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Yes, it’s that time of the cycle again when the RBA pretends that it can “normalise” interest rates only to discover that doing so will crash the financialised edifice that we used to call the economy.

This time we had a little scare as the RBA pretense described the shape of a ski ramp.

But, it is now all but over. So, what should we do?

Buy houses, I hear you scream!

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Maybe so, but I don’t see any rush. I’d characterise it more as a case of starting to lowball on properties you like to buy.

There are three reasons why.

The RBA faces a long period of high inflation and has already added a lot of tightening. The fixed-rate reset is also underway. There’s more downside for prices as this tightening flows through.

Second, the bank won’t be in any rush to start cutting. Not least thanks to Albo’s gas whale which will lift CPI materially in the year ahead. The central bank will trim this out of its core measure but there will be spillovers.

Third, the major risk to this outlook is a material external shock. This would most likely be brought on by the tightening of the Federal Reserve in the US. US inflation is proving “sticky” for now so more hikes are ahead until something breaks.

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In that event, there will be material further downside for asset prices including property. In this scenario, the time to buy will be when the RBA is forced into emergency cuts amid the wider panic.

I do not think that there will any point at which property prices fall enough to form a feedback loop with unemployment and crash prices.

But then, you never know.

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About the author
David Llewellyn-Smith is Chief Strategist at the MB Fund and MB Super. David is the founding publisher and editor of MacroBusiness and was the founding publisher and global economy editor of The Diplomat, the Asia Pacific’s leading geo-politics and economics portal. He is also a former gold trader and economic commentator at The Sydney Morning Herald, The Age, the ABC and Business Spectator. He is the co-author of The Great Crash of 2008 with Ross Garnaut and was the editor of the second Garnaut Climate Change Review.