House prices
It's a good article dandandan with some commonsense ideas.
But I think the article misses the mark and ignores two elephants in the room.
The first I would suggest is that Australia politicians and others with decision-making influence and power, and in general a very large chunk of Australian society, via property and other asset ownership like shares, have a vested interest in doing everything they can to keep increasing the nation's economic growth and prosperity, corporate profits and asset prices, and only provide lip service to anything contrary even if in the interest of the struggling and left behind, and even if in the interest of things like the environment and climate change.
This is the US-driven neoliberal model in which we live.
The second more obvious one is interest rates and quantitative easing/tightening. Isn't the current largest-on-record property price decline due to increased interest rates and quantitative tightening - nothing else has really changed at all in the past say 6 months, in particular housing supply or tax rules relating to property investing...? (And this is not an argument however against the above paragraph: Embedded higher inflation, wage-price spirals, hyperinflation and currency debasing, etc, are far more damaging to long-term economic growth and prosperity, corporate profits and asset prices, than some short-term economic pain from higher interest rates.)
The trajectory of modern, developed economies, fearlessly led by the US, continues to be one of going further down the neoliberal path towards more inequality, disadvantage, poverty, people being left behind, and extreme concentrations of wealth.
The reality seems to be that one needs to get themselves at all costs on the correct side of the economic growth and asset price ledger, or just get left behind. I'm not sure if anyone really cares about those being left behind, who can easily be swept under the rug and written off as being in their situation due to self-sabotaging and victim mentality.
Actually it seems that in the neoliberal model an increasing stock of disadvantaged and people left behind is beneficial to the already landed, asset owning wealthy and the corporate world since it puts the wealthy in an even more privileged position with more power, and it increases the stock of cheap labour trapped with no options and forced to take the working conditions and wages on offer, holding down wages and thus increasing corporate profits and asset prices (hello 200k immigrants/yr under the guise of skills shortages!).
I very strongly think Australia needs to take a good hard look at itself and at what's going on around us on this planet, and think twice about getting further tied up and in bed with the US, and thus getting trapped in the US's neoliberal economic policy and warmongering foreign policy agendas. We should consider looking more closely at the Nordic economies for our economic inspiration, and pursue more independent foreign policy relations (that are not influenced by the US) with the EU and member countries, and also countries like India, China, Indonesia, etc. I believe that we should also consider the idea and policy of military neutrality like say Switzerland or Ireland.
Completely agree GCSO.
you haven't already read The Asset Economy (it reads like you have!), then you will nod along furiously - emphasis on furious - with it. Short at only 90 pages, but it's the most damning and unsettling book I've read in ages (probably less so if you have assets or expect to inherit them).
One of their main points is to make clear that critiques of the current asset economy fall short in that they emphasise the growth, interests, corruption, etc of the 1% rather than look more broadly at how the democratization of asset ownership through policy settings (including low interest rates) has done exactly what you have said - created a large cohort of middle-class Australians with a vested interest in the continued rise in asset prices.
They go further to argue that we need to completely reshape our understanding of class in Anglo countries away from relationship to labour and your employment, and towards asset ownership. We're really at a point now that we risk locking in a new class structure that is entirely reliant about asset ownership and asset price increases, and on the other side of the coin a demographic of people who will never participate in the asset economy and exist to serve the debts of others.
First chapter is here if you're interested!
https://lareviewofbooks.org/article/the-asset-economy/
gsco wrote:It's a good article dandandan with some commonsense ideas.
But I think the article misses the mark and ignores two elephants in the room.
The first I would suggest is that Australia politicians and others with decision-making influence and power, and in general a very large chunk of Australian society, via property and other asset ownership like shares, have a vested interest in doing everything they can to keep increasing the nation's economic growth and prosperity, corporate profits and asset prices, and only provide lip service to anything contrary even if in the interest of the struggling and left behind, and even if in the interest of things like the environment and climate change.
This is the US-driven neoliberal model in which we live.
