Sydney – Wednesday – November 8: (RWE Aust Business News) – The Reserve Bank of Australia today raised the cash rate by 25 basis points to 6.25 per cent.
This is the RBA’s third rate hike this year after raising rates
by a total of 50bps in May and August.
The central bank said the decision was taken against a background of continued expansion in the global economy and further evidence that inflationary pressures had increased.
“The world economy has grown strongly in 2006 and is generally
expected to grow at an above-average pace in 2007,” it said in the
accompanying statement.
“Although growth in the United States has moderated recently,
strong conditions are prevailing in other parts of the world.
“The global expansion has contributed to high levels of commodity
prices, which continue to add to incomes and spending in Australia.
The board took careful note of the likely economic effects of
the drought, which will lower the supply of rural produce, reduce farm incomes and may temporarily affect prices for some foodstuffs.
“At this point, these developments appear unlikely to affect
significantly the medium-term outlook for inflation.
“Domestic demand has been expanding at a relatively strong pace
against a background of limited spare capacity.
“Labour market conditions have remained have been some tentative signs of moderation in the demand for credit recently, the overall pace of credit growth has remained strong.
“This combination of forces has contributed to an increase in
inflation.
“In the September quarter the underlying inflation rate was
around 3 per cent, up from 2.5 per cent at the end of last year, and it
is likely to remain around that rate in the near term.
“The headline CPI increase has been noticeably larger than this
recently, though this reflects some temporary influences which will be reversed in the quarters ahead.
“Producer price indices showed further strong increases at all
stages of production in the September quarter.
“Aggregate wages, though not accelerating further, have continued
to grow at a faster-than-average pace.
“The board judged this to be an environment in which the risks of
inflation exceeding 2-3 per cent over the medium term remained
significant.
“Monetary policy has been responding to these risks for some
time, with increases in interest rates in May and August.
“Some effect of those measures is becoming evident in demand for credit by households.
“Nonetheless, the board’s judgement required in order to moderate inflation over time, and thereby to secure sustainable growth.”Cheers
Richard Taylor
Residential & Commercial Finance Broker.
Licensed Financial Planner. Ph: 07 3720 1888
[email protected]
Looking for life cover – We Guarantee to beat any quote you have in writing.Richard Taylor | Australia's leading private lender
Having only been in the real estate game for a few years, I’m wondering if the current interest rates are high in proportion to investor’s commitments? What part of the interest rate cycle are we in? I would have thought at the bottom but some say nearing the top… I’ve heard all the horror stories of the 90’s, is it possible for history to repeat itself or are these recent rate rises just part of the overall risk we take as investors?
Originally posted by alotti:What part of the interest rate cycle are we in? I would have thought at the bottom but some say nearing the top…
The RBA can move either way on new information, or just a whim. However, there is no doubt that we are currently in a global economic environment of rising inflation and rising interest rates. Long term? Well, the rising inflation is a direct result of rising levels of money creation primarily in ‘Western’ economies. This money is created by the issuance of new debt from the banks. Currently this new debt is being issued (demanded), and the total money pool growing at a rate far exceeding either aggregate national income growth or national GDP. Consequently, inflationary pressures remain.
Analogy – you look into your purse to find you have $20 in $1 coins. Your shopping amounts to $40, so you discretely duck into the hardware aisle, grab some heavy-duty cutters, and snip each coin into 2. Naturally, when you present these 40 coins to the cashier, they will recognise that you don’t really have 40 x $1 coins, you have simply halved your coins (doubled the number) and therefore halved the value of each coin. They see each coin as ‘worth’ 50c. Think not of inflation as rising prices, but as the devaluation of currency.
Back to my point. The last 7 rate hikes have had little effect on the rate of debt/money creation. To stop the money creation, and curb inflation will clearly require higher interest rates, or a major economic upset such as recession or widespread unemployment.
Now to tie it back to property for the benefit of the forum. Over the last 30 years, total housing debt has grown at an average of over 15% pa to support house price growth averaging 8% pa. In years when housing debt grew by only 10%, house prices were steady, and when it grew by less than 10%, house prices generally fell.
If housing debt equalled GDP growth next year of around, say optimistically, $40 billion, this would represent only a 5% increase in housing debt. It would also represent a HALVING of housing turnover, implying either a 50% drop in prices or a 50% drop in turnover or (more likely) a combination of both.
To put that another way, sellers are not going to drop prices by 50% next year under current economic conditions. Half of all buyers are not going to simply disappear under current economic conditions. So interest rates are still too low to curb borrowing and therefore inflation. Interest rates must, and will, continue to rise.
F. [cowboy2]
* I am not and never will be economically educated or qualified to make forecasts. However, I continue to do so. So sue me.
* I tell you what, the prospect of soon being able to demand 7%+ for my savings makes me very happy. Who would have thought that ‘money in the bank’ might one day prove the best investment?
