Low Interest Rates the New Carbon Monoxide

Colourless, odourless, tasteless and initially non-irritating, the world and this country are well and truly caught in its deadly embrace. While many celebrate the reduction in official interest rates that occurred last week it is worthwhile to pause and reflect on the cause and consequence of this further reduction. This is best done by comparing it to the long forgotten era when interest rates were on the rise.  There was too much demand in the economy.  We were all making too much money.  Remember that?  The job of the central bank was to ‘take away the punch bowl just as the party gets going’.  Now we have stagnant incomes and a growing output gap best illustrated by the growing number of underemployed in the economy.  A phenomenon our statistics on the number of unemployed are unable to convey.The constant talk is about our transition from the resources boom to something else.  This is a work in progress and the filler in between is the activity that occurs in the property sector.  Not just any property but specifically low density property located in or around our big cities.  Sure, there is overflow into apartments but it can be argued that this is driven by the rising prices of detached inner city and fringe suburb housing that has put the traditional aspiration of home ownership out of the reach of many. The shift towards the construction of high density dwelling in premium locations issomehow eerily reminiscent of the hollowing out of the manufacturing base that occurred during thehalcyon days of the resourcesboom and strong exchange rate.  Remember our car industry.  At least now we have submarines, twelve.   In order to fill the gap we are turning many locations from vibrant and diverse places where the daily dramas that occurred enriched people’s lives into something else.  Are they now turning to vertical ghettoes of high rise apartments where the daily dramas are more concerned with survival? It is difficult to say how this will pan out.  Joining the ranks of commentators who call a bubble in the housing market is a mugs game.  Bubbles are notoriously difficult to call and the turning points represented by their bursting are virtually impossible to time other than in retrospect.  Rather than try to play to the bursting bubble game it may be better to think instead of the notion of the lockout bubble. A generation or more of Australians has been effectively locked out of the ladder of prosperity that used to start with purchasing a detached residential property in a convenient location.  With the price of those properties going from about three times average yearly earnings to closer to seven the ability to secure them has been mostly limited to those who already own a property with sufficient equity to use as a deposit.  The ability to afford them has been allowed by the absurdly low interest rates that a dysfunctional financial system has dished up to buyers.  The important point here is that if you are not already in the game, there is a good chance you have been locked out. This may end up being the saviour of this country of ours.  A sufficiently large cohort of our population may realise that they may not be able to get wealthy simply by owning a truckload of property.  They may have to start being productive rather than speculative.   The road may be long and the realisation may be slow to set in but necessity is a great mother. When we have exhausted the low hanging fruit of mining highly price commodities and priced ourselves out of the enticing capital gains of propertyspeculation we may be forced to look at ourselves and decide it is time to move to an inherently productive, dare we say innovative economy.  This does not happen like a tip toe through the tulips but only after we are left with no alternative.  Our interest rates cannot go much lower, quantitative easing is a huge long-shot, competitive devaluation is an arms race.  A day of reckoning may be approaching and although it will more than likely be terrifying it is also likely to be the best time of our lives and our children’s lives. By Harry Notaras -Business Broker