The second more obvious one is interest rates and quantitative easing/tightening. Isn't the current largest-on-record property price decline due to increased interest rates and quantitative tightening - nothing else has really changed at all in the past say 6 months, in particular housing supply or tax rules relating to property investing...? (And this is not an argument however against the above paragraph: Embedded higher inflation, wage-price spirals, hyperinflation and currency debasing, etc, are far more damaging to long-term economic growth and prosperity, corporate profits and asset prices, than some short-term economic pain from higher interest rates.)
The trajectory of modern, developed economies, fearlessly led by the US, continues to be one of going further down the neoliberal path towards more inequality, disadvantage, poverty, people being left behind, and extreme concentrations of wealth.
The reality seems to be that one needs to get themselves at all costs on the correct side of the economic growth and asset price ledger, or just get left behind. I'm not sure if anyone really cares about those being left behind, who can easily be swept under the rug and written off as being in their situation due to self-sabotaging and victim mentality.
Actually it seems that in the neoliberal model an increasing stock of disadvantaged and people left behind is beneficial to the already landed, asset owning wealthy and the corporate world since it puts the wealthy in an even more privileged position with more power, and it increases the stock of cheap labour trapped with no options and forced to take the working conditions and wages on offer, holding down wages and thus increasing corporate profits and asset prices (hello 200k immigrants/yr under the guise of skills shortages!).
I very strongly think Australia needs to take a good hard look at itself and at what's going on around us on this planet, and think twice about getting further tied up and in bed with the US, and thus getting trapped in the US's neoliberal economic policy and warmongering foreign policy agendas. We should consider looking more closely at the Nordic economies for our economic inspiration, and pursue more independent foreign policy relations (that are not influenced by the US) with the EU and member countries, and also countries like India, China, Indonesia, etc. I believe that we should also consider the idea and policy of military neutrality like say Switzerland or Ireland.
Good summary
This link was very difficult to find, but is essential reading, especially if you are university educated and no-one mentioned anything like this in your studies.
https://web.archive.org/web/20020925223144/http://homepage.ntlworld.com/...
dandandan - the great theft and inequality already happened. I cannot stress this enough. In the place of common land for the people to hunt on, fish in, or farm and ancestral houses, a system of title to land was established. Thus, common people were displaced of their land on an absolutely massive scale (also in Scotland and Wales and Ireland). The land was titled and combined into large sheep farms, productive swamp land was filled in, biological diversity gone. Any resorting to hunting was now poaching, and led to an enormous prison problem - these were overflowing, and for what? Normal activity by common people on their land. The First Fleet, Australia, and Transportation ensued for the common people. And the Aboriginal people were then displaced from their land. In both cases, the newly titled land supported sheep, and was very profitable.
The people left behind agglomerated in cities, and their industry began the Industrial Revolution (and also Association Football, to keep them happy!). Thus, human development began it's current exponential rise, and incredible leaps in technology, medical care, transport, education, opportunity and connectivity began. That genie is out of the box, and most of us would agree we have very great potential to access the experiences possible in this world, far greater than in 1650 for example.
The establishment of titles is not entirely bad: titles can be used within an increasingly complex financial system to raise capital, start ventures, and branch and diversify into an incredible array of activities. This system, along with successful governance (of which the Western liberal system has proved the most adaptable and enduring over the last 3 centuries since Enclosure) permits much of the economic complexity we have today. Important to note too, is that Australia can be economically egalitarian within this system, for example in the early 1970s.
There have been periods of very large inequality - people mention Dickensian London, and every now and then 'feudalism' gets a mention. Feudalism was before Enclosure however, and the Commons still existed. It's relevant to Australia today as the system of land title was brought along as well, and it's the sheer cost of these titles relative to earnings today that has become a pressing issue. A reversion to the mean would be very welcome.
dandandan wrote:A good article out today:
https://theconversation.com/how-housing-made-rich-australians-50-richer-...
This says it all really doesn't it!!!
"Housing is driving up capital income
Rents used to make up just 2% of national income in Australia. Now they’re almost 10%. This explains more than a quarter of the rise in the capital share of income in Australia since 1960.
As housing has become more expensive, it’s the wealthier Australians who own more housing who have benefited the most.
Economists Josh Ryan-Collins and Cameron Murray estimate that up until June 2019, in more than half of the previous 30 quarters the median Sydney home earnt more than the median full-time worker.
