What’s caused property values to rise so strongly over the past few years?
Well…there were lots of factors involved including our relatively strong economy, population growth and the fact that most of us want to live in the same 3 or 4 big capital cities.
But two other significant factors have been low interest rates and a property market fuelled by a lot (and I mean a lot) of overseas investors ploughing their money into Australia.
For the last few years the RBA has been conducting a delicate balancing act trying to balance our interest rates (which it would like to lower to boost the economy) and our dollar which is a little high for its liking.
So what could happen if interest rates rise?
And would could happen if the Australian dollar dropped in value? In fact if you’ve been following the currency markets (or maybe if you’re planning to travel overseas) you’ll notice the dollar has already dropped significantly.
Leading economist Terry McCrann wrote a great piece in the Herald Sun warning us that if the Australian dollar plunges it could burst our property bubble.
Here’s some of what he said:
We’re in the middle of the mother of all bubbles.
Anyone who doesn’t believe we’ve been living through the mother of all residential property bubbles clearly hasn’t been to an auction on one of the recent Saturdays, yesterday’s still — just? — included.
Down here in Aussieland, we’ve been riding on two bubbles over the past year or so and they both derive from the absolute granddaddy of all global bubbles — the zero interest rates and the massive printing of money, led by the US and repeated pretty much across the entire developed world.
That’s zero pretty much everywhere else other than Australia and New Zealand.
This has led to the bizarre and certainly unique situation that our Reserve Bank’s 2.5 per cent official rate is at the same time both too attractively low and too attractively high.
Our first bubble —
In property — is because it’s “too low”.
Mortgage interest rates, which are priced off that official rate, have never been as low as they are today. People are borrowing and buying.
The second bubble —
In the Aussie dollar — flows from it being ‘‘too high”.
All that foreign money sloshing around in global capital markets has been pouring — or being dragged by our banks — into Australia chasing our “high” interest rates.
As I noted last week, three big things happened running down to last weekend.
China might just have sneezed, the European Central Bank went all the way to zero, and the US jobs numbers looked soft.
This added up to interesting times ahead.
Now in the past week, we might just have seen the Aussie dollar bubble starting to pop.
The really big question is if the one bubble pops, will the other follow?
In the previous week, the Aussie had seemed to defy gravity.
When iron ore prices went south — China sneezing? — the Aussie actually went up, threatening to go above US94c.
This week, though, it went down one big number on Tuesday, another big number on Wednesday and kicked up only briefly on the spectacular 120,000-plus jobs number on Thursday.
By Friday night, it was teetering just above US90c.
Be careful, be very careful, what you wish for.
The Aussie’s clearly been too high; RBA governor Glenn Stevens wants it at about US85c or so.
That would be the opposite of the interest rate mix.
At US85c it would be both not too high and not too low. Not too high as to strangle the non-resources side of the economy, not too low as to start pushing up inflation from imported goods.
Two problems, though:
You can’t just dial up the desired number for the Aussie.
History tells us two things: when it breaks it breaks suddenly and then goes much further than you would expect or want.
Second, an Aussie plunging would take us into new and completely unpredictable territory in terms of the global backdrop.
We have never been in this position before — with China underwriting our economic prosperity and US money-printing pouring money into the country.[sam id=51 codes=’true’]
So self-evidently, we have also never been in the period after they reverse. If indeed they are in the process of so doing.
If the Aussie dollar does pop, two things are likely to happen to threaten to burst the property bubble as well.
The Aussie falling means less money coming into the country chasing our “high” interest rates and direct asset purchases.
It would also mean the banks would have less money or no longer as cheap money to lend. In short, not just if you’re planning an overseas holiday, but if you are planning to buy or sell property, watch the Aussie.
As for that jobs number, it was obviously and so self-evidently completely wrong.
It’d be the equivalent of nearly two million jobs being created in the US in a single month — trust me, they’d think they were in a boom if they got 500,000.
There’s a much more general message out of it, which the various economists and commentators will almost certainly not learn.
This is that even “normal” monthly jobs numbers are meaningless.
A figure of 121,000 looks wrong, so most commentators treated it with caution. Exactly the same applies to a figure of 21,000.
But instead, commentators will authoritatively opine that such a figure shows the economy is picking up pace, or the opposite, depending whether it’s a plus or minus.
Two things so far as policy is concerned flow from this. In Canberra, the Government needs to ditch attempts to make major changes to the budget.
It’s pretty silly politically to keep banging your ahead against a brick Senate wall.
But that aside, what the country needs is stability in government.
That leads to the second thing — once again it’ll be wise to leave management of the economy to the RBA. It can act quickly and effectively as needed.
Read more at the Herald Sun
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