Interest Rates cause of Recession?

Karl FitzgeraldCommentary2 Comments

if it's the reason for a sale it must be true
Creative Commons License photo credit: megananne

Here we go again! The Reserve Bank is worried it raised interest rates too high. Is that what has caused this downturn?

The real cause of this looming recession is the rampant over investment in land. This has pushed land prices to double the long term average in Australia, at 6.6 times the average wage, rather than than the 3.3 long term average.

The further this divergence is maintained, the uglier this downturn will be. Fannae Mae type bailouts will not help. To answer why, we return back to elemental economics. The more we spend on rent to meet these high land prices, the less is left for investment and consumption. This flows through to a reduction in job opportunities and the closing of small businesses. Wages often fall as business struggles to meet its’ rental obligations. Properties are then foreclosed. Tears are shed. This happens repeatedly, approximately every 18 years. Read Fred Harrison’s Boom Bust to explain why.

Rental payments need to naturally fall back to the long term average of 3.3 years average wage. We can only live on easy credit for so long. Prolonging land prices at their current highs, like the Japanese tried to in the 90’s, will only prolong the recession. Let the market work it out.

Of note is also how the Reserve is in the process of changing its’ focus away from an ‘inflation only’ perspective. Tim Colebatch says:

And the Reserve does not want to create a recession, mild or not. The statement subtly redefines its goal as not low inflation, but “sustainable growth consistent with the medium-term inflation target of 2% to 3%”.

Read what our Bryan Kavanagh said about this ‘inflation only’ mantra here in Property Bubble Leads to Crash Landing. Bryan’s excellent Rating Federal Treasury’s Performance should also be digested when considering the trade-off between inflation, unemployment and the elephant in the room – land prices.

It must be clearly maintained that this recession-to-be was not caused by the sub-prime. Nor was it caused by high interest rates. Unfortunately, it will be caused by the absence of holding charges on land, which has allowed high land prices to fester. This has attracted a large number of speculators, all greedily chasing the easy money, called economic rent, that the community’s activities always deliver to land. Land values reflect the community’s hard work in the higher prices that naturally gravitate towards it.

We believe that this natural increase in land prices should be captured on behalf of the community by the government via a Resource Rentals system. Then we address at source the boom bust nature of the neo-classical economic paradigm.

2 Comments on “Interest Rates cause of Recession?”

  1. Nice to look restrospectively at some of these posts.

    They keep sticking with the mantra that property prices in Australia are always going to be bubbling with the undersupply situation.

  2. Things are getting closer with turnover now dropping. This is the pre-cursor to a drop in the property market.

    Check the 1st comment by Gavin Putland here.

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