The reality of a low interest rate, high house price world

Another month, another rise in average Australian capital city housing prices, up half a per cent in October, 2.7 per cent for the quarter, 7.5 per cent for the year. That’s the reality of living in a low inflation, low interest rate world.
In the big ticket cities of Sydney and Melbourne, the CoreLogic home value index scored monthly rises of 0.6 and 0.8 per cent respectively, with quarterly rises of 2.9 and 4.6 per cent, and 10.6 and 9.1 per cent for the year.
For all the talk of supply and demand and zoning and population growth and foreigners and investors and negative gearing and discounted capital gains tax, the biggest single factor in pushing prices higher over the past year has been increased borrowing power – lower interest rates.
That’s the unpleasant reality the Reserve Bank board has to deal with at Tuesday’s meeting. Monetary policy has reached the point of providing stuff-all stimulus for anything other than increasing the bidding power of would-be buyers at housing auctions.
And thus, despite core inflation weakening a touch more in the September quarter, the RBA is expected to leave rates unchanged on Tuesday.
On Friday, we’ll get a full guide to the RBA’s thinking in its quarterly statement on monetary policy. Odds are that it will show little change in the bank’s inflation outlook as outlined by governor Philip Lowe – a slow rise over the next couple of years to the desired minimum level of 2 per cent.
While 21 out of 27 economists polled by Bloomberg are tipping no rate change on Tuesday, a clear majority of them still expect one or two more trimmings by the June quarter. Nobody is tipping a rate rise. The consensus is that we are stuck in a low inflation world for as far as the eye can see.
If it’s a choice between the RBA’s track record on inflation forecasts or that of the private sector, I’ll go with the RBA. That still means nothing happening with our rates as the bank is hoping the Federal Reserve will lift US rates and thus give us a relative rate cut.
Most of us are still coming to terms with our expectations of low inflation.
It’s implicit in the acceptance of low wage rises, along with the reality of weak bargaining power thanks to excess capacity. It’s yet to get through to some of the shock jocks, politicians and tabloids that rail about the cost of living, but we’re getting there. It’s human nature to remember the jump in the utility charge and overlook how much cheaper TVs and clothing are.
The RBA doesn’t want us to get used to it, fears low inflation expectations becoming ingrained. Too bad. It’s happening.
And the willingness to borrow more and more money to buy housing is the obvious outcome of that. With receding fear of rates rising again, that million-dollar mortgage isn’t so scary. Hence our record household debt.
The record household debt in turn means that, when the economy is growing fast enough to warrant an interest rate rise, the RBA will only have to feather the brakes to have impact. Monetary policy has no traction going downhill from here, but it will grip fast should it turn up.
If current high housing approvals continue, supply will eventually reach a better equilibrium with demand, but so far that’s happening only in a few pockets of overbuilding and where the end of the resources construction boom has bitten.
In Sydney, a city with geographical limits and underwritten by an infrastructure investment boom, high borrowing power is still bidding.

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