Play the Game and You Might Get Rich

I’m beginning to think Australia is just one giant game of Monopoly…

Pass GO every fortnight or month, depending upon your employer, and receive $200.

Try to buy up every Australian property in sight…even the cheap disgusting ones.

Speculate on which side of the board you’d like to control. I tend to go for the red and yellow properties myself.

Then, build as many houses and hotels as you can, spurring on the construction industry and jobs.

And I’m not the only one who seems to think so. The ‘experts’ over at the Reserve Bank of Australia (RBA) — the gurus who control the price of money — seem to think so too.

It’s why Governor Philip Lowe said lower interest rates could be on the cards. Lower rates might stimulate spending, assets purchases and construction jobs.

But the game Lowe is playing might end in disaster for us Aussies…

The property pile in: round two

I was wrong!

Yesterday, I told you quantitative easing (QE) was over. QE is when central banks enter the bond market and start buying by the billions.

They buy these assets with free money, mind you, they can create it from nothing.

The aim is to shower money over bond holders, who will hopefully spend it in the economy. Buying bonds also has the added benefit of increasing reserve assets within the banking system.

You know…the just-in-case assets. Assets that hold up all the loans and credit created out of thin air.

And what happens when reserve assets increase? Banks can create even more unbacked trust paper, diluting cash holders of their wealth further.

Like I said, dear reader, I was wrong. QE is not over. Not in the US, at least. They’re just going to call it something different so no one complains.

Bloomberg reports:

As soon as next year, analysts say the Fed will resume large-scale buying of debt securities — this time just U.S. Treasuries — in amounts that may ultimately exceed its crisis-era purchases. According to an estimate by Wells Fargo & Co., the central bank’s balance sheet will rise past its historic peak as it adds over $2 trillion to its Treasury debt holdings in the next decade.

Of course, it won’t be called QE, which President Donald Trump has urged the Fed to restart. Rather than trying to drive down long-term interest rates to boost growth, the purchases are intended to replace the Fed’s mortgage-bond holdings gradually as they mature and to keep ample reserves in the banking system. But the effect, some say, will nevertheless be largely the same.

Money Morning

Source: Bloomberg
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And what happens with these newly purchased reserves?

The US banking system can try to grow by pumping even more debt into the system. More debt for growth’s sake.

The RBA might look to do the same.

OK, maybe they’re not going to purchase more than US$4 trillion worth of government bonds. But the idea of lowering rates would pump more credit into the system, forcing Aussies to have even more debt over their heads.

Oh and did you hear the recent decision from banking regulator, APRA?

Apparently, their strict serviceability hurdle of 7.25% has done its job. This was the rate at which banks would assess homebuyers for new loans.

It acted as a buffer. It made sure borrowers could comfortably afford an advertised 4% rate (still a common rate today).

Yet apparently, that buffer has served its purpose, according to APRA. Maybe they just put a wet finger in the air and could tell it was enough.

I wouldn’t be surprised if that’s how it went down…

The interest rate “floor” was introduced in late 2014 in an attempt to contain soaring house prices and surging housing investor loan growth. It has required banks to test prospective borrowers against the higher of either an interest rate of 7 per cent, or a 2 per cent “buffer” over the loan’s actual interest rate,The Sydney Morning Herald writes.

APRA proposed removing the guidance that banks use an interest rate floor of 7 per cent, saying it would allow banks to set their own minimum assessment rates.

“With interest rates at record lows, and likely to remain at historically low levels for some time, the gap between the 7 per cent floor and actual rates paid has become quite wide in some cases — possibly unnecessarily so,” chairman Wayne Byres said.

Of course, a buffer is still required. As you saw above, instead of a 7.25% assessment rate, most borrowers might only be tested at a 6.5% rate (4% plus a 2.5% buffer).

Such a move doesn’t help existing homebuyers, who followed prices up in 2017 and are now leveraged up to the hilt.

What it does as we sit here with record low interest rates is again drive Aussies into the property market. And what good does this do for the economy?

A property transaction between two people adds nothing for GDP. No new good or service is created. Few new jobs are created, assuming the property is move in ready.

All that happens is one party pays more for a fixed asset than another.

And as long as the banks are willing to lend, then prices will again ratchet up to fund that dream home purchase.

And now…the RBA is maybe going to cut interest rates? And for what…because inflation isn’t destroying cash fast enough?

May as well play the game

When it comes to the economy, central bankers have blinders on.

They have a blunt tool: interest rates.

And they only want to see two numbers…inflation and unemployment.

The goal is to have a healthy balance. Unemployment needs to be low…but not too low. If it’s too low, then inflation tends to rise much higher. And no one wants that.

But inflation can’t be too low either…for some reason. The RBA likes to erode your wealth over time. They are so scared of the Aussie economy reverting that they’re willing to pump far more money into the system than is needed.

For the moment, job numbers aren’t looking so good. Bloomberg cited Lowe during a speech in Brisbane:

The labour market has surprised on the upside over recent times, and it could do so again…While we can’t rule out this possibility, the recent flow of data makes it seem less likelyA lower cash rate would support employment growth and bring forward the time when inflation is consistent with the target…Given this assessment, at our meeting in two weeks’ time, we will consider the case for lower interest rates.

But are low rates really going to support employment? Or is it just going pump more dollars back into property, putting more Aussies in debt?

You see, the problem isn’t rates, but debt.

Easy credit and good times have encouraged bidding wars for a fixed amount of goods (inner city properties). And these bidding wars are waged on debt.

The banks are willing to lend, and the borrowers are willing to spend. But then what happens? Borrowers are left with hundreds of thousands to pay off in principle, sometimes millions. And this doesn’t even include interest!

No, lower rates will do nothing. People don’t want to borrow. They don’t want to spend. They want to fix their own balance sheets and remove a whole lot of debt banks helped them accumulate.

And what’s the RBA’s answer to this…‘let’s think about lowering interest rates so we can fuel growth with even more debt’.

But you have to play the game, right…even if it is rigged.

The RBA is going to look at inflation and unemployment to make their rate decisions. They’re going to continue pumping cash into the system, pumping up asset prices whether you like it or not.

Might as well play the game and buy some assets then.

Just don’t use a lot of debt…

You friend,

Harje Ronngard,
Editor, Money Morning


Money Morning is Australia’s most outspoken financial news service. Your Money Morning editorial team are not afraid to tell it like it is. From calling out politicians to taking on the housing industry, our aim is to cut through the hype and BS to help you make sense of the stories that make a difference to your wealth. Whether you agree with us or not, you’ll find our common-sense, thought provoking arguments well worth a read. Money Morning Australia is published by Port Phillip Publishing, an independent financial publisher based in Melbourne, Australia. As an Australian financial services license holder we are subject to the regulations and laws of Corporations Act and Financial Services Act.


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