This week, the Reserve Bank of Australia cut interest rates by 0.25%. A quarter of a percent. One part in four hundred. And judging by the media’s reaction, you’d think we’d just discovered cold fusion.
The headlines were breathless. The analysis was feverish. Pundits on TV, eyes bulging, declared that relief had arrived! Struggling homeowners could breathe again. Businesses would now, finally, take the plunge and expand.
Give me a break.
For the average mortgage holder, this earth-shattering development translates to about $25 a week in savings. A small mercy, sure. But is this really the difference between boom and bust? Between stimulus and stagnation? Between a thriving economy and the abyss?
God help us if that’s the case.
The only reason such a minuscule change matters is that we’ve stacked our entire economic future onto a single, wobbly, Jenga-like pillar: residential property.
Not industry. Not innovation. Not productivity. Just bricks and mortar.
What used to be a place for people to live has been repurposed as the Great Australian Wealth Generator™ — a magical asset class where prices only ever go up (allegedly).
And so here we are. An entire country watching, with bated breath, as a central bank nudges the price of debt by a fraction of a fraction, because this is what now determines our economic fate.
This really shouldn’t be the biggest economic story of the year. But the fact that this microscopic shift matters so much tells you everything you need to know about how absurd things have become.
We’ve built an economic house of cards where marginal (and, let’s face it, entirely subjective) changes to debt pricing dictate everything. Where our collective prosperity doesn’t come from making useful things, being more productive, or increasing real wealth — but from property prices that must keep rising at all costs.
This is not how a sane, healthy economy functions.
The only reason this circus has worked (so far) is that we’ve traded a massive chunk of our future earnings for higher asset prices, creating the illusion of wealth. But that’s come at the cost of a radical jump in wealth inequality, forgone investment in productive capacity, and the impoverishment of younger generations.
And it’s one of the biggest drivers of our cost-of-living crisis.
As insane as it all is, the powers that be are doing everything they can to double down. Stimulating excess demand while bungling supply. Because, politically, the whole damn thing is “too big to fail.”
It’s a devil’s choice: prop up a bubble, or collapse the economy. Sure, as Alan Kohler suggested in our recent interview, there’s a third path — where prices move sideways long enough for real incomes to catch up. But that’s a hell of a balancing act, and it still spells trouble for anyone that is negatively geared (which is almost half of all property investors).
So what does this mean for us investors?
Well, everyone has their own view, but to me, it just reinforces the importance of quality and value. Which, let’s be honest, is always the smart play. Not only does it tend to work well across the cycle, but it also lets you tune out all this macroeconomic theatre.
If things go south, even great, reasonably priced stocks will take a hit, for a while. But solid businesses will survive. Paper losses will be less severe. And, most importantly, they won’t keep you up at night, sweating over every tiny tweak to interest rates.
Easier said than done, of course. But far better than hanging on every word of a central banker, hoping they sprinkle a little more magic dust on the economy.
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