RBA Governor Glenn Stevens Reveals Intention to Raise Interest Rates to Normal Levels

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Well you have to give RBA governor Glenn Stevens credit (no pun intended). He is no Alan Greenspan. He got on the idiot box yesterday and told anyone who would listen that speculating on house prices is crazy. Specifically he said that, “I think it is a mistake to assume that a riskless, easy guaranteed way to prosperity is just to be leveraged up into property. It isn’t going to be that easy.”

There are two reasons why it’s not going to be easy, although we don’t speak for the governor. The first is that he pretty clearly telegraphed his intention to raise interest rates to what the RBA considers more “normal” levels. “We can’t assume rates will remain low,” he told Seven. “The relationship between the cash rate and what they pay for mortgages or small business loans is what we think is useful.”

Useful for what? For predicting where mortgage rates are headed. And that would be higher if the relationship between the cash rate and mortgage rates persists. “If you look back when the economy was stable and we had low inflation, the cash rate, that is the rate we decide on, the rate has been in the average of 5 per cent.”

So if Stevens thinks the economy is pretty normal now with low inflation, then you’d expect the cash rate to rise from 4% now to at least 5% by the end of the year, beginning as soon as April 6th when the RBA meets again to rig the price of money (we mistakenly said they meet today in yesterday’s edition.) In February, Stevens said there was a good chance rates were headed up in the first half of this year.

When the man who sets interest rates tells you that you’re rising, it would be wise to at least hear him out. Whether you take him at his word is up to you. But if you’re making financial plans – say, like you’re going to buy a house and are trying to figure out if you can stand a few extra points rise in the interest rate – the man has told you what is going to happen.

Of course there is the chance, mentioned last week, that bank interest rates have decoupled from the cash rate. This was the possibility raised by NAB execs when they said Australia’s dependence on wholesale borrowing from overseas meant that the foreign cost of capital would determine the local cost of capital, not the RBA’s price for money. We’ll see about that.

In the meantime, Stevens has also said the RBA is watching whether or not “the role of foreign purchases [in the Australian housing market] is an important one.” We’d submit that it is. This is the second reason it won’t be “easy” for Australians to get risklessly rich in leveraged property investments. They’ll be outbid!

It’s obvious now that the Rudd government has opened the Australian property market wide open to overseas investors in order to keep the housing market bubbling along. The stamp-rich gorging state governments have not objected. The end result is a huge spike in prices that locks out Australians hoping to enter the market at the bottom end of the property ladder.

Some people might call this the government selling-out the interests of its citizens in order to prevent the bubble from popping on their watch. In fact, we just muttered that aloud to ourselves. And we’re not even Australian. But as an American, we’ve seen these desperate attempts to keep the good times rolling before. It always costs the little guy the most.

To be fair, there isn’t much data yet on how much of last year’s national price surge was fuelled by foreign buying. And let’s face it. By “foreign,” most of the media accounts mean Chinese. And you know, from a Chinese perspective, buying real Australian houses with money not subject to Australian interest rates is probably a great investment.

But whether it’s such a good thing for Australians depends on who you ask. If you’re a Baby Boomer with 3.6 investment properties that you’re counting on to fund your comfortable retirement, the influx of cashed-up foreign buyers is just what the doctor ordered. If you’re a first home buyer…well…you’re going to need a bigger grant…or be willing to live in an outer suburb…or rent for the rest of your life.

Can you see now that we have the confluence of two bubbles? The first is Australia’s fevered national pastime of speculating on property. It’s all good as long as it’s making someone – property spruikers or investors – rich. But what if it makes the Chinese rich? And what if the Chinese investment in Australian property is itself a product of China’s massive lending bubble?

As always, all bubbles come back to excessive credit growth. You have to prune away at the flowers these bubbles are decorated with. They make it look pretty, desirable, and natural. But beware!

In a great article we read over the weekend by GMO’s Edward Chancellor we found this quotation from 19th century economist John Mills: “Panics do not destroy capital; they merely reveal the extent to which it has previously been destroyed by its betrayal in hopelessly unproductive works.”

