RBA sold the message that it was winding things back. But there’s something they weren’t saying.

So has the FREE MONEY era come to an end?

The RBA left rates unchanged at its meeting last week, but did announce that it was tapering the pace of it’s money printing back, from $5bn a week, down to $4bn a week.

It was testing the waters. Markets took it as a sign that the RBA was ready to unwind it’s MASSIVE MONEY PRINTING PROGRAM.

That’s how they sold it

The Reserve Bank has taken a first baby step towards unwinding its extraordinary $237 billion monetary stimulus, but signalled it will lag other central banks in lifting rates and a move remains unlikely before 2024.

The RBA kept the cash rate at a record low 0.1 per cent at its board meeting on Tuesday, but announced a move to a “flexible”, scaled-back bond-buying program to reflect the growing strength of the economic recovery.

At the end of the current 12-month $200 billion bond buy-up which ends in September, the RBA will transition to more flexible quantitative easing of $4 billion per week, down from $5 billion, which will be reviewed in November.

Dr Lowe said the move was in response to an improved outlook for the economy but emphasised the lower rate did not “represent a withdrawal of support” and the bank would keep buying bonds until there was material progress towards its employment and inflation targets.

“Because the inflation and wage outcomes have been lower than other places, we’re going to keep stimulus going probably longer than other countries,” he said.

More importantly for home owners, Lowe remains of the view the first rise in the 0.1 per cent overnight cash rate won’t happen until 2024 – despite markets pricing in a late 2022 or early 2023 rate increase.

But the devil is always in the detail.

And what’s the detail?

First, they’re moving from to a ‘state-dependent’ regime. That is, they’re no longer putting a time limit on the money printing. They’re going to wait until they get the ‘states’ they want – namely, when inflation is up and unemployment is down.

Second, they’re much more clear about what those states actually look like. They want wages growing above three percent, inflation above two percent, and unemployment below 5 percent.

So while it looks like a taper, the old regime was set to end in November. It could now run much longer than that, and therefore end up pumping much more money into the system in total, even if it’s coming at a slightly slower pace.

And they’re promising to keep printing until they get the outcomes they want.

And that means that this is still an incredibly radical monetary experiment.

I mean, if I said to you that the RBA was going to print $4bn a month until wages were growing at 3-4%, no one would have believed me.

And if they did?

… they would have bought property. As much as they could get their hands on.

JG.

What do you think’s going on here? Are we getting sick of each other?

So I’ve flagged this little puzzle before and it’s only getting worse.

So Domain have released their vacancy rate data, which shows that vacancies are down to an incredibly low 1.6%

That is almost ridiculously low, and is the lowest levels in ten years.

All cities have returned to vacancy rates that are lower than pre-pandemic levels reported in February 2020, except Melbourne and Sydney. However, the number of empty rentals have reduced significantly in Sydney and Melbourne.

This will boost confidence among landlords, as renters face increased competition among remaining rental listings, but there will be some areas that will have elevated vacancy rates until international borders reopen…

Vacancy rates remain tight in all of the smaller capital cities, which is likely to translate into higher rents.

And take a look at this table. This has the suburbs with the highest vacancy rates.

In Adelaide, you can get a top-5 finish with a vacancy rate of just 0.7%!

This is how the national picture charts out, with a clear acceleration downwards post-Covid.

The two biggest capitals, and their inner-city high-rise markets are holding the national averages up. Here’s Sydney:

And Melbourne:

While in the other capitals, we’re looking at rock-bottom levels. Here’s Brisbane:

And Perth:

And Adelaide:

Incredible.

And as I’ve said before, this is all happening while net immigration has gone negative and the actual population is falling!

So what does that mean? It means household formation must have gone up.

It means that despite Covid people are going out on their own and starting up new households.

Or is it because of Covid? Is it all just getting too tight and squishy living with mum and dad or in the share house?

Do we hate each other that much?

Do people just need to get away from each other for a while, regardless of what it costs us in rent?

It’s the ‘cabin fever’ property boom.

And not surprisingly, with vacancy rates this low, rents are growing at a record pace as well.

And where rents go, prices follow.

So on top of the cheap-money boom we’ve got a cabin fever boom.

And that’s why this boom is already breaking all records.

JG.

There’s a lot of money slushing round the globe. Where will it end up?

So the front page of the AFR yesterday was all about the Sydney Airport deal.

Some infrastructure investors got together and put in an offer to buy it.

(It wasn’t for sale.)

But they were flashing big money around, offering an indicative price per share of $8.25.

With the share trading at $5.81 on Friday, the share price popped over 30% at the opening yesterday, even though the board were urging shareholders not to sell.

Big news.

There’s a couple of things going on here.

One is the wannabe corporate raiders are looking through the mess of Covid to a time when travel opens up again. It’s probably coming soon. The early indicators from the nations that have high vaccination rates is that travel does look like it will be possible.

So at some point Sydney Airport will be back to normal capacity. And given it’s shares were trading around the $9 mark before Covid, it’s still at a discount.

But the second thing is that there is just a lot of money slushing around the globe right now.

And that money is looking to find a home somewhere. And infrastructure is always appealing to the long money in super funds and sovereign funds.

A buyouts like this are becoming more and more common. In fact, the AFR reckons that Australia is in the midst of an extraordinary boom in mergers and acquisitions.

Figures compiled by Goldman Sachs show a record $148 billion worth of deals were announced across Australia and New Zealand in the first half of calendar 2021, about 2.6 times the five-year average of $58 million for the same period.

But the size of the deals is unusual too, with 38 per cent of deals worth between $1 billion and $4 billion and a further 37 per cent of more than $4 billion. On average, just 54 per cent of deals topped $1 billion during the past five years.

Deals are becoming more intense too, with $18 billion worth of hostile deals announced in the first half, compared to the five-year average of just $1 billion. More than 30 per cent of announced M&A volumes in the first half involved contested situations, with two or more players fighting it out.

And finally, deals are becoming more expensive, with takeovers in the first half of 2021 seeing a 51 per cent premium above a company’s undisturbed price before a deal was announced, compared to a typical pre-COVID-19 premium of 39 per cent.

Goldman Sachs’ local head of M&A, Marissa Freund, says “It’s an extraordinary year of M&A activity and really our senior people in the business can’t remember anything like this.”

Now this is all great news if you own infrastructure assets, but it also points to the factors that are driving this once-in-a-generation property boom.

I mean you probably lived through the last boom. You’ll be telling your grandkids about the boom that’s coming.

All that money is looking for a home.

Sooner or later, it winds up in land prices.

It always does.

JG.