In other words, a relatively low-risk, low-effort investment provided greater returns than a year of hard work."
Here's a thought. Decrease the CGT offset/negative gearing arrangements for investment properties greater than 1. ie for your 1st investment property CGT deduction and negative gearing arrangements as per status quo. 2nd, 3rd , 4th etc all of the above are off the table!!!
dandandan, thanks for the book recommendation, really interesting and I nodded my head vigorously (and got a good neck workout) while reading that 1st chapter. I think everyone should probably read that.
VJ, thanks for that link, and Trevelyan's History of England - The Illustrated Edition also has a nice section on the enclosures and brief discussion of the development of private property rights, pp336-40 in my 1973 edition.
Thanks for the tip gsco, will dig around for that one.
I've long thought that a productive economy (ie actually makes stuff, value-adds) should be held in much more esteem here.
VJ if I interpret you correctly, yes I believe it's better if a country's wealth and prosperity are built on foundations of actually producing things and relative equality instead of asset price ponzi schemes and extreme wealth stratification.
Interesting stats on rent prices. Shows overall rents in capital cities haven't actually boomed taking into account CPI/inflation etc.
https://thenewdaily.com.au/finance/property/2023/01/11/rent-assistance-h...
good posts / points above... all of em, vj, gsco, ddd
the salt in the wound is, many people who have benefitted from all this, are the very ones pushing (embracing?) frugality for plebs to 'solve' climate change, whilst seemingly totally oblivious to what the ipcc says about the economic growth model...
it would seem the horse has well and truly bolted re. equality and associated opporunities, though I believe gsco is correct in saying australia is still tentatively holding onto that crossroad, and an assertive decision could still be made...
but, ...200k migrants... thanks labor!
yes the 1970's... ahhh! ...this is where I am also totally dubious about 'the voice', blackfellas (some) have been totally left behind in this race to the bottom, and perhaps more importantly, totally ill equipped for the epoch we now live in, and even more so, for the stage we are blindly walking into...
the policies to now, have been very good at preserving (restoring) culture, but have only created / entrenched a two tiered society, parallel (and below) the mainstream tiered society, now a very stratified society... the voice is no doubt well intended, and we clearly need to address issues... but it all just comes across as a 1970s / 80s solution, to address a genie that has long left the bottle...
there's clearly no going back, and it would appear no political will to even address the big (real) issues
as mentioned above, the vested interests of those running the show, means tinkerimg at the edges (lip service) is all they've got - or more correctlly - willing to cede
bleak... someone - something - needs to put brakes on this bus, urgently! ...she's now a runaway train!
Yes GSCO, that's what I mean. In any discussion of making things (as we've witnessed with the loss of our car industry) there has to be understanding of settings which foster or hinder value adding. Every country uses settings to either nurture this, or eradicate it. I think we've chosen to eradicate it, in favour of financialisation of housing, and punted the rest on resources. What could possibly go wrong?
Yes Sypkan, if you add 200,000+ people pa and then multiply x average Australian CO2 footprint, makes it damn hard to meet those climate pledges, no matter how much technological improvement you see. That said, recent trips through SA were very impressive at the scale of wind and solar being deployed and working. And my project for 2023 is to convert the surf wagon (existing technology, no further CO2 input required to create a new one) to E85. Liquid Sunshine.
I saw on the ABC late last year a stat saying that of all voters, about 1/3 rent, 1/3 have mortgage and 1/3 own outright. Trying to make owning property easier for renters means hurting the second group. I hazard a guess that the proportion of households with dependents is greater in the mortgagee group than the renting group, so the socio-economic damage of policies that drive down asset values would be greater than maintaining the status quo. Not to mention, there are those in the third group that have helped those in the second group into ownership, so they (as voters) also don't want to see their offspring hurt.
So the ONLY way the property market becomes fair again for would-be owner-occupiers and current ones, is for the Commonwealth to implement a policy whereby any debts relating to residential mortgages are forgiven while simultaneously eliminating all negative gearing and CGT tax concessions as well as the State Govts eliminating stamp duty and replacing it with a land tax tied to the Auditor General's land valuations.
