Quantitive Easing and the Property Market

This is a really important insight. Real estate has been a dud investment the last 4 years, with some life only in the past 6 months. My view is that what is happening is a multi-year catch up within a broader inflationary reset that will go to mid-decade, with some shocks along the way.

Remember, the central banks are telling us that there is going to be inflation and that they are not going to interfer with it, on the (mistaken) belief that it will be temporary.

If we zoom out, what we are seeing is a currency debasement rather than a real estate boom. Real estate is still far less exciting than almost all other asset classes right now: crypto, equities, metals, commodities etc. So this is a broad based response to a currency collapse that no one wants to stop.

This is another way of asking: how would real estate in Sydney stop going up when noone wants to stop the currency debasement? Who is going to stop the deficits, or start paying off federal debt, or raise interest rates.

Real estate is at the beginning not the end of a big run up that actually reflects disfunction at the (international) policy level, not anything to do with real estate.

 

I agree with you and the way gov generally reduce stop inflation is by increasing interest rates, generally over a 24 months period with big jumps up. Real Estate in some cities, some locations is at the beginning of a big run up. As you have said before the end will interesting. The currency debasement i.e QE will be stopped once international boarders are open is my best guess

 

I don't think they can stop QE. Governments are addicted to debt, and stimulus - despite it being a sedative on the real economy. It's like a heroin addict voluntarily going cold turkey - they won't do it without a crisis first.

 

Why do you believe they cannot stop QE?

 

It will end in tears....

 

To milk the drugs analogy if I may: for the patient to feel the benefits of the drug, over time the doses need to get bigger and bigger. We've been addicted to stimulus since the Greenspan era and the dot com crash of 2000. Every time there was an asset price fall, the Fed would jump in with stimulus to prop those asset prices up. But once the patient is drugged up, the pain has become too great to withdraw the stimulus.

Everyone wants the drugs but no one wants the hangover.

We saw them try to increase rates in 2018, and they could only go so far before they had to quickly reverse the rate increases, and then lower them even further than the previous lows.

To quote Peter Schiff: endless stimulus is like the hotel california - you can check in but you can't check out. Stimulus does a lot of damage in the meantime, because it prevents price discovery and misalocates resources. Notice how our standard of living has been decreasing in the decades defined by stimulus?

Our standard of living can't increase with interest rates this low, because it prevents savings and capital formation. Topic for another thread methinks.

 

There is no other possible outcome.

 

I agree with alot of it but some key things im noticing and would like to discuss Start another thread for sure!

 

It's a new thread

Looking forward to your response

 

Sorry, Mickyyy what exactly do you want a response to?

 

Your last paragraph said topic for another thread, so I figured you had alot more to say...

Some observations, October 2014 the FED stopped QE in the USA, why cant it happen again?

All governments especially western are all pushing for higher wages and inflation

RBNZ laid out plan of interest rate increases from next year

All economies in particular western are recovering well with inflation to follow

Aussies have 160b in bank accounts (Highest saving rate since 1976) ready to deploy and those funds will chase less goods and services available

As im sure you have read several times many people talking transitory inflation, I think it could go much higher and catch people out.

 

Oh right, why do interest rate suppression reduce living standards.

Okay, i'll try to do this quickly ... because it's late and i'm tired.

1) We need all prices to tell the truth so that we know how scarce something is. Mis-pricing (read: under-pricing) things is how we become wasteful, and capitalism has been very good at letting things find their price and minimising waste.

However, there is no more important price in an economy than the interest rate. When central banks use monetary policy to "stimulate" the economy, they are basically interferring with our ability to understand how plentiful something is.

Take for example the current housing market: the RBA slashes interest rates artificially, which leads to an abundance of credit, and therefore an abundance of buyers - but no corresponding abundance of dwellings.

So by slashing interest rates we have an artificially created mis match between the time preference of buyers (who want things now) and the time preference of sellers (who want to sell later).

