonising, what HAPPENED to him?

    • The truth is that house prices are already rising in the markets I’ve been looking in.
      Why shouldn’t lower interest rates exacerbate this process?

      There are indeed a few reasons that many point out here but there is nothing yet to impede the outlook for those who have been taught since childbirth that they must get on the property ladder! Property is always a good investment….ask anybody except the few of us here on MB.

      • “those who have been taught since childbirth that they must get on the property ladder”

        In the DNA flawse. I’m convinced it will blow up, but in the meantime our leaders will keep the drugs up to the patient, and even now in the form of higher immigration so we’re a very long way from our destiny IMO.

        • Seems the last few interest rate cuts people have put the extra hundred on the home loan and used the extra couple of dollars for an extra latte a week.

          Interesting development – definitely not making the Harvey Norman crowd / dinosaur happy.

          Discounting / shopping around more prevalent too – I think people are enjoying that aspect and are unlikely to return to “old habits” once they get the taste of what they can have.

      • DelraiserMEMBER

        I agree as it is a case of confidence, security, and chasing a return. I see no rationality behind the move to property, but when uncertainty abounds, people want tangible assets and there aint much more tangible than bricks and mortar.

        The problem with this, is that there is no golden dawn ahead to justify this. The problems that existed 3 months ago are still there, and in the case of Europe and China, probably more at risk of an event to trigger global mayhem. To dump your wealth in a risky, illiquid asset at this time should be, and is, completely bonkers. If you view the economy within the very narrow prism of IR, then you deserve to do your trousers if your bet goes wrong.

        I still think the UE rate is clinging on by its fingernails, and the rise we have all been waiting for will come in the next 6 months. At this point, confidence gets hammered, and no amount of IR cuts can fix that.

        I’ll stick my neck out and say dead cat bounce (with a bit of hot air blown up its bum to levitate it for a month or two

      • Agreed.

        Only UE will stop Australians investing in property and/or Owner-Occupiers using old addages to justify purchasing over-inflated homes.

        I get genuine pain when thinking about this: but we are going to ride – no, push – this Ponzi all the way to its extreme end: throw virtually everything at it, and still fail.


    • Stevens is also on record as recently as late August, arguing that (amongst other things) he saw no signs that the mining boom is over; big banks’ profits are not excessive; Aussies are more worried about Greece than the Greeks –

      Given Stevens’ statement yesterday that “the peak in resource investment is likely to occur next year, and may be at a lower level than earlier expected, his previous comment in late August is noteworthy –

      “I don’t think we’ve seen anything in recent times that would have caused us to materially revise our expected profile [for investment]”

      How swiftly things change.

      • Aussies are more worried about Greece than the Greeks

        Let me counter Glenny by para-phrasing him:

        The rest of the world, esp the “economists”, CBs and the rent-seekers, are more worried about Japan’s lost decade than the Japanese!

        This addiction to growth for growth’s sake (especially “Jobless” growth) has to stop.

        • Indeed Mav. ‘Tis in large part why I keep calling for the abolishing of “GDP” as a measure of anything.

          And if they won’t abolish it, then let us join together in discrediting the bejeezus out of it.

        • +1 I’m not sure i know many Aussies who look back at the insane growth over the last 20yrs and say – ‘well yeah that was really fantast i’m so much better off’.

          Roads are clogged, hospitals are rooted, schools are over-crowded, urban amenity is stuffed, beaches are over-developed, city bays are run-off cesspools… yep growth is just the beez neez.

  9. Fair comment HnH – and probably how they view the world.

    But the reality is they (like all central banks) have shown they will do what ever they can to protect asset speculators. They just don’t want asset prices to fall, and this is exactly what should have happened to put back the risk on the speculators.

    The central banks are rewarding and protecting asset speculators and the mechanisms they use, and this message wont be lost in the next boom.

    • Oh and we can also expect more unfettered pointless and hideous urban development as the construction sector flogs off more crap to the speculators.

      • Yes indeed. More urban development is done with EXPONENTIALLY rising cost to provide infrastructure!!!

        • This is the most absurd kind of thinking. “Urban growth constraint” is the PROBLEM. The COST of inflated land prices is several times as much as what gold-plated infrastructure for growth WOULD have cost us; this cost has all fallen on the sucker younger generation; and we have got absolutely nothing tangible to show for it. We COULD have simply let the growth happen and paid for the infrastructure; it would have cost a LOT less, the cost would have been shared a LOT more equitably, and we would actually HAVE infrastructure to show for the debt.