The latter will help to disincentivise big developers only slowly releasing land once they have development approval in order to artificially inflate house+land package prices. Such a move would mean the RBA would have to just delete a bunch of debts (despite any hoohar, this is easy, as these are all just made up numbers and not based in hard physics - i.e., it's all just based on myth/agreement between humans), which would solve the issue of debts held by retail banks for the purposes of mortgage lending. The trickier one is where any retail bank lending isn't backed by debt from the RBA. That would likely mean a sweetheart deal for the banks, either via compensation paid by the Commonwealth (i.e., the taxpayer) or perhaps allowing the banks to get a really good write off deal for those losses, which would be so large they probably wouldn't need to pay corporate tax for 50 years, given the value of resi RE in Australia.
Sorry mate I don't understand what you are trying to say there at all.
Are you saying the Govt cancels all mortgage debt?
Just the part equivalent to any asset price falls triggered by actions taken to make it more affordable for those trying to get into the market as owner-occupiers. Without it the socio-economic fall out probably dwarfs any of the negative consequences of the status quo.
If RE values drop by 20% because of policy changes that remove the perverse incentives (those tax breaks and replacing stamp duty with land taxes), then the govt. and the banks should forgive 20% of loan totals. Someone owing $500k now only owes $400k.
It's fairly crude and only works to ameliorate the impact on people with decent sized mortgages, or put another way, someone who has paid off 80% of their mortgage already will feel shortchanged. So the govt. might need to add another layer via tax offset for these people (not sure what point in time would be used though).
Like others have said, I can't see the status quo changing given the vested interest at the individual human up to the national economic levels.
Australian RE is worth, roughly, the equivalent of 8% of global GDP. Given the big 5 banks get about 1/3 funding offshore in USD, the interest in not having the music stop might even be global to some extent.
For disclosure, we bought our first place in 2018 and sold that and upgraded last year. Since we bought that first one, there are two couples we're close with that continued to "hold out for price falls" and now look where we are. Both were keen for 3 bdrm houses in the sort of inner-BNE areas of Nundah and Cannon Hill respectively, and the RE values of each since then (even accounting for recent falls) have gone +94% and +53% respectively. Do I feel smart or like a hero? Not even a little bit. Despite all my rage I am still (feeling) like a rat in a cage. But hey, at least there's food and water in here and predators can't get to me (to stretch the metaphor).
Gotcha, seems like a good idea.
It would be kind of cool if you bought stock or bonds on margin and their value fell, you were given a dollar amount by the government equal to the fall of the margined amount of the stock or bonds.
Similar, but not the same thing VJ. The spirit of what you're talking about is more akin to negative gearing with RE, which to me is perverse.
For it to be the same the government would have to do something that lead to the falls in asset prices and could be demonstrative via a causative relationship. And since stocks relate to different sectors, everyone would need to own a basket of stocks in at least the same sector though probably the same company.
My idea, while requiring abandonment of certain virtuous positions, is about being pragmatic based on the incentives for the three (major) different participants. Politicians don't want to lose votes, mortgagees don't want their asset to lose value, and renters want to get into the market. I've yet to see a policy that doesn't have a mix of "winners & losers". Politicians don't care if the rules of the game change as long as they stay in power, mortgagees will be upset because the rules have been changed post-them entering the game, and renters feel the game is rigged against them.
So how to change the rules to suit as many as possible? You can't. No politician will because (1) they'll lose a monumental number of votes and (2) they'll lose wealth personally since most of them also sit in the mortgagee basket. So the above approach minimises the number of people on the loser side of the ledger and the politicians get to keep votes (maybe even gain some). That is the only solution (i.e. keep as many people happy) to the problem.
Everything else either just pays lip service and/or pushes prices up further and/or results in more environmental destruction.
It is a supply problem, but not because they're aren't enough dwellings to live in...
mowgli, I think I get your idea: removing CGT discounts and negative gearing may cause property prices to fall, most impacting those up to their eyeballs in mortgage debt?
So the govt should compensate them in some way, by say partly paying off their loans so their gearing ratio (loan/property value) remains the same. This might be ok for owner-occupiers, but maybe hang property investors out to dry since that's just the risk they take?