Extrapolate this across the economy, and we become over-consumers and under-savers, and we become wasteful. This wastefulness eventually reduces our standard of living because we are squandering resources that we should think are scarce, but are fooled into thinking are abundant due to artificially low interest rates.

Free market pricing of interest rates would solve this, but we don't have this unfortunately.

2) Further to this: lowering interest rates discourages savings. But savings is the first step to wealth creation. Again, in a free market with an honest interest rate, we would have the following steps in the lifecycle of wealth creation:

- under-consumption -> savings -> capital formation -> investing -> dividends/wealth/returns etc.

Lowering interest rates eliminates the incentive to defer any of your consumption. Again, we become wasteful, but without under consumption there can be no savings, and without savings there can be no investment.

Google: "Austrian Business Cycle Theory", which is actually the intellectual underpinnings of what I base almost all of my PC posts on. Understanding ABCT will make you a much better investor.

 

RBA minutes;


The economic recovery in Australia has been stronger than expected and is forecast to continue. This recovery is especially evident in the strong growth in employment, with the unemployment rate falling further to 5.6 per cent in March and the number of people with a job now exceeding the pre-pandemic level.

The Bank's central scenario for GDP growth has been revised up further, with growth of 4¾ per cent expected over 2021 and 3½ per cent over 2022. A pick-up in business investment is expected and household spending will be supported by the strengthening in balance sheets over the past year. The unemployment rate is expected to continue to decline, to be around 5 per cent at the end of this year and around 4½ per cent at the end of 2022.

Despite the strong recovery in economic activity, the recent CPI data confirmed that inflation pressures remain subdued in most parts of the Australian economy. A pick-up in inflation and wages growth is expected, but it is likely to be only gradual and modest. In the central scenario, inflation in underlying terms is expected to be 1½ per cent in 2021 and 2 per cent in mid 2023. In the short term, CPI inflation is expected to rise temporarily to be above 3 per cent in the June quarter because of the reversal of some COVID-19-related price reductions.

Housing markets have strengthened further, with prices rising in all major markets. Housing credit growth has picked up, with strong demand from owner-occupiers, especially first-home buyers. Given the environment of rising housing prices and low interest rates, the Bank will be monitoring trends in housing borrowing carefully and it is important that lending standards are maintained.

At its July meeting, the Board will consider whether to retain the April 2024 bond as the target bond for the 3-year yield target or to shift to the next maturity, the November 2024 bond. The Board is not considering a change to the target of 10 basis points. At the July meeting, the Board will also consider future bond purchases following the completion of the second $100 billion of purchases under the government bond purchase program in September. The Board is prepared to undertake further bond purchases to assist with progress towards the goals of full employment and inflation. The Board places a high priority on a return to full employment.

The date for final drawings under the Term Funding Facility is 30 June 2021. Given that financial markets in Australia are operating well, the Board is not considering a further extension of this facility. Authorised deposit-taking institutions have drawn $100 billion so far and a further $100 billion is currently available. Given the facility provides funding for 3 years, it will continue to support low funding costs in Australia until mid 2024.

The Board is committed to maintaining highly supportive monetary conditions to support a return to full employment in Australia and inflation consistent with the target. It will not increase the cash rate until actual inflation is sustainably within the 2 to 3 per cent target range. For this to occur, the labour market will need to be tight enough to generate wages growth that is materially higher than it is currently. This is unlikely to be until 2024 at the earliest

 

Sorry, one more thing - a crucial component of the theory why low interest rates make us poorer:

Low interest rates create inflation. However, inflation isn't wealth, it is just higher prices. Inflation fools us into consuming our capital when we think we are consuming our yield.

Let me explain:

In a housing boom caused by mis management of the currency as we are seeing now: housing prices rise, and we think we are richer. But we aren't really richer - the house is no different - the money has been debased, so we think our house has gone up in value.

We are then fooled into consuming against the value of our house (think of a redraw). However, are are actually consuming the capital, and making ourselves poorer.