* No doubt some misguided optimist will jump up and cry “all that money creation and inflation means that house prices will go up massively!†Nope, sorry, not likely. Remember, flat or falling housing co-exists perfectly happily with housing credit growth (monetary expansion) up to 10% ($80 billion currently). For houses to go up by say 7% pa would require housing credit growth around 15% pa ($120 billion and compounding) which would bankrupt the entire nation very soon – like when interest costs exceed our total national income…
Hi Foundation,
Thanks for the interesting reply, although I had to read it twice [blush2]. I must admit your view on the econimic climate makes me want to run to the hills! But I’m not one for timing the market, so I won’t even try.
Lena
Originally posted by alotti:Thanks for the interesting reply
You are most welcome!
I must admit your view on the econimic climate makes me want to run to the hills!Really? Just wait ’til you meet Dr Steve Keen then:
Originally featured on ‘The World Today’, ABC local radio:ELEANOR HALL: But you talk about depression in Japan. I mean, even though there are obviously pockets of real hardship in Australia right now, you know, we’ve got so many more Australians in employment, we’ve got booms in at least two states. Do you really think that a depression is likely in Australia any time soon?
STEVE KEENE: If we follow the path that Japan has, then yes I do, because exactly the same things were said in spades about Japan in 1989. So you can get to be absolutely going gangbusters, you hit a debt wall, and if it’s as big as we’ve got now, you just don’t get out of it without the help of things we’re currently trying to get rid of, like inflation.
ELEANOR HALL: From your knowledge of the level of private debt in Australia, have you been surprised by the official figures on defaults and mortgagee sales, because they don’t seem to be so worrying?
STEVE KEENE: I was surprised by those figures. It did look strange compared to what I saw about the data.
With levels of debt like we’ve got, with the price bubble that we had beforehand, and with the number of people who were encouraged to regard speculating on house prices in Sydney as being investing for their futures, I can’t see how you can match off those levels of private debt against the ending of the housing bubble, and still the level of mortgagee sales look quite low to me. It just didn’t seem to compute, basically.
And your show yesterday, about the number of… the proportion of sales which are actually mortgagee sales, but aren’t being noted as such, that’s more realistic, and that is extremely scary, because we’ve never had scales that high since the great depression.
ELEANOR HALL: So, from what you’re saying, we are heading for economic breakdown…
STEVE KEENE: I believe we are.
ELEANOR HALL: Can we avoid it?
STEVE KEENE: No. I’m titling this ‘the recession we can’t avoid’.
Now, I would be delighted to be wrong, and I’m not making an econometric prediction. I am making a prediction based on looking at the data and the debt deflation coming our way.
ELEANOR HALL: But a recession we can’t avoid – when?
STEVE KEENE: Well, that’s the $64 million question. If I had to put a stab at it, I’d say about one to two years away.
ELEANOR HALL: And that’s Dr Steve Keene, Associate Professor of Economics and Finance at the University of Western Sydney, with that dire prediction.
Now this guy is pro-inflation and anti-interest rate hike! The investor’s best friend?
F. [cowboy2]
always very interesting reads foundation, thank you.
i find it hard to believe that theres a recession 2 years away, but then again im not an economist am i [baaa]
do u believe what he said?
Hi Foundation,
That was a very interesting response that you wrote, however I also had to read it a couple of times to make sense of everything it says. Especially because my background is structural engineering and not economics.
Are there any websites or books you could recommend reading to get a better understanding of how australia’s economics works and how it affects property prices and interest rates?
Thanks
Paul[suave2]Originally posted by dare_to_dream:Are there any websites or books you could recommend reading to get a better understanding of how australia’s economics works and how it affects property prices and interest rates?
Essential reading:
http://www.rba.gov.au RBA’s Statement of monetary policy, a quarterly assessment of the Australian and international economy.
http://www.henrythornton.com mostly free articles, good economic commentary plus politics.
About half the stuff written by Ross Gittins. Ditto Alan Kohler. Try a google news search. Oh, ditto Shane Oliver – http://www.amp.com.au -> “Oliver’s Insights economic reports
“.http://onlineopinion.com.au economics section often has good articles and vigorous debates. I’ve stopped going there since the place became overrun with xenophobes (ploise ixploin?)
http://www.globalhousepricecrash.com has some incredibly intelligent economics-savvy folk amongst the uber-bears. Not so among the bulls though, strangely. Mostly UK focussed, but…
http://cracker.com.au/threads.aspx?categoryid=11061 is our equivalent. It’s equally open to bulls and bears. Some interesting threads turning up there lately (and it’s far more active than this site these days!)
http://thehousingbubbleblog.com is a good insight into what the future may hold for us. US based blog gathers news articles from around the ‘states.
Any old introduction to economics text book.
Wikipedia? http://en.wikipedia.org/wiki/Inflation is probably a good kick-start. FWIW, what I’ve described probably fits closer to the ‘Austrian’ view (as per wiki). Just keep clicking on links until you know everything! [biggrin]
That’s about all.
F.[cowboy2]
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