Also, harsher land taxes based on land size and/or value to remove the incentive of property developers to hoard land and thus reduce supply is mentioned in that old article on the enclosures VJ posted. I wonder if the rules here would need to be different for farmers and other primary producers?
Regarding rental affordability, one thing I haven't noticed mentioned in the debate is that we're kind of in a perfect storm of both still relatively high house prices and now higher interest rates. So for property investors to get a decent rental yield relative to interest rates in order to make property investing worthwhile financially, they really need to hike up rents. I recall reading that average rental yields used to be 1-1.5% or something pre-covid. Not sure what they are now.
Everyone is having fun say bashing airbnbs and rich people leaving properties vacant, etc, but maybe it's a bit simpler than that?
So long as kids and anyone else saving up for their home gets a cash equivalent for the amount of mortgages forgiven (for the suburb prices will tend to go up this amount as of the intervention) then all good. And existing owners too while I think about it, or they go backward relative to everyone else, as the government actions reduce their net worth just as they do to mortgagees. Inflationary? You betcha.
With enough money, I am sure we can remove consequence from decisions made, once and for all.
Does someone remember this thing called GST and the fact a government was voted in taking a new tax called GST to the polls. Not all governments are idiots and I’m sure the majority of the population could see and understand what the gov would be trying to achieve and introduce.
Negative gearing and CGT concessions are a joke and have to go in order for any future generations to have any hope of making it off the rental merry go round and into affordable property ownership.
Just wanted to game out the other side of the mortgage forgiveness: the banks.
So say Hypothetical Bank, after securing deposits/financing bonds and then lending, having re-deposits, re-lending etc etc comes out at a leverage rate of 30:1.
Roughly, if 3% of the loans on their loan book go bad, their capital would be depleted.
But -
Would it be fair to say that government forgiving the underwater part of the loans would be paid directly to the bank?
If so, then the government would be funding any losses the bank may make.
It wouldn't take too long for a CFO of Hypothetical Bank to realise - eureka! - that there is effectively no capital base required, and no losses will ever occur
Anyone having that revelation would then instruct their lenders to go forth and multiply the loan book on a massive scale
Other banks would notice
And the government guaranteed liquidity tsunami would begin
“There is no means of avoiding the final collapse of a boom brought about by credit expansion. The alternative is only whether the crisis should come sooner as the result of a voluntary abandonment of further credit expansion, or later as a final and total catastrophe of the currency system involved.”
-Ludwig Von Mises
https://www.abc.net.au/news/2023-01-25/inflation-cpi-december-quarter-20...
7.8% oof!
"The biggest price rises for households over the last three months of last year were for domestic holiday travel and accommodation (up 13.3 per cent), electricity (up 8.6 per cent) and international travel (up 7.6 per cent)."
velocityjohnno wrote:https://www.abc.net.au/news/2023-01-25/inflation-cpi-december-quarter-20...
7.8% oof!
"The biggest price rises for households over the last three months of last year were for domestic holiday travel and accommodation (up 13.3 per cent), electricity (up 8.6 per cent) and international travel (up 7.6 per cent)."
And other than electricity all of the above will be the first to feel the pitch once the recession takes hold. Idiots for pushing up prices as it’s a short term blindness IMO.
I still dont get it .....foods up 8 to 35% ,fuels up in fact everything you buy now costs more so its a bit tough that this all adds up to higher inflation.........and whammo interest rates go up adding to more inflation.......
Yeah as someone with very little knowledge of economics, to me it seems the price increases are primarily supply driven (lack there of), so bumping up interest rates seems to be quite a painful weapon to use to combat inflation. As in, we'll only start to see inflation ease when people are so broken financially they can't spend anymore, problem is there's so much wealth in the country, that some people will easily weather the interest rate rises and maintain a steady demand for high priced goods.
Ugh.
Is currently a fair bit of research and commentary taking place on the degree to which the current inflation episode is demand vs supply driven.
The Federal Reserve Bank of San Francisco has been publishing some good commentary: Supply- and Demand-Driven PCE Inflation.
Core PCE breakdown:
Headline PCE breakdown:
(PCE = personal consumption expenditures, one among a number of inflation measures.)
It's roughly 50-50 demand vs supply inflation, possibly slightly higher contribution from supply constraints.