Has Australia over-invested in higher house prices at the expense of other national investment and productive possibilities? Let us know what you think at dr@dailyreckoning.com.au

And if you think we’re making up the idea that China has exported its property bubble to Australia, well, that’s alright. Free thinking is encouraged here at the Daily Reckoning. But according to today’s Wall Street Journal, “China’s banking regulator banned new property loans to 78 companies owned by the central government in an effort to control risks in property credit and curb asset bubbles, which pose a threat to the country’s strong economic recovery.”

Urban property prices rose 11% in February compared to the same time last year. In fact, there’s a way of seeing the performance of the entire commodity sector – and by extension Australian resource stocks – as a function of China’s retreat from the U.S. T-bill market and into tangible asset markets like copper, iron ore, coal, and high-rise flats in Melbourne.

We’re taking these concerns and questions to a meeting in an hour with Diggers and Drillers editor Alex Cowie. Alex sent us a note yesterday that one of his gold stock recommendations has nearly doubled. But he hinted that there are some decisions he’s made regarding the rest of his recommendations. He’ll share those with D&D readers when he’s made them. But tomorrow, I’ll let you know what he thinks about the big picture and the China risks highlighted above.

Until then…

Dan Denning
for The Daily Reckoning Australia

Dan Denning
Dan Denning examines the geopolitical and economic events that can affect your investments domestically. He raises the questions you need to answer, in order to survive financially in these turbulent times.
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48 Comments on "RBA Governor Glenn Stevens Reveals Intention to Raise Interest Rates to Normal Levels"

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Justin
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“If you look back when the economy was stable and we had low inflation, the cash rate, that is the rate we decide on, the rate has been in the average of 5 per cent.” Does RBA Chief Stevens mean the time when the price of gold, oil & most (if not all) other commodities, housing, ASX, etc, etc was on its multi year tear to all time highs? Is that what he means by a ‘stable economy & low inflation’, a loose money inflationary boom? Forget the cash rate, the RBA was raising it the whole period from May… Read more »
Steve
Guest

When the governor says that speculating on house prices is crazy.

You know its going to all come crashing down soon

Adrian
Guest

We all know that members of Central Banks are only good at pointing out bubbles or problems in economies until it is well and truly too late. They have no ability to see bubbles rising and warn before things become too bad.

SIM
Guest

Dan,

Love your site and read it regularly. ONe small point, only 3.7% of personal investors have more than 3 properties. Fully 72.5% of property investors only hold a single property. Note, I don’t say own, because half are paying interest only loans.

It doesn’t change the thrust of the argument one iota, of course.

Biker Pete
Guest
Realist
Guest
To look at this scenario and assume that by raising interest rates we are going to see housing prices fall or crash is dellusional. I am 30 and have been priced out of the market for years, even i can see that nothing will change even if they raise the rates to 17%. According to most of the relevant agencies data, at least 30% of the market going to auction within 20km of the city is to foreign investors. I even have an older friend who lives in Glen Waverley who looks out her window to 2 houses on the… Read more »
Steve
Guest

Bier Pete have you sold any of your properties yet?

Biker Pete
Guest

No, I’m a Bier. :)

Steve
Guest

Still,
The other day you said you were thinking of selling some of them, If thats the case then obviously it must be a bad time for me to buy, hopefully other people in your situation are starting to think the same way as you, that will flood the market
I am also starting to get excited with all these interest rate rises.

Biker Pete
Guest

Steve, it’s _never_ a good time for you to buy. ;)
A good time for me to _sell_, however, is when interest rates reach 10%.
If you go back through my posts, you’ll see that I conjectured I could live quite ‘comfortably’ on the interest… .

Steve
Guest

Steve, it’s _never_ a good time for you to buy.

Why is that???

Biker Pete
Guest

Living at home with parents is what family is all about. As your mum and dad age, you’ll be able to provide not only care, but continual love and support.

It’s also cheaper, but that’s a minor consideration in the big picture.