          • Old debate – go and live in Sau Paulo if that’s what you want. Reducing urban growth constraints without managing loose liquidity feeding into unfettered development would be the madness.

            There’s not a housing shortage in Australia – there is a surfeit of investors.

  10. Stevens was quite clear a few years ago, that regulatory distortions to “supply” were making housing inflate unmanageably. What went wrong with his sanity/scruples meanwhile?

      • And “who” is both paying the Guv’nor AND telling him what not to say?

        1,000,000 salary, but can he sleep at night? Don Brash at the RBNZ actually quit and got into politics, over this very issue.

  11. Put yourself in the RBA/Government’s shoes. You have an uneasy feeling that there might be about to be a nasty domestic or foreign shock coming down the pipeline. You need to re-align your economy before that happens and give the re-alignment as much time as possible to bed itself in before any shock hits. So, ram interest rates down as fast as possible, get the adjustment process out of the way and settled in, compensated for with lower mortgage rates, and see what happens. At worst all hell breaks loose and all the setting put in place are needed. At best, nothing happens and you’ve re-aligned an economy that badly needed structural/taxation change.

    • Oh, and goody! I mentioned last Friday that I thought the worm had turned in New Zealand, as indicated by the number of failed auctions and the ‘price war’ that was occurring in stale listings, well here’s today headline ” Auckland house prices fall in September”. Now the ‘panic’ in Oz re lower rates might temper that this coming month, but the graph is likely to be down from here on in.( not full link but on page

  12. Now here’s the problem.
    The first thing we need to do is to define what we think we are achieving by lowering interest rates and then define what are the results.

    So let’s take all the things that have been nominated here as possible aims and outcomes of lowering rates.
    1. Increased consumer spending. So the benefit of increased spending is more stability of jobs in retail and retail is indeed one of our largest employers.
    We could also add in here the construction of more Super Shopping Centres as our Superannuation is directed towards shopping centres in a big way.
    2. Increased housing construction ensuring continued employment in another of our major areas of employment.
    3. Increased house prices leading to a greater feeling of wealth and more consumer spending.
    4. Lower Australian dollar to increase exports

    Now let’s look at what will actually happen here in a bit more depth. Instead of just looking at the first layer of spending let’s try to follow through on where the spending goes to at the next level and the level after that etc.

    1. Increased consumer spending. As a nation we have been spending more than we earn for 50 years. We spend something like 33% of GDP on imports. Now our basic needs are met largely from domestic production. Even yet most of our food comes from Aus. So what does EXTRA consumer spending consist of
    a. Coffee shops, restaurants, recreation etc but where does the money then go. It goes towards further consumption. As long as RAT interest rates are negative, and a Govt is running a deficit the circulation of money will eventually disappear into the external account.
    b. TV’s, Cars, Mobile phones, computers etc Note these are, pretty much, imported goods.
    So most of any increased consumer spending, as the money goes around, is going to end up being on imported goods. Thus all the extra spending ends up as DEBT! Further it is not debt denominated in A$ that we can just print as some favour. The people from whom we buy these goods demand payment either in USD or their own currency. This is REAL debt people!

    2. Housing construction. On the face of it housing construction is one of the lesser damaging choices here. Certainly much of the material used in framing and construction of the basic house is made here so yes we do get a stimulation of the economy across quite a broad spectrum. However again follow the money right through. Tradie needs a new Ute…imported. Roof tile company exec gets a new car…imported BMW. Tradie needs tools….imported. Tradie spends at restaurant…back to 1a) and then follow the money. It all, in the end, leads to more imports.

    3. Increased house prices…back to 1. More consumer spending more imports more debt.

    5. Lower Australian dollar to increase exports. Finally we get to some offset to all the above but how likely is it in the short to medium term? The problem is that our major exporter, mining, is looking like it is headed for a real slow-down. So revenue is very unlikely to increase. We may get some increase in Ag exports however the ability for Ag to gear up for any significant increase in production in the short term is very limited. Hopefully some of our tech brained guys will get a bit more of a fair go in international markets than they have been.
    However the reality is that our political, industrial, governmental and social environment is such that it actively discourages anyone from investing in factors of production. Who is going to build a factory in the face of the headwinds imposed on it. In any case, suppose we get the dollar down from lower interest rates who is to say we don’t raise interest rates, for anyone of quite a few reasons, and end up with the dollar back where it is at levels that are uneconomic?
    Investment in import replacement production is just not going to happen in the current environment. Especially in the short to medium term we cannot change the direction of funds flow towards production. It takes along time.