I think the basic belief is that when inflation was still expected to be transitory, it was largely demand driven from the covid stimulus, with only small supply side influence from transport and shipping constraints etc. But then Russia invaded Ukraine, causing a large energy related supply side shock, with still a large demand driven component.
Some more commentary from the New York Fed: How Much Did Supply Constraints Boost U.S. Inflation?
Interesting, thanks gsco.
One issue to me, is that if we're experiencing demand driven inflation, why wouldnt rising interest rates have the reverse effect- as in, everyone now needs more money to service their debts, and as supply is so low, the supply chain just increases prices to cover what they need.
Gsco, I wouldn’t touch those supply/demand driven inflation statistics with a barge pole.
At a guess I would say it is 99% confected rubbish. Probably being generous there.
Stok, it would require a thesis to answer that one. So many variables at play, and at the root of it all is the psychology of crowds.
It’s a chaotic system, small changes in variables in the right circumstances can lead to large differences in outcomes.
If you’re looking to die of boredom you can read more academic papers on the theories of inflation than you have time left on this earth. And you’ll still be none the wiser.
gsco wrote:Is currently a fair bit of research and commentary taking place on the degree to which the current inflation episode is demand vs supply driven.
The Federal Reserve Bank of San Francisco has been publishing some good commentary: Supply- and Demand-Driven PCE Inflation.
Core PCE breakdown:
Headline PCE breakdown:
(PCE = personal consumption expenditures, one among a number of inflation measures.)
It's roughly 50-50 demand vs supply inflation, possibly slightly higher contribution from supply constraints.
I think the basic belief is that when inflation was still expected to be transitory, it was largely demand driven from the covid stimulus, with only small supply side influence from transport and shipping constraints etc. But then Russia invaded Ukraine, causing a large energy related supply side shock, with still a large demand driven component.
Some more commentary from the New York Fed: How Much Did Supply Constraints Boost U.S. Inflation?
What’s ambiguous inflation? Cause to me, looking at the charts it was the real driver of the early inflation post covid.
I think it means that they couldn’t really precisely classify it as demand driven or supply side.
And I get your point batfink that these measures in any case are imprecise.
Overall, a bigger picture view of what has happened may be:
Since the GFC (well going all the way back to the tech/dotcom bubble) governments injected a lot of money into the economy over a long time via ultra low interest rates and quantitative easing. Then enter the covid stimulus. This translates into asset price bubbles and a lot of pent up or latent demand and hence potential inflation in the economy.
It’s like batfink interestingly said of the economy being an unstable, possibly chaotic, dynamical system,, meaning a small change in conditions may tend to make it spiral out of control.
This pent up demand increased its instability and it only needed a small nudge or shock to set it off into an inflation spiral - enter Russia in Ukraine.
So the point is the current scenario is one of a lot of latent demand and hence potential inflation at tipping point and getting set off by a supply side shock.
Hence the need for tight monetary policy to rein back in that demand driven aspect of the inflation.
And of course other measures are needed, and are being used (although we hear less about them), to address the supply side issues.
So are we having bets on where the RBA is gonna go in Feb? My money is on 50 basis points.
25 in Feb.
25 in May.
Then hold.
Agree Feb will go up, I'm thinking 25. I think the RBA will hold, over 1 in 5 mortgages will see rates double this year.
"Most of the fixed-rate loans taken out in 2020 and 2021 were struck at mortgage rates of between 1.75 and 2.25 per cent. As more than one in five Aussie home loans have their fixed rates switch to variable rate by the end of 2023, the interest rates paid by these borrowers will more than double to 5-6 per cent."
https://www.afr.com/wealth/personal-finance/interest-rate-shock-just-aro....
I predict retail spending will contract significantly when that happens.
channel-bottom wrote:I predict retail spending will contract significantly when that happens.
Probably, but were such a well off country.
There's so many people without mortgage pressure, and just heaps of disposable income.
These rate rises seem to only really be effecting a small portion of people, quite dramatically. That small portion were not 'big spenders', but were already frugally saving up for (huge) deposits through 2016 onwards, and have since been planning their budgets to live with their new mortgages. Can't see this group of people being the saviour to Australia, when it comes to reigning in consumer spending, to bring inflation under control.