We have been fooled by inflation to cut down the tree when we think we are just picking off the fruit.

Hope this makes sense. It's important.

 

Ah the CP-lie.

Inflation is the creation of new currency units (the expansion of the money supply), not the rise in prices. Inflation leads to higher prices, but is not itself the process of prices going up and down.

We have an economy where house prices are rising by 20% per year and are simultaneously being told there is no inflation. CPI just doesn't measure the things we buy.

 

Interested to hear people theories on what the catalyst will be and what it would look like. E.g. Will we have a "recession we had to have" or.....? I wouldn't be surprised if most countries continue to kick the can down the road for quite a long time. It will just create a large difference between those that own assets and those that don't. Perhaps there will be significant tax reform to manage the inequality. Who knows how this will play out but I guess the US will be a key player as always.

 

I suspect domestc covid recovery will play a broader role for the 18months. This will impact elections, the economy and inflation targets by the RBA (eg housing)

CPI is a basket of 11 goods and services. The basket is weighted for each and the average weight can vary with changes in the economy. Its like an average of many baskets of average-averages consumed by average groups of people who also vary. Its a ******** statistic. Just a index. Housing is a element (13% ?) and this is in itself a index of rent and ownership and of the ownership a huge % of that is unchanged eg includes 80 year olds who have lived in the same home for 40 years and first home buyers who will have very different person costs but this is adjusted for the total population. This all smooths the rents and the mortgage ones. People look at housing prices rising 20% and expect a massive CPI effect. Very few homes have changed hands as a % of all housing. The CPI housing element dilutes it for the bulk of people with existing ownership and a small % is impacted by price rises. CPI is not really a real reflection of true prices since there is no such thing as the mythical person who consumes that basket. Its a statistical "mean" comapred to the same one last quarter, not a measure per individual. And many groups dont consume all elements eg retirees who own their own home, well people v sick people, those with and without kids, education costs etc. And its determined by population centres and smoothed to reflect the whole country. eg Perth food up 1.1% v Sydney, Melb, Brisbane each up 0.3% Sydney Housing down 0.6% (try telling a bidder at auction that one !!)

The true measure of CPI is the change in that basket of prices Consumer Price Index, Australia methodology, March 2021
It is just an index. It doesnt truly measure actual price change specific to specific persons. Its like saying unemployment rates fail since I know a unemployed person. He is 100% unemployed not 5.1%. Oh that right I also know loads of others who are employed. And it doesnt count under employment.

 

This is why property is great

You take advantage of the foolishness of central banks

 

Hi Paul,

Good post. My point is more that house prices not being in the CPI is precisely the problem, and what makes CPI un-usable as a proxy for cost of living.

My point about house prices going up at 20% and CPI not capturing it:- is more that we have defined inflation incorrectly to be if prices are going up or down. Inflation is actually a process - the process of central banks expanding or contracting the money supply. Higher prices is a result of inflation.

Because we have incorrectly defined inflation, it has become impossible to fight it. We are fighting higher prices, when all we need to do is slow down the creation of artificial credit.

I would add, that the CPI understating "inflation" is not an accident - it is on purpose. It understates inflation so that the RBA and the FED can keep interest rates lower than they ought to be, and then claim that they are following the data.

A real inflation measure would require higher interest rates and they don't want that.

Coming back to real estate as this is a real estate blog: i have joked in the past that "real estate comes with a central bank guarantee". It is obviously tongue in cheek, but this is the reason:- CPI as a measure deliberately and persistently under reports inflation. This allows central banks to keep interest rates permanently stimulatory. Good for real estate.

 

Its true that housing booms dont make society wealthier, but it does make some people wealthier. bubbles transfer wealth which is why its an insidious policy for our govts to stimulate them. Although even the beneficiaries of the wealth transfer are not as wealthy as they think as its hard to get decent low risk yield across any asset now so you need more and more "wealth" to generate a liveable income for retirement.