    So, in summary, what have we achieved with lowering interest rates even supposing we get the outcomes we desire.
    1. We get a temporary boost in economic activity that can only be sustained by higher levels of foreign debt and an accelerated sell-off of national assets that is required to fund our consumption. As such our future becomes more precarious. Increased debt is likely to eventually result in difficulty obtaining funds to continue our lifestyle. Selling off our assets to pay for consumption is shafting our kids!!!! Nothing less!!!!

    2.Domestically, in a nation with a rapidly ageing population, we are actively discouraging saving and promoting profligacy. Just when anyone who has saved for their old age and about to get some security from that we are confiscating their income ….for what exactly? What’s the aim?

    3. We reinforce all the factors that have brought us to this impossible situation we find ourselves in. We reinforce Real Estate as the supposed generator of wealth; we reinforce consumer spending as a supposed generator of wealth. They don’t generate wealth…they generate DEBT!!!
    As such we make any attempt at increasing production more and more impossible.

    Reducing interest rates, that are already RAT negative, just puts us into a deeper hole of more debt and more distortion without the accompanying fiscal, governmental and social changes that are necessary. If we are to reform ourselves and our country lowering interest rates so we can consume more by having more debt is surly not the way to go about it.

    • Totally agree. That’s why ‘we’ need to re-align macroeconomic/taxation settings in tandem with this, and the coming, rate cuts. Otherwise, as you spot-on point out, we’re stuffed!

      • ..speak’n n hope you don’t mind Janet,Flawse at this rate how am i going to get anything else read,maybe we think of similar times…disc increase in consumer spending,if passed on,and probably will be in-leading to more continued spending to the low/debt free secure type wages group..young to affluent..retails one of our biggest investment sectors,bargains,maybe not
        2.probably and most likely in this section are a type grouped that will take advantage to lock-in if passed on..
        3.well,an ease of debt repayments lost to a stall,can now be continued at a similar preexisting rate,if passed on maybe even rolled over to another saving and if found over then being an option where maybe,some might even be spent
        4.yes well it does admit the red cross on the side of their van,has wants to certain flows of healthy states,to resume n repair or at least see some sort of social improvement that would see the private clear its prior commitments being most important in having the same effect as a debt free private..sheez not more..1
        a service sector ,that has FX funds that are swapped back as purchases
        a…I heard a couple of times on a market-watch site earlier in the year that 33k we’re employed in the catering/food /service sector as another 19k to retail sales..US,We don’t need swap some coffee bean,we do grow our own,but if we did where’s the price of a coffee’ spent…payments
        b.I’ve got 18 computers,not all working ,but more than 10 work,screens,displays,and then theirs always the tool stores ,and not really something i use up,but if a bunny wants to take my payment ,and in short deposit, takings to an Au bank then pay his foreign suppliers,the banks between would just seek to swap fx holdings level
        2.but if and at it,n the ToT could have rocketed as we saved spending ,then at AU$1.10+ we could have had them build ,stacked 10 high in our desert ,vacuumed packed ,ready for assembly…n on ,tradie as you say or a worker needs a job with more hours ,a ute like an auction of a newish BMW need a roof to tile like a masters
        3. can be paid
        4.where Four out’st thou
        5.if it doesn’t,you-may-have just put the ratings agencies global bubble compass paper weight into orbital spin,where it up or down means left or right and left is bad n downgraded,…leaves the worlds always going better build a shed for storage..and sounds like a Gas conversion..maybe the rate won’t drop..that far,all given n taken..or at least until somebody starts spending more..returns anyone
        1.if passed on,like a patchy temporarily,it may well turn better to BBQ at Xmas..rather than be its calling subject
        2.I often say to my girl ..if we’re all paid to take care of the elderly for the next thirty years,and so in paying down the debt burdens, more or less by slowing flows over all by wishing this way of less spending..a world,where we manage to have no car dents,they didn’t breakdown and we had enough sheds factories and house,energy n roads with out little use,no wars..n after 25 years to this asset commitment paid..n who is it by proportion affords ones head thoughts to a cutting of steel plate ,to vision a ship and then build a shed..could it be left to the grey nomads surfboard makers apprentice,that crafts the boat,that takes time to become a ship.. now we’ve found ourselves…lost/out of time n gotta go back to work..n rushed this is,four flawse
        Cheers JR

    • Well said! However this is a touch long and takes a bit of thought so i’ve given some alternative national strategies that are a bit easier below:

      1. Working families;
      2. Stop the boats.

        • Don’t apologise – great summary and exactly the reason while this site is good value.

          (It’s just too much of a chortle not to point out that we get nothing like this kind of analysis from the knobs in the party propaganda squads.)

