This is disconcerting to the people who watch numbers all day. Financial markets are pricing in a 65% chance of further interest rate cuts, taking us down to record lows of 1.5%. When it hits that number, I guess we won't be calling it TwIRP any more, it'll be some other beast headed towards Zero Interest Rate Policy, even in an allegedly healthy Australian economy.
"If they wait until February, it will be too late and they'd need to cut again immediately after the first one. So we're hoping, and expect them to go in November," economist Josh Williamson said, citing the labour market figures as the trigger.
Meanwhile, Bank of America Merrill Lynch has looked at the timing of the first rate rise by the Reserve Bank, generally not expected before late 2016.
Analysts say even that may be too early as the local central bank is viewed as facing similar challenges to the US Federal Reserve on its path to lift-off.
"The US Federal Reserve has been extraordinarily transparent in its intention to lift interest rates at some point this year. It has also been extraordinarily cautious," chief economist Alex Joiner wrote in a note, which, in a subhead, pointedly and somewhat provocatively asked: "Will the RBA ever be able to raise rates?"
He said that "this all comes as US economic growth, although absent an inflationary pulse, appears quite solid".
Well, where do we start? We all know about the inflation figures being wildly inaccurate thanks to the development over the years of ways in which not to calculate inflation, just so that central banks look good.
Every time a central bank cuts rates, it gooses the equities market, and everything looks good. There's an imperative to goose the share markets because that's where our superannuation is tied up one way or another, and with low interest rates, there are a lot of people who are forced to take the risk of being in the share markets so they can collect the dividends and live on that, instead of the appallingly low interest rates.
But of course lowering interest rates adds fuel to the hot air balloon that is the property bubble in this country; and let's not forget all our banks are plugged into this bubble at the fundamental level of mortgages. They dice up the mortgages into mortgage bonds and on-sell it, but in most part, if the bubble blows up, the banks are going to take a hit. When the banks take a hit, their shares are going to go down, and with them dividends. There are going to be a lot of retirees who are going to have their cashflow blown out of the water, even if they're not real estate investors.
How likely is it that the bubble will burst? I don't know. I've asked people from Japan how long the Bubble took to build in Japan but I only get a vague time frame of 5years, maybe 10years. They're vague because the original slope upwards was very gentle and you couldn't say for sure where the definite start point sat. This would be true of Australia, where until early this year most authoritative pundits were telling us there was no property bubble, and that things were priced fairly.
Maybe the picture is changing. Paul Sheehan of all people is now going on about what happens when the Australian property bubble pops. It's a bit of a joke because his real target is Bill Shorten and the ALP and what terrible policies they would have should they be in power when the bubble bursts. It doesn't seem to occur to him that if it bursts in the next 12months while Malcolm Turnbull is the Prime Minister, the Liberals collectively don't have a better idea as to how to rescue the economy.
It's really unlikely there's a plan for when the bubble bursts because there's simply too much money in the real estate market to bail out with public monies. Banks will be shored up, but beyond that, there won't really be a way of shoring up housing prices. If you can even imagine that scenario, do you think it's in the Liberal Party's thinking to manipulate markets to save asset prices? Remember, these were the munchkins going on about government debt during the GFC when liquidity dried up and could have felled our major banks. Besides which, proper liberal thinking would say market corrections are part of the market so let the prices fall where they may.
Which brings us back to the RBA which is charged with setting interest rates to aim for certain outcomes and has sat on the sidelines when it comes to housing prices and property bubbles and any such talk. They're already in a vice grip because they want the Australian dollar to go down; but interest rates are already at historic lows. If people aren't borrowing money to invest in businesses and making capital investments but instead are locking it up in housing, then lowering interest rates isn't doing the trick. If they really do go to 1.5% by the end of the year, then that's an indication that our economy is in dire, dire straits.
When The Bubble Pops
You can cue 'When the Levy Breaks' if you like. Or 'Here Comes The Flood'. I was talking to some people who lived through the rapid devaluation of property in Japan when the bubble popped. They had bought investment properties at about the equivalent of $300k. Then, it started to climb steadily until 3 bedroom flats in suburban Tokyo and Osaka hit the equivalent of $1million, but they didn't sell. They thought that was priced fairly - and they based their judgement on the fact that if the rest of the market was asking for the equivalent money and getting it, then it must be worth it (sound familiar?). When the Bubble popped, prices slid down to the equivalent of $400k in a matter of months, the banks went into receivership by the dozens, and so the government stepped in to shore up the banks and made them merge.
The bank mergers were a messy affair. Lots of people in banking lost their jobs in the big squeeze, cutbacks, redundancies, and shuffling and culling of offices. It was a disaster for people who picked banking as a career and were in their 20s. They were cast out the door first with nowhere to go. There's a whole generation of mostly Gen-Xers in Japan that copped this turmoil straight in the face, and naturally those people didn't go off and have kids because their financial security had evaporated. This contributed to the slowing population growth, the effects of which we're seeing now.