How do you encourage the already very well off, mortgage free (or say, mortgage size from back when houses were undr 750K), to stop feeding demand?
Anyway....
Exactly Stok.
Well I'm not sure what's being argued here.
Are you arguing that monetary policy is not an effective tool to manage inflation (and unemployment, economic growth, etc)?
Or are you arguing that monetary policy is not a fair tool, in that it unfairly or disproportionately targets or burdens certain people (possibly the worse off in society) compared to others.
Or are you arguing both?
I noticed the other day that some left progressives in the US and their associated think tanks, I think backed by what they're calling critical race theory, are trying to argue that monetary policy is actually racist and sexist and reinforces white male supremacy and privilege.
"Or are you arguing both?"
I think so, from a very primitive perspective.
I agree with you freeride76. These kind of inflationary measures are inherently political and easily driven by ideologies. There's no escaping that interest rate rises unfairly burden lower-income families and the poor, and have little impact and even big benefits for those with the most discretionary income to spare. Even for renters, rate increases are seen as a trigger to charge higher rents even though low interest rates never see rents decrease in the same way.
It's an interesting point that made in that Asset Economy book I mentioned was that while Central Banks across the world have made deliberate decisions to try to influence consumer price inflation and wage growth, mostly since the start of the 90s, the out of control inflation of asset prices (namely housing) has never been a key target of Central Banks. In fact a lot of their decisions have the outcome of increasing the speed at which asset prices increase.
As of about six months ago, The Australia Institute was arguing the following :
"Australia’s current outbreak of inflation isn’t caused by surging consumer demand or surging business investment; it’s being caused by worldwide increases in the price of energy and a wide range of consumer goods. Economists call this cost-push inflation and, importantly, hitting the Australian interest rate brakes will not do much to lower our inflation when there is a global freight train pushing it along."
So if that's true, then most of what we're being told in the press is inaccurate.
And it also means, in theory, that the RBA can raise interest rates till the cows come home and it will make little difference to inflation.
https://australiainstitute.org.au/post/why-the-rbas-interest-rates-rise-...
Stok wrote:How do you encourage the already very well off, mortgage free (or say, mortgage size from back when houses were undr 750K), to stop feeding demand?
Huge stockmarket crash would throw a nice big spanner into that segment. "Wealth effect" would go backwards. No idea if it will do this after falling so much last year.
Restricting the ease of adding these demand items to the home loan would do similar.
Andy from what I can see the Fed's rises (plus other stuff like USGov draining the SPR) has taken the energy prices down. Far more dramatic in gas. Fed's rises have also stopped inflationary spike in soft commodities (ie, what people have to eat, especially important in lower income nations). So my take on that is Fed has reduced inflation with the tightening of credit to an extent, and would be looking at those and almost thinking "mission accomplished" - unless they all start ticking up again in which case it's whack-a-mole time. Also unless the rising USD of last year gave the rest of the world an extra wedgie and decided to do that again, which it doesn't seem to be so far this year. Again that's 2c, not financial advice.
gsco wrote:Well I'm not sure what's being argued here.
Are you arguing that monetary policy is not an effective tool to manage inflation (and unemployment, economic growth, etc)?
Or are you arguing that monetary policy is not a fair tool, in that it unfairly or disproportionately targets or burdens certain people (possibly the worse off in society) compared to others.
Or are you arguing both?
I noticed the other day that some left progressives in the US and their associated think tanks, I think backed by what they're calling critical race theory, are trying to argue that monetary policy is actually racist and sexist and reinforces white male supremacy and privilege.
Yeah, kind of both, from a layman's point of view.
Just seems right now it's a blunt, poorly aimed weapon.
I can't help but see past the direction we're heading in as a scoiety - no one wants to work manually anymore, nor can they afford to. This is just causing a bottom up supply chain issue, in terms of cost and availability. To me this seems to be the strongest driver of inflation.
Housing prices at bubble levels are one thing, but we're simply a highly sought after country to live in, with most housing within short distances of inner CBD's and with great access to amenity and nature. There's not, viable, lower cost housing, because any lower cost housing is in a dead end town in the middle of nowhere. Apartment living is generally low quality and not of much interest to the majority of buyers.