My Generation (Who!) was much more selfish and uncaring. We fled the nest at the first opportunity. No values of respect at all. Independence was all we thought about. Rock ‘n’ Roll… . As soon as we understood grammar (not sure if I ever _really_ understood her) and punctuation, we were off. Never looked back.

Steve
Guest

Another smart ass remark

Biker Pete
Guest

Deeply shocked, Steven! You thought I was TTP?
Look, I’m giving you an extra star, on your ‘crashing down’ comment.
Now you’re a Five Star General! :)

Biker Pete
Guest

No, it didn’t work, sorry. But I _did_ try… .

Seriously, on the issue of buying now, I don’t think it’s a good idea.
Your current living costs are very low, giving you the ability to save rapidly.

You clearly believe there will be a crash… and when that day comes, you’ll buy a heavily discounted house, close to the ocean or CBD and be glad you didn’t camp out or rush in where angels fear to tread.

Stillgotshoeson
Guest
1) To look at this scenario and assume that by raising interest rates we are going to see housing prices fall or crash is dellusional. 2) I am 30 and have been priced out of the market for years, even i can see that nothing will change even if they raise the rates to 17%. 3) According to most of the relevant agencies data, at least 30% of the market going to auction within 20km of the city is to foreign investors. 4) Housing is now outside of the control of Glenn Steven 5) To think china are not actively… Read more »
Steve
Guest

Good advice I will do just that.

It seems The president of Australia’s peak real estate industry body isnt too happy with the governors sensible remarks HAHAHAHA

http://www.businessday.com.au/business/rbas-housing-comments-stun-real-estate-chief-20100330-raxn.html?comments=11#comments

Biker Pete
Guest

You’ll be out of that little bedroom in just a few months, Steven. Bet you can already taste the tangy sea breeze of Clovelly… .

Steve
Guest

Ohh no I don’t expect Clovelly, I am surprised you would even know where that is being a sandman, because hardly anyone here knows anything about over there its almost like another country wa.

Just an average suburb or even a bit below average suburb (that isnt too bad) would do me fine

Biker Pete
Guest

I crew an S&S34 whenever I’m over there, Steven. We’ve made a lot of trips east, including five weeks’ biking. We have good friends living ‘on the beach’ in Sydney… poor devils. They won’t be happy to learn their homes will be underwater when the Red Revolution comes… .

Your main issue will be being trampled by the Shoes of this world, whose assets will eclipse most competitors. And, at last count, there are lots and lots of Shoes… . :)

Critter61
Guest

I fully welcome our new [s]US[/s] [s]NAFTA[/s] [s]ZIONIST[/s] CHINESE OVERLORDS!

Tony Scott
Guest

Good article. A small point though – the 19th century economist you quoted is John Stuart Mill not John Mills who is an actor. Mind you most economists these days are actors reading from a very bad script.

Realist
Guest
STILLGOTSHOESON : I hear what you are saying but how do we know what portion of the private sale numbers are foreign investment. I would think that they to would be making up a far portion of these sales but (for whatever reasons) the only results we ever get is the weekend auction results. This is a bigger problem than we care to admit or maybe even know, there is a street in Balwyn (inner eastern Melbourne) that was on all the new stations last week as being over 80% owned by foreign investment as if it is something we… Read more »
Realist
Guest
I also need to add: GROWTH FOR THE SAKE OF GROWTH IS A LOOMING DISASTER!! I could explain this to a 10 year old and he understands but the wider adult community can’t seem to grasp the concept as the greed has blinded them from what is the inevitable outcome. By pumping in 100,000’s of immigrants to buy homes and more produce and clothes etc etc just prelongs the crash for another 2, 5, 10 years it does not make it go away. The reality is this nation in it’s current form is unsustainable if it is haevily reliant on… Read more »
Biker Pete
Guest
As a senior who will never, ever receive a cent from an old age pension, or any health or medical benefit, I can point out without accusations of personal gain, that OAPs will quickly drain Australia’s financial services, if immigration slows. As many have noted here, not only do the Baby Boomers represent a very large voting block for the next two decades, most are financially unprepared for retirement. It may be unrealistic to argue that it’s their problem and we should “Let them starve!” when they’ve not only contributed taxes for 40+ years, but will also _change governments_ with… Read more »
Don
Guest

I agree with you Realist but of course as you know the first job of any government is to get re-elected and hang onto power. So they are going to use any means to ensure that house prices remain high or growing rather than let through a significant correction. Although they can’t effect interest rates, they have shown that they can juice the market using the FHOG and now by relaxing foreign ownership rules.

