Developed economies across the globe have been clinging to their property markets like a buoy, relying on the fact that housing is an essential commodity of trade and therefore, the most likely to stay afloat when all else is threatening to sink the proverbial financial fleet.
As much of the world continues to teeter on the brink of deflation, central banks right across Europe, Canada and the American Fed, have been forced into what’s essentially a state of ongoing inertia over interest rate policy.
The Reserve Bank of Australia has been banging on about its inability to do anything but leave rates at all time lows for what’s going on years now.
Sitting on the sidelines, Governor Stevens and his pals have been waiting for another ‘ref’ to come barrelling in and take control of what some are insisting is a runaway property sector.
Sure enough, as concerns continue to mount over escalating investor based borrowing, APRA came charging in on their macroprudential steed recently, in a bid to apply the brakes and prevent a local ‘housing bubble’ scenario.
Bigger than the Beatles!
Like most other modern societies, Australia is smack bang in a state of ‘housing bubble’ hysteria that would have to trump the infamous throngs of fainting teenagers who followed The Beatles everywhere.
But what do you do when you’re faced with a dichotomous dilemma? Where one aspect of the economy is going gangbusters, while everything else sort of sits around like the tired, grumpy uncle at a family BBQ griping about how expensive new dentures are these days?
Well, popular opinion has it that perhaps you’re best off dealing with the perceived problems that low interest rates bring, rather than trying to recover from the mistake of raising rates too soon and tipping an economy into deflation.
We’re not alone
This seems to be the thinking across the UK, where the Bank of England hasn’t increased rates since way back in July 2007. Yep! It’s been eight years since our mother country made an upward move on official interest rates.
It’s expected that China’s recent decision to devalue its currency will only cement the Bank of England’s resolve to leave rates at a low 0.50%, with some analysts suggesting a rate rise won’t be forthcoming in the UK until toward the end of 2016.
Elsewhere in Europe, different central banks have attempted to raise rates (particularly across Scandinavia), only to lower them again virtually straight away.
Finally facing its Waterloo?
You might be surprised to know that in Sweden, the official interest rate is into negative territory at -0.35% and now, the housing market in ABBA’s homeland is facing its own Waterloo in the form of a growing property bubble.
But as with most other nations, Sweden’s official monetary policymakers recognise that not only will higher interest rates potentially deflate overall economies, they’ll also create even greater consumer price stress.
Homeowners with mortgages would suddenly face increasing costs, as would consumers with personal debt and big business.
It’s all relative
While most financial boffins believe things will have to look a lot rosier before rates start to rise again, others say we could see a bit of upward movement sooner rather than later.
But what would the Central Banks achieve with a slight increase that made very little difference to mortgage holders anyway? It’s unlikely that a 0.25% or even a 0.50% escalation would deter too many homebuyers and property investors.
Increasing rates would, at this stage, really only be intended to prevent a nasty deflation of different, so-called housing bubbles.
But because rates would have to be increased dramatically to move beyond current historic lows, a few basis points here and there is unlikely to change current perceptions of debt as relatively cheap and therefore, appealing to those who can no longer rely on cash savings to secure their financial future.
The bigger picture problem
So what might the long-term implications be if interest rates continue flatlining indefinitely across the developed world?
Well, there are a couple of big concerns currently being voiced by various factions of the financial services food chain around low interest rates, and they go something like this…
- They force savers to become speculators.
In fairness, there are a lot of savvy investors out there who are using the current climate to their financial advantage. They’re certainly not speculating, but thriving in favourable economic circumstances.
Many punters however, those who would normally be content depositing their money in the bank, have started dabbling in higher risk activities, including bond and equity funds, peer-to-peer lending and crowd funding and of course, real estate.
Experts say this is all well and good while most asset prices keep rising (driven by investors chasing higher returns than they can get on their savings), but a lot of the investments being marketed to unknowing yield chasers can carry significant liquidity risk.
It’s a lot harder to pull your money out of a declining property market for instance, than it is to withdraw it from a bank.
Of course this won’t necessarily be an issue for educated investors who’ve undertaken a thorough asset acquisition process and secured investment grade property, but unfortunately, many have received misguided advice and essentially entered the markets blind.
- It establishes a dangerous status quo
When you look back throughout your own adult life, chances are you remember a time when interest rates weren’t so wonderfully low. Unless you’re a Gen Y or ‘Millennial’.
Some analysts have cautioned that we could see a future generation of complacent, credit loving consumers, overly reliant on what’s considered ‘cheap debt’. They say this is a ‘moral hazard’ that could wreak wider social and economic havoc when rates do eventually rise.
No doubt when the world’s economic cogs start to spin that little bit faster and the financial tidings of various market sectors turn in a new direction, the accompanying change we can anticipate in what’s become a long standing status quo will have a profound ripple effect.
Exactly what the implications might be are unclear. The truth is, living in such unprecedented times of rapid market evolution has made us all, to some degree, into speculators. No one can genuinely state with any certainty what might be around the corner. We all just have to sit tight and see.
About the Author
Since 2008, David Thomas has built a business aimed at servicing the needs of property investors, owner occupiers and small business owners. David is recognised as one of the top 10 independent mortgage brokerages in the country, David and his team have settled almost billions of dollars worth of residential and investment loans over the last decade.
Known for his straightforward, relatable style, David believes by educating people about property funding; they fare better in the market. By sharing his expertise openly, some of the people he educates will likely become his clients. It's a win-win approach.
David Thomas is a credit representative (Representative Number 506153) of BLSSA Pty Ltd, ACN 117 651 760 (Australian Credit Licence 391237).