Point is - I think we'll just see rising rates topple over a few people, and barely scratch the surface of the actual reasons for inflation. I also can't see them bringing housing back to affordable levels, becuase no young people will be able to afford to service the mortgages. And as soon as rates begin to fall again, there'll be plenty of well off crew ready to snap up the premium properties once they begin to re-enter the market.
@VJ - yes, a stock market crash would disrupt things, but again I don't see rates being the cause of this.
In the last 2 months, I spent time in SA, VIC, and NSW. And I can see people spending big in all the areas I visited. Yes, it's summer, Christmas but still...Cafes and restaurants are packed. The shops are full. Even after Christmas shops remained full. Melbourne CBD surprised me the most, the place is packed with people. All the commercial retail space seemed occupied. And I can't believe how many apartments they built (and still building) in the CBD. Melbourne apartment market is huge and is probably a massive benefactor of policies like negative gearing. I stopped in front of one real estate agency to check the prices in one of the towers. Rentals actually looked reasonable, around $400-$500+ but selling prices were all well in the 7 figures. So, big losses for investors who are betting on the negative gearing to get some funds back.
Inflation-wise, I'm struggling to see the results of higher interest rates. From what I'm observing demand is still very strong.
Could argue that rates haven’t gone far enough yet to have the desired effect - especially as a lot of low rate fixed mortgages are still yet to feel the pain. And talk of pivoting in the same breath as we will see more increases strikes me as ludicrous. Are they thinking we’ll snap inflation and immediately need to stimulate the economy by dropping rates? The only thing that would trigger that is a cataclysmic financial event (which is not implausible given current leverage and denial behaviour). If everyone continues to behave like the higher rate regime is gonna be a 6 month pain before it all becomes easy again, then that’s exactly what won’t happen. High rates may prove to be as ‘transitory’ as inflation was supposed to be.
Agree Flollo, and with no major stock market correction (ASX still well above 5 yr avs) and a pretty piss ant housing correction there's no widespread diminishment in wealth effect and thus overall aggregate demand.
Not to mention insane terms of trade due to commodity and ag prices/volumes.
These interest rate rises are just tinkering at the margins.
And this is all as immigration rates are about to hit record highs.
Those people need to be sheltered, fed, transported etc etc = demand for goods and services.
flollo wrote:In the last 2 months, I spent time in SA, VIC, and NSW. And I can see people spending big in all the areas I visited. Yes, it's summer, Christmas but still...Cafes and restaurants are packed. The shops are full. Even after Christmas shops remained full. Melbourne CBD surprised me the most, the place is packed with people. All the commercial retail space seemed occupied. And I can't believe how many apartments they built (and still building) in the CBD. Melbourne apartment market is huge and is probably a massive benefactor of policies like negative gearing. I stopped in front of one real estate agency to check the prices in one of the towers. Rentals actually looked reasonable, around $400-$500+ but selling prices were all well in the 7 figures. So, big losses for investors who are betting on the negative gearing to get some funds back.
Inflation-wise, I'm struggling to see the results of higher interest rates. From what I'm observing demand is still very strong.
Only 30% or so have a mortgage, and the percentage of those with big ones and about to hit the cliff wouldn’t be spending, it’s the other, 70% or more.
"It was not that the inflation print was worse than the RBA expected. It was actually slightly better at the headline rate:
What will spook the bank is how broad-based the price rises. The Trimmed Mean was 6.9% versus the 6.5% expected and December monthly inflation erased nearly any sense of a peak. "
https://www.macrobusiness.com.au/2023/01/australian-recession-takes-cent...
FWIW, been on the west coast and the amount of 100K to 200K Covid ARBmobiles parked up to enjoy Australia day on the beach in the sun says no recession - as does the entire east coast.
Did see rellies who are in the mortgage belt in Perth's southern corridor down near Rocko, tales from the schoolyard about kids turning up with nothing in their lunchbox, lots of working people doing it tough, every dollar counts. When we were last in the area during mining boom phase 1, same people were hooning past my old jalopy in new SS utes towing jetskis...
House prices - going to go up , down or sideways ?
Opinions and anecdotal stories if you could.
Cheers