Betting on form means that this will continue and will only be ramped up in the face of any future crisis.

Biker Pete
Guest
Ross
Guest
Shoes, is your MEL inner city Chinese direct property investment evidence based? The sledging of China by both sides of politics on RIO has not been evidenced based as presented in Australian public statements or mainstream media reports. Such sledging must be held to be “recalcitrant” in the face of the intent of the FCPA (Foreign Corrupt Practices Act). We have even had Australian government owned media referring to “baksheesh” as everyday activity in doing business in China and elsewhere (Virginia Trioli – ABC). And there is a defence against facilitation payments available under the FCPA but not on the… Read more »
Ross
Guest

Oh and I forgot a link that might bring some lights on how we are respectfully conducting ourselves in China currently :

http://www.news.com.au/business/more-aussies-charged-with-economic-crimes/story-e6frfm1i-1225847759759

Biker Pete
Guest

Ross: “…property investment evidence based?”

Admit I wondered the same about your DINKs comment a few days back, Ross.
My own guess was upgraders, off the back of median sales… .

wasabu
Guest

Wow. Stevens is really getting emotional lately – anyone notice? Wonder what he knows that we don’t? OR perhaps we do? :)

http://www.theage.com.au/business/god-not-to-blame-for-gfc-stevens-20100331-rcer.html

wasabu
Guest

… same as Bernanke, with his candid, almost bored answers to Congressmen lately. It’s kinda like when you know there’s nothing that can be done and there is that gracious relaxation in acceptance.

Realist
Guest
Quote “that OAPs will quickly drain Australia’s financial services, if immigration slows. As many have noted here, not only do the Baby Boomers represent a very large voting block for the next two decades, most are financially unprepared for retirement. It may be unrealistic to argue that it’s their problem and we should “Let them starve!” when they’ve not only contributed taxes for 40+ years, but will also _change governments_ with their votes… perhaps for the next 25 years… . “End Quote Biker, from someone who turned 30 2 days ago i can tell you that his argument falls on… Read more »
Stillgotshoeson
Guest
Comment by Realist on 31 March 2010: STILLGOTSHOESON : I hear what you are saying but how do we know what portion of the private sale numbers are foreign investment No figures are available, common sense dictates that it would be much lower than the Auction Rate.. Houses for Auction in Melbourne are more common within the 20klms radius of Melbourne CBD with Private Sales making the bulk of house sales outside the 20klms radius.. not to say that Auctions don’t occur outside inner Melbourne and Private Sales don’t occur in inner Melbourne but the ratios swap at around that… Read more »
Stillgotshoeson
Guest

How would you feel about bailing out Gen Y’s who have borrowed amounts they have no real way of paying back long term, would you feel comfortable with paying their mortgages and forego old age care just because they also vote.

When the market does correct this is exactly what the government will do.. just like in the US.. and just like in the US it won’t work here too, won’t stop them though..

Ross
Guest
Biker, without going back to it I hope that I phrased that as my speculation on that sector of Sydney demand because that it was. I have heard from several sources since with anecdotes that support exactly what you are saying. ie: upgraders from apartments and semis who sold to first home owners without having committed to a new mortgage in advance and then buying into houses in middle distance (or outer inner) areas. This is still speculative but at least not just from my own musing. The MEL inner city thing intrigues me. Unless the population growth is a… Read more »
Stillgotshoeson
Guest

“wouldn’t that show in higher rental supply around Port Melbourne”

The general consensus is.. and again no figures.. is that most of the foreign investment properties are not rentals, but accomodation for their children whilst they attend University. They feel capital gain over the period the children are at school….is a better proposition than them renting… in a growing market, will all go pear shaped in a correction.. A smaller portion again are “company” residential properties.. foreign business people reside in them whilst here working.

