Not So Fast!

ABS Inflation data out today shows a big fat zero: we have nil inflation, at least for this quarter.

The consequences for interest rates are profound. Mortgage rates may seem reasonable at 6 to 7 per cent.  In practice they are agony. A real interest rate of 6 per cent is a significant transfer of wealth to lenders and spills borrower blood.

The World Bank’s Real Interest Rate table (which measures the lending interest rate adjusted for inflation as measured by the GDP deflator) shows real rates in Australia were 1 per cent in 2009, vastly different to today. The 2010 figures for our peers are: Canada -0.3, UK -2.4, USA 2.4.  No wonder they want to buy Aussie bonds.

Price stability may seem worthy and honourable, but the RBA has an inflation target of 2-3 per cent for good reason: it reduces the friction in economic activity with a drop of lubricant.  Australian activity is now on dry axles and the wheel bearings are running red hot.

One quarter’s figures are not a country’s destiny, but inflation has been trending down for some time.  This prompted the RBA’s two 0.25 per cent cuts in November and December.

The politico-housing complex will be out claiming big interest rate cuts are imminent and will reignite house prices FOR SURE!  Nothing could be further from the truth.

The banks are already decoupling their interest charges from the RBA’s guidance.  Their very big overseas funding requirement is getting more expensive, not cheaper. If the RBA cuts hard, the banks will not follow.

We have severely unaffordable land prices, gross housing oversupply and poor employment prospects in manufacturing, retail, finance and construction.  High real interest rates will be the final blow that prompts the heavily geared to tap the mat.

The good work by consumers to pay off debt is no longer assisted by inflation.  They will increase their efforts and put a further crimp on aggregate demand.

These are not the conditions for house price rises.  Don’t Buy Now!

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https://prosper.org.au/2012/01/25/no-so-fast/