    • Remember, agriculture is just the conversion of diesel and fertiliser to food. Most of the inputs, including virtually all farm machinery, are imported.

  13. tsport100MEMBER

    “Whether they succeed of course is up to you”

    It’ll be up to Landcom won’t it? The cheapest land release blocks still start @ $350k for a 1/8 acre in Metro Sydney (not including all the kick-back schemes for landscaping, solar panels etc.)

    The moment Landcom start advertising the REALLY price of land, there will be more than enough demand!

  14. I think also, the lower rates make housing more in reach for those that want it and don’t have it. Like some FHB’s.

    As many have said, including the RBA, setting off a another house price bubble is not the intention and hard to achieve anyways for a myriad of previously stated reasons. Not that it will stop the RE spruikers from getting very noisy.

    Bottom line, we may see a stalling of the slow price melt as the balance point between demand and affordability/cost is temprarily met as new entrants decide to climb onboard the housing market.

    • More evidence that there are real headwinds prevailing against a bubble reforming in RE;

      “A key private index of services sector activity has found the recent slump in commodity prices is feeding through to companies supporting the miners.”

      “The overall state of the services sector, which is being squeezed between low selling prices and rising costs, including from the carbon tax, suggests that further rate reductions will be needed before the sequence of negative news is reversed,” he noted in the report.”

  15. Still think we’re not quite on the money in regard to RBA intentions here. Perhaps the Minutes will reveal more.

  16. RBA legal mandate is clear. Control inflation first and then, within stable prices, maintain/improve employment. That being the case they look at both current and predicted future inflation and employment scenarios and set policy accordingly. Relative sectoral strengths are of much less concern, other than bank liquidity and solvency.

    I agree that the RBA will look to see something else like housing and commercial construction take over the burden of providing employment. Unemployment is the greatest concern regarding causing house price falls and bank bad debts.

    I don’t think they are overly concerned with house prices per se unless they either continually trend down or look like falling at a fast rate even for a short time. There can’t be a general perception that you will lose money (nominal) if you buy now.

    A slow real melt that never seems certain to continue is the best protection for bank balance sheets; coupled with nominal gains is even better. A young couple feel better off to buy if they can’t save (after all normal living expenses including rent) at the rate of house price increases. 2% of $600,000 is $12,000 before tax or say $18,000 before tax at marginal rates.

    Home buyer grants will be mainly for new construction, and that will be fiscal policy not RBA.

    The low construction rates (other than mining/resource processing) of the past 3 years have created a buffer for employment for say 3 years after the mining construction boom tails away. During the following 3 years (ie from 3 to 6 years hence) I expect much greater concern to develop about the manufacturing sector and AUD as it would be the next sector to take over the role of employment provision.

    We are 5 years away from any real problem other than bank liquidity drying up because of our dependency on foreign wholesale funds, and that is being slowly reduced over time.

    • “A young couple feel better off to buy if they can’t save (after all normal living expenses including rent) at the rate of house price increases. 2% of $600,000 is $12,000 before tax or say $18,000 before tax at marginal rates”

      Only while they are feeling confident in their jobs. PS jobs cuts, and the inevitable restructuring it invokes, are just one aspect of the insecurity FHB’s experience at these times.

      • itsonlyrockandroll

        To me, a sentence including an implied first house, a young couple who can’t save, and 600,000 bucks being used as an average example is what makes me feel like things in this great country are just a little bananas.

  17. The RBA’s difficulty is trying to reinflate retail without housing going with it.

    Rock and hard place, meet the RBA.

    This is why they have gone a little early this year. By dropping in October rather than November, it gives the punters more time to actually get the decrease from their banks.

    • Stevens KNEW this years ago. WHO shut him up?

      This whole disgraceful debacle stinks to high heaven of economic-ignoramus leftwing central government charlatans.

    • Agree the RBA is trying to put money back into householders pockets with a 2nd order effect being a re-inflated housing market. Now how inflated will this become give that .25% cut will likely to translate into a .20% rate cut from the banks remains to be seen. Any extra cash in the pockets of householders has been amply consumed by rising utility costs, rego, insurance etc. For many, this is a clawback, not extra dollars in the pocket.

  18. I’ve been wondering the effects of little to no capital growth over the last few years on peoples ability to upgrade. The middle ring suburbs of Melbourne/Sydney have land values in my area of about $1m for 700sqm (so my local agent tells me). Without the capital growth how do people buy these properties? If you take out a $600k loan, even at 5% you need a good double income to pay that off over the next 20 years. Will this lack of capital growth hold back the re-inflation of house prices?