Biker Pete
Guest

Realist: “What you are saying is we should keep immigration strong to support the health and retirement of people who have p##@ed up 40 years of exponential growth and created a system devoid of any real sustainability.”

Nah, nothing like that… . I’m a realist. I’m saying you face another two decades of these same folk deciding who runs the country… . My generation had very large families… . ;)

Biker Pete
Guest

I agreed with your views on the Chinese situation, Ross.

Interested in your comment: “I wonder if the student population is being captured properly in the figures.”

I know that when foreign ownership was relaxed, the new policies had increased provision for foreign ownership, based on studies in Australia.
I may be wrong, but I thought the ceiling was $500K. It may have been further relaxed since then, of course… .

Ross
Guest

Shoes, I forgot to say that we walked from Docklands to Spencer Street on the weekend and we didn’t see any significant no. of Chinese students (not even on the free City bus from the markets down to Docklands that students often hitch a ride on) but perhaps they are all inside hitting the books!

Greg
Guest
Ross, What do you call a “significant number”? I live in a Melbourne CBD apartment, and when I walk the streets I see thousands of Chinese and Indians. In fact, after 6pm it is rare to see a European. Of course not all of these Chinese and Indians are necessarily students, but they do tend to congregate around the hairdressing and cookery schools, which suggests that a lot of them are. In any case, once they have paid their education industry bribe and received their residency visa, what makes you think that they will be happy to support old white… Read more »
Biker Pete
Guest

Greg: “When the immigration bubble bursts, it will cause much more damage than just a housing price collapse.”

British Columbia (notably Vancouver and Victoria) took similar numbers of Chinese and Indian immigrants non-stop for over three decades. If you believe Sydney and Melbourne prices are high, take a long hard look at realty in BC cities. ;)

Greg: “…what makes you think that they will be happy to support old white people?” _No-one_ will be _happy_ about it, Greg. This is not really a site for _happy_ folk, you know… . :)

Ross
Guest
Greg, my anecdote is real and yet limited. I welcome others. In the earliest days of the student promotions I was involved with those marketing the institutions overseas. In those days the institutions and various coordinators kept an eye on each other and the quality on offer. That appears to have gone out the window later on (it would have been in the Howard years mind you). Info on no.s etc is here http://www.austrade.gov.au/Education/default.aspx VET (+35% growth on Labor’s recent watch) and ELICOS are the most abused as you say. Chinese make up 24% and India 19% of the 600K… Read more »
Stillgotshoeson
Guest
I would like to see Company Taxes and Payroll Taxes reduced for companies LOCATED in Australia.. I would also like to see income taxes reduced and the GST increased.. More money for “the people” to invest/save/spend as they see fit.. Incentive for companies to a) stay or invest here with lower costs, more companies = more jobs = negative effect on tax receipts for lowering taxes in the first place GST is consumption based.. Hewson’s 15% on everything, and removal of a myriad of sales taxes etc was a far better system than the one we have.. The removal of… Read more »
Greg
Guest
Ross, each side of politics has its own reason for pushing excessive immigration rates despite long term and growing opposition from the majority of the population. The money-grubbing Liberals want to reduce the cost of labour to increase corporate profits for their business mates. The power-hungry ALP control freaks want to extend their branch stacking practices to the national level, so that they can get the votes needed to form government and boss everybody around. Immigration does not necessarily create jobs. It can create additional local demand, but it does not necessarily enable the means to support the additional demand.… Read more »
Sambo
Guest

Great posts Realist

wasabu
Guest
….”and that’s what happens when the people forget that paper chits are there to represent real wealth, such as gold and silver, and allow their Governments to disolve the prudence that resulted from the last major disaster.” “What happens then mommy?” “well, dear child, the chits start multiplying at an incredible rate until suddenly, they’re not worth anything any more. But just before that happens, everyone thinks they’re stupendously wealthy and smart for having so many more chits compared to their parents! They go out and spend, drink and celebrate as though they have discovered the fountain of wealth. Everything… Read more »
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