Does the global property boom amount to [another] housing bubble? Yes, it does, in my view. But that’s not to say it won’t continue for some time yet. Still, the result is always the same — a horrific bust at some point. But perhaps this time is different? Well, in some ways, it is. Even the central bankers are worried about a housing bubble this time around, after being caught out in 2007: ‘US cannot afford housing market “boom and bust”, warns Fed official’ reported the Financial Times. Indeed, it can’t. A financial crisis now would be devastating. So why are central bankers inflating another housing bubble with their low interest rates and QE? The interesting thing about the comments from the Federal Reserve’s Eric Rosengren is that he connects loose monetary policy with house prices, however tentatively: ‘“It’s very important for us to get back to our 2 per cent inflation target but the goal is for that to be sustainable,” Eric Rosengren, the president of the Boston Fed, told the Financial Times. “And for that to be sustainable, we can’t have a boom and bust cycle in something like real estate.”’ The comments were made with inflation at 5%, but they refer to inflation still being too low and therefore needing very low interest rates… But it’s the acknowledgement that this is connected to house prices surging out of control, which implies a bust at some point, which is most interesting. Low interest rates push up house prices by making debt cheap. Something that central bankers missed in the early 2000s or denied. At the heart of all this is the mistake central bankers make by focusing so much on consumer prices, even as the price of everything else spirals out of control. In their world, as long as consumer price inflation, as defined by them, is near 2%, their policy is spot on. Even if their actions are fuelling a housing bubble, that’s the elephant in the room that nobody mentions. Well, nobody used to mention, now that Rosengren has implied it. He’s also not alone, with two other Federal Reserve presidents echoing the comments in the Financial Times article. Where were these warnings in 2005? Even the BBC is onto the case this time around, though. Not because of the boom, but because of the inequality being created, of course: ‘More than five million people became millionaires across the world in 2020 despite economic damage from the Covid-19 pandemic. ‘While many poor people became poorer, the number of millionaires increased by 5.2 million to 56.1 million globally, Credit Suisse research found. ‘In 2020, more than 1% of adults worldwide were millionaires for the first time. ‘Recovering stock markets and soaring house prices helped boost their wealth. ‘Wealth creation appeared to be “completely detached” from the economic woes of the pandemic, the researchers said. ‘Lower interest rates and government support programmes had led to “a huge transfer” of wealth from the public sector to the household sector, they added.’ So it was central banks and governments who drove this transfer of wealth? Is that their job? Make millionaires out of property owners? In Australia, the connection between central bank interest rates and house prices is especially obvious. Owner-occupied mortgage debt is at record highs, but the ratio of interest payments as a share of household disposable income fell to a 21-year low thanks to record low interest rates. It is cheaper than ever to borrow and buy a house, despite record debt and absurd house prices. Of course, there’s a causal relation. When debt is cheap, people borrow more and this bids up house prices. It’s a classic case of unintended consequences. Some central bankers, who acknowledge the problem, as well as the fact that they are part of the cause, are wondering whether it’s time to stop inflating housing bubbles. Newsmax has the key quote: ‘A number of Fed officials, including St. Louis Fed’s James Bullard and Kansas City President Esther George, have suggested that the tapering of bond buying be more weighted toward mortgage-backed securities because surging home prices suggest the market doesn’t need additional central bank support. ‘“Right now the housing market is on fire. They don’t need any other unnecessary support so I would be all in favor of that,” Waller said.’ The trouble is, withdrawing support can trigger a bust. That’s how things go, historically. Central bankers inflate bubbles, burst them by raising interest rates, and get a recession or crisis. And so they lower rates again, fuelling the next bubble. For now, central bankers are still pouring fuel onto the fire with their low interest rates and QE. So the boom can continue. Will they get the blame if the bubbles they’ve created go bust? I doubt it. We’ll be sure to blame bankers, capitalism, deregulation and derivatives instead. Until next time, Nickolai Hubble,
Editor, The Daily Reckoning Australia Weekend | 