The threat to property ownership

Since last week’s article, the inevitable has happened: interest rates have plunged. Given the IMF’s predictions of imminent recession, this means we are a step closer to negative interest rates. If you’ve read so far, you shouldn’t be surprised. Remember, the IMF goal is negative interest rates. Central banks carry out these objectives. What should be a little more surprising, though, is the media’s reaction. But it’s no shock, really, that they’re playing it down. They’re talking up the dead-cat bounce as housing prices have risen in Sydney, Melbourne, and Brisbane. They will peak again for a short time, perhaps. The reaction of people like Innes Willox of the Australian Industry Group is a little more surprising, though. He considers negative interest rates “unthinkable.” Other presenters and economists have used the same term. We’re not sure whether “unthinkable” means impossible, or too unpleasant to contemplate. Either way, the eventuality is not publicly discussed.   

If we look at this trend in interest rates as deliberate, and not just a symptom of the dumb causal mechanics of economics, we will see the future clearly. The problem the IMF currently has is that economics is not a science. People might pretend it is, but it’s not. There is a ghost in the machine. It’s called human behaviour. Economics does not operate independently of human beings. The IMF does not know how people will react when the economic emergency hits. There’s too much choice involved.

I’ll reiterate: the best way to implement unprecedented monetary policy such as this is to eliminate choice. That is, eliminate cash. When cash is considered “black market”, you’ll begin to understand the depth of the coercion to spend. You will be arrested for using it.

What does all this have to do with property ownership in Australia? Everything. Property ownership is intimately linked to the health of an economy. When moth and rust have consumed everything else, the property remains. During the Great Depression, a small percentage of the population became wealthy because properties were acquired from those who could no longer afford to sustain them and foreclosed.

What you might be surprised to hear is that, since GFC 1.0, a lot of our foreign debt is being paid for by households, not banks. Increased house prices are accompanied by higher household debt. When you have high household debt and slow growth of disposable income, you will always have concerns about the cost of servicing those debts, which will affect consumption growth overall, mainly in mid-to-low income groups.  

Australia’s debt bubble is coinciding with a growing international bubble. On September 30, the Reserve Bank revealed that, in August, Annualised Credit to Housing (that is, credit for the purchase of Australian housing) plummeted to a new low of 3.1%. The bubble has been pricked and will shrivel. This means the economy will slow.

Next Week: What are the consequences for the Australian economy, and property ownership?