Déjà Vu — Low Interest Rates and Liquidity Are Fuelling Inequality

I met up with a few friends at an event during the week. And I have to say, I’m really enjoying seeing people again after such a long lockdown.

Our conversation soon turned to the hot topic of the moment.

No, not the pandemic. The other one, property.

Out of the seven of us, one had recently bought a place and two were hoping to buy in the near future.

The conversation went a little something like this:

Have you been to an auction lately? It’s crazy.’

You can add another $100,000 or $200,000 to the price you see advertised straight away.’

People aren’t taking expensive holidays abroad, eating out as much. People have a lot more money in the bank.’

We waited for years to buy thinking prices would fall but prices just keep rising. We could have gotten in at cheaper price than now if we hadn’t waited.’

With how much property has gone up already though, what happens when mortgage rates start going up? Property prices could really fall.’

We have been through so much I don’t think the government will let property prices collapse.’

All this kind of gave me déjà vu. It’s 2017 fear of missing out anxiety all over again.

Even with a once-in-a-century pandemic and plenty of uncertainty, property is hot.

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Only in the month of February, national prices increased by 2.1%. Rate growth is now the fastest it’s been in 17 years.

Unlike the last spur, this time the push is coming from owner-occupiers instead of investors. And it’s easy to see why. Rental yields have dropped with no travel, no need for booking an Airbnb and no backpackers or students.

I’m a bit sceptical of how much higher property can go up if incomes don’t follow…

First, interest rates are already at record lows.

Second, in Australia, low interest rates and immigration have both been boosting property prices up. In 2020 for the first time in decades, net migration dropped to negative.

Another thing to note is that things are getting even hotter at the high end of the market on anything above $960,000. Low interest rates and liquidity are fuelling inequality.

But it’s not just in Australia.

Here is Politico on the US property market:

The booming housing market helped stave off economic collapse in 2020. But soaring prices are starting to worry policymakers, who fear the market could lock a generation of would-be buyers out of homeownership.

‘Home prices in January — typically a slow month for the market — were up 14 percent over the same month the previous year, while sales jumped 24 percent, despite an unemployment rate that was almost twice as high. Demand for existing homes is so strong that the average residence is on the market for just three weeks, and inventory is at a record low after seeing its steepest drop last year since the data was first tracked in 1999. It all threatens to freeze broad swaths of the population out of the market.’

Of course, it’s not just property.

Liquidity is pushing up stocks, cryptos, and even things like digital art through non-fungible tokens (NFT). NFTs allow you to own something in virtual digital form. I have a friend who is an artist making a small fortune selling his art this way.

So far, it’s all a rush away from cash, in search for value. Especially since asset prices have been increasing faster than incomes.

But back to my conversation with friends, I agree. In my head, central banks and governments will do anything and everything to keep property from collapsing because that’s where much of the wealth (and debt) is at.

So far, both the RBA and the US Fed have said this week they will be keeping rates at zero for years. ‘Life at Zero’ is what my colleague Greg Canavan has been looking into. You can hear more about it here.

Of course, it’s easier said than done. And the wild card here is inflation.

Liquidity and low interest rates have been pushing asset prices up for over a decade. It remains to be seen if all the COVID stimulus will seep into the real economy…and what central banks will do if inflation starts to get out of hand.

In practice, it’s not that easy to control inflation. We’ve seen it over and over throughout history.

Investors are already starting to worry about this.

In fact, here is the Financial Times:

Coronavirus has been overtaken for the first time since the early days of the pandemic more than a year ago as the top risk that keeps investors up at night, according to a new poll of fund managers. Money managers polled by Bank of America now see inflation and an unruly rise in borrowing costs like that seen during the 2013 “taper tantrum” as the key “tail risk” that could unsettle global markets. The survey of investors with $597bn in assets under management highlights investors’ concern that the economic recovery from Covid-19, backed by unprecedented stimulus, may unleash a surge of price growth that could be difficult to tame.’

We have record-low interest rates, and plenty of cash in the economy.

And then of course, psychology plays a big part here too. Most of our economy is based on confidence. How do central banks keep pushing for more stimulus if the economy starts running too hot? And, if so, how will asset prices react if central banks cut or reverse stimulus?

We’ve been here before.

The fed tried to increase rates in 2006 and again in 2017–18 but had to reverse course, even before the pandemic.

With more stimulus hitting the market, we’ll likely see more euphoria for a little while.

But keep in mind…this is all fake, it’s a fake recovery.


Selva Freigedo Signature

Selva Freigedo,
For The Rum Rebellion

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Selva Freigedo is a research analyst for The Rum Rebellion.

Born in Argentina, her passion for economic analysis started at a young age. Her father was an economist for the Argentinean governments and the family used to discuss politics and economics at the dinner table.

Argentina is a country with an unusual economic history. Growing up there gave Selva first-hand experience on different economic phenomena such as hyperinflation, devaluation and debt default.

Selva has also lived in Brazil, Spain and the USA.

Back in 2000 she was living in the US as the dot com bubble popped…
And in 2008 she was in Spain as the property market exploded and then collapsed…

She has seen first-hand what happens when bubbles burst.

Selva joined Fat Tail Investment Research’s team in 2016, as an analyst. She now writes from her vantage point in Australia, where she settled in 2015.

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