All the while asset prices were pulverised. Bad debts multiplied. You couldn't keep track of the spiral as just about anybody and everybody with a mortgage found themselves underwater. Banks simply couldn't write off the bad debts because all this capital had been destroyed simultaneously- writing it all off would have meant instant closures of all these baks, with deposits and all.
The government went on a spending spree, trying to stimulate growth for a decade. It spent big and it went into great debt to do this spending - but of course most of the infrastructure investment went to vested interests with lobby groups and resulted in a plethora of unnecessary capital works, (think, WestConnex all over the country) which in turn turned out to offer no increase in productivity, but merely put the government further in debt. The central bank put interest rates at close to zero. This destroyed the retirement plans lots of people - and with the growing number of elderly people thanks to an ageing population, shaved the living standards of the middle class right down.
In short, it's been cripplingly bad ever since; but at each juncture, what all the players did was go by the options given and choosing the least worst option out of many bad ones. That's how it goes. So when you look at Australia where inner city dwellings have hit well over $1million, you have to think it could easily all go to shit. If Paul Sheehan thinks he's going hang it all on Bill Shorten and the ALP, he is an imbecile (but we knew that anyway). If the day comes when the bubble bursts in Australia, it's going to eat up much more than a couple of careers in politics.
The Price of Doing Business
Here's something interesting that must be the sign of the times:
Cr Byrne, who will seek the backing of his fellow Leichhardt councillors on Tuesday night, also hopes to win the support of other Sydney councils that have similarly seen their commercial centres hurt by a mix of factors including high rents, competition from mega malls, and the rise of internet shopping.
The mayor's proposed "carrot and stick" approach would pair incentives such as speedy approvals for short-term leases with amendments to state and federal tax laws that would discourage premises being left vacant indefinitely.
"Under the Local Government Act, there is currently no allowance to reduce rates for those property owners who keep their properties tenanted or to increase rates for landlords who are using their properties as a tax write-off," Cr Byrne said.
"It's time for that to change."
However, Angela Vithoulkas, a City of Sydney councillor and small business owner, cautioned that the causes of declining main streets were "much more broad" than the role played by property owners.
"I've spoken to landlords who have vacancies on Oxford Street, they're as equally alarmed about the problem, not being able to find a tenant," Cr Vithoulkas.
"Do they just put in pop-ups, peanut rents? How do they fund that because that devalues their property as well once there's a rent value attached."
Cr Vithoulkas said incentives were the answer rather than "the stick", adding that changes could be introduced through the Retail Leases Act, which is already under review.
"Maybe you could have a discount on your land tax if you were encouraged to put in a tenant at a discounted rate," she said.
Good god, it's hilarious reading that. Nobody wants to take a haircut on their investment, right? One councillor thinks if they fined the property owners, that would encourage them to lower rents and get tenants in. In other words, there should be an enforced haircut to the property owner because it's a bad look for the council to have empty shops.
The other councillor says, no, no, no it's hard getting tenants. Not many people can afford the rents, but if hey lowered rents, it effectively is a haircut. So no. But if the council took the haircut on behalf of the property owners, then that might be okay.
There's nothing so awful as the aggressive pursuit of self interest at the expense of the public purse, but be that as it may, it shows that retail in Australia is squeezed not only by the competition from on-line but from the property bubble itself, demanding high rents. On the one hand, the consumer has many means to price the wares on offer more accurately which eats into the margins; but the landlord also wants a bigger chunk of the margin. What's a retail business renting a shopfront to do? Maybe the numbers have reached the point where there just can't be retail businesses in certain areas, thanks to the property bubble?
At a certain point the landlord has to recognise what the market will bear is much lower than they are insisting. The haircut is theirs to take, and they can't be passing it on to the council. If the council gave into that demand, it's giving way to a moral hazard. If you go out there and invest in a shop, it's part of your risk that you might not get the rent you want. The tenants are already shouldering the risk of having to meet rent and trying to squeeze out a margin - they're the ones that need the help, not the property owners.
Over the last few months I've noticed some old musical instrument shops go out of business. It's not long ago that Jackson's Guitars went into receivership but Smithy's seems to be gone, and the Classical Guitar Shop has also gone from Parramatta Road. It's not exactly surprising given just how much money has headed on-line and away from traditional retail outlets. I think Dickson's Music in Chatswood has also closed its doors. That's a sad one for me because once upon a time I worked there when I was a youngster.
I guess it is ironic that after the musicians were mauled out of business by the digital economy, it was then the retailers of musical instruments that got mauled out of the economy by both the digital economy and the property bubble. I wonder who will have their meal tickets taken away by the digital economy next. It would be kind of funny if it happened to bankers, lawyers and doctors.
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