While the RBA worries about whether we understand inflation, the real number to watch is how fast and hard house prices are falling.
The Reserve Bank of Australia (RBA) thinks we have a dummy problem. Apparently, their survey tells them Australians don’t understand what the RBA does (it’s called monetary policy), and Aussies care more about inflation than housing affordability.
One of the big concerns for the central bank is that a big number of the 9,000 people surveyed were so poor in understanding economics that they didn’t believe high interest rates would reduce inflation. And twice as many think, “incorrectly”, that rising borrowing costs will increase inflation. If this confuses you, then please read on…
While there’s a lot there in the RBA’s revelations about us, concerns about housing affordability could soon be replaced by a slump in house prices of a record kind. In an interview now on my website, www.switzer.com.au, one of Australia’s brightest economists and wealthiest bond business owners, Chris Joye (who founded Coolabah Capital that manages $21 billion) says a record fall in house prices is coming.
In a wide-ranging interview, Joye and his big team of economic ‘brainiacs’ have made some pretty impressive calls over time. I don’t ignore these calls but like many experts, Joye could be proved wrong, though I doubt he’d ever think that’s possible! I often joke with him, that he thinks he’s the smartest guy in the room, but in many cases he is!
This is what he thinks the combined effect of the RBA’s three interest rate rises this year and the Budget’s hit, which he thinks is akin to two interest rate rises, is doing to capital city house prices right now: “So where we stand right now, mate,” Joye said, “I’ve got the data on the tip of my tongue. Sydney house prices are falling at a 13 to 14% annual rate based on the last three months. Melbourne is falling at an 11 to 12% annual rate. National house prices are falling at a 6% to 7% annual rate. And price growth, which had been spectacular, north of 20% in Perth, high double digits in Brisbane, is quickly being vaporised.” And we can thank Jim and Michele for this. For the alleged “dummies” out there, Jim is Dr Jim Chalmers, and Michele is the RBA Governor, Michele Bullock, and anyone wanting to see an economic crystal ball look at inflation, interest rates, our economy and the US economy, and stock prices, should check out my chat with Chris Joye.
But back to what the RBA’s survey has found:
- 60% of people cited inflation as one of their top three economic worries.
- Housing concerns worried 40%.
- 25% worried more about employment, wages, government spending and climate change.
- Lower-income Australians were more worried about inflation and that makes sense as big price rises hurt those with less money.
- Only half of those surveyed thought high interest rates would lead to lower inflation.
- More than half thought higher interest rates would lead to more inflation.
On this point, the so-called economic dummies aren’t totally wrong. In the short term, interest rate hikes can lead to what’s called cost-push inflation, meaning landlords, businesses with big loans and others badly affected by rising rates jack up prices, taking inflation up short term.
However, eventually, consumers react to rising rates, they spend less, the economy slows, unemployment rises and prices are cut. Longer-term, the RBA’s monetary policy, which is really just interest rate policy, will kill inflation using rising rates but they can also KO the economy.
That said, those ‘dummy’ Aussies who think rising rates cause inflation, are part-right but really who cares and why did the RBA need to pay for a survey to discover that most normal people don’t understand economics? This just shows how out of touch many economists are with the real world!
And if they work for the government, they’re even more removed from normal people.
Chris Joye isn’t normal, but he and his team strive to understand the real-world economy we all live in, and his handle of that world is often very accurate, unlike our RBA.
Among the many economic revelations, he shared with me, on the expected big house price falls ahead, the actual magnitude of previous price falls probably shows why Aussies prefer property over shares. “My official position is that we’re likely to have a very big correction in house prices, and that correction could well test the prior records, all three of which were 8% to 9% using monthly data,” he said. “If you use the more precise daily data, 2017 to 2019 was 11%, but I think we could test that. I think we’re going to get a very large correction in house prices.”
Looking at our inflation problem, he doesn’t blame the RBA but more the Albanese Government’s immigration program that brought 1.5 million immigrants in a short time that pumped up demand and prices. He also thinks government spending has been a shocker that also added to inflation explaining why the RBA has been raising rates.
By the way, this JWS survey for the RBA was done in February, when the first 0.25% interest rate rise happened, but it was followed up by another two interest rate rises, which I think would’ve been short-term inflationary.
But what would I know? I’ve spent too long in the real world building businesses, employing people and explaining economics that economists make hard to understand to normal people!
Oh yes, I did ask the AI agent Search Assist if rising interest rates could cause inflation, and it took information from credible sources, and this is what it said: “Yes, when central banks raise interest rates, it can lead to a short-term cost-push impact on inflation. Higher interest rates increase borrowing costs for businesses, which may pass these costs onto consumers, potentially raising prices in the short term.”
It looks like Aussies aren’t as economically dumb as the RBA thinks.
