Interest-Rate Shock Horror!

Sorry to be so dramatic…but I had to get your get your attention somehow.

The RBA left rates on hold this week. No surprises there. Glenn “Let the good times roll” Stevens seems happy to leave rates at record lows and to keep pumping gallons of cash into the economy.

But because there was no change, some esteemed economists think that the next move is up instead of down… Shock horror.

I'm all for a balanced view, so let's look into it…

Paul Bloxham, Chief Boffin at HSBC is telling anyone who'll listen that the next move in rates is up. Warrick McGibbin also reckons that rates should be going higher. In fact, he thinks the both of the rates cuts at the end of last year were a mistake.

Geez, who invited those guys?

The truth is, their logic is probably sound. But it's never going to happen.

Let me tell you why.

But first, who is this Warrick McGibbin character? I don't blame you if you never heard of him. He's an academic economist after all. But for quite a few years he was sitting on the RBA board, helping chart the course of monetary policy. Now that he's left, he's a bit freer to wax lyrical on interest rates. This is what he told the AFR:
“Barring any disasters out of the US and Europe, the RBA's easing cycle should be over…It will become increasingly important for the RBA to normalise what are extraordinarily stimulatory interest rates given the striking asset price inflation we are now seeing coupled with the economy's nominal growth. I would not rule out two hikes before the year is out…”
Take it easy, tiger.

McGibbin might have a bullish view of the market, but he's a notorious policy hawk. (Just a note for those of you new to Central Bank bird watching – a hawk is someone who's happy to sacrifice a bit of growth to keep a tight lid on inflation. A dove, on the other hand, is happy to let inflation run a little if it means better growth outcomes.) McGibbin is a hawk and probably argued against every rate cut that happened on his watch.

The thing that jumps out at me from that quote is the bit about “striking asset price inflation”. What's he talking about? Shares are doing ok these days but it's nothing to write home about. It can only mean one thing.

Property.

McGibbin has been around long enough to know that rates this low, that these “extraordinarily stimulatory interest rates,” are going to have a big impact on property prices. The last time rates came down to these “emergency levels” property prices grew 20 percent in a year!

And it's already started. Prices are already on the march. House price data across the board are showing that things started ramping up late last year. And it's just the beginning.

But hang on a second, aren't increasing property prices a good thing? Haven't we been hanging on every data release through 2012, waiting to see when the recovery would finally kick off and we could finally crack that bottle of bubbly?

We have. A healthy property market and rising property prices are a good thing – especially for property investors like you and me.

But that's not what's got McGibbin worried. Nor anyone at the RBA.

To use the RBA's term, what McGibbin and the hawks are worried about are “imbalances” in asset markets. But let's call a spade a spade. Their worried about bubbles.

And it's not the rising prices that make bubbles so scary. The danger is the way inexperienced punters can end up leveraging themselves into a corner. They take on more debt than they can handle, and sink it into poor investments. These poor investments do ok when the market is on the way up, but are the first to hit the floor when the music stops.

And what the hawks are arguing is that the current interest rate setting is driving people into the property market.

Well, of course they are. With mortgage rates at record lows, and pretty ordinary returns to be had anywhere else, property is the only game in town.

But is it a bubble?

Of course not. Prices are just picking themselves up off the floor in most of the capitals. Things are definitely on the up, but it's been a slow couple of years.

So what McGibbin is really saying is that he's worried that, at some point down the track, we might be stuck with a bubble.

I think it's probably too early to tell either way. He might be right. And it might be making ‘Good Times Glenn' over at the RBA a bit nervous too. And it might be, that if you had a magic crystal ball that could tell you such things, it would tell you that interest rates actually do need to go up this year to stop it happening.

But that still won't change a thing. Interest rates are going nowhere
Why?

Because the RBA isn't in the business of bursting bubbles.

The RBA, like most central banks these days, is an inflation-targeting central bank. That is, they have an agreement with the government. They said, you let us control the interest rates, and we'll use them to keep inflation under control. We'll leave everything else to you.

So the only excuse they've got for raising rates is if it looks like inflation might be getting out of hand.

And what's inflation doing?

Nothing. It's going nowhere. It's right at the bottom of the RBA's target band and going nowhere fast.

So if the RBA was worried about this “asset price inflation”, they'd have to make the argument that ….
1. There was a bubble,
2. That the bubble was about to burst, and…
3. When it bursts it's going to take the economy down with it and drive inflation through the floor.

That's a pretty big call to make.

And could you imagine just how much of it would hit the fan if Glenn came out and said, “Hey, we're jacking up rates and adding 300 bucks to your mortgage. Why? Because we think your homes are worth too much.”

Forget it. He'd be torn to pieces. And once the dust settled, he'd be lucky to still have a job guiding tours around the currency museum.

Rates aren't going anywhere.

It is true that current settings will have a big impact on house prices, and quickly too.

But until there's solid evidence that inflation is on the move, it's time to accumulate and get rich – or in your case, richer… Much, much, richer.

So right now you can slip under the radar and start picking up deals that yesterday (last year) had negative cashflow and today are positive… Make sense?

While Glen keeps busy “like a hawk” watching the inflation numbers, retail spending, unemployment, commodity prices, new start home figures, the Australian dollar, etc, etc…

(By the way all, of which determine if interest prices go up or not…)

…You can take advantage of the all this cheap money on offer and become rich before every one else wake ups.

Come on now, get busy, get to work, take action and make it happen…this year.