The Secret RBA Plan to Send House Prices Soaring

Now that we've had the worst year on record for house prices, a drop of almost 5% according to the Australian Bureau of Statistics, what is the Reserve Bank of Australia (RBA) going to do about it? How is it going to stop property prices haemorrhaging wealth in 2012? 

Well, it could hire a laughologist - a person who is properly qualified to improve your wellbeing, or in this case make house prices go up, using only the power of laughercise.

Believe it or not, this qualification and job do exist. If you're feeling pessimistic about the prospect of a laughologist moving house prices, get a load of this story from CNBC:

In what may be the strangest market indicator ever, a blogger found that the amount of laughter recorded in the official transcripts of Federal Reserve Open Market Committee meetings from 2000 to 2006 correlates almost perfectly with the rise in housing prices taking place at the time.

That's right. US Federal Reserve board members chortled their way into a housing bubble. Never mind the loose monetary policy at the time. No, it was pure wit and useful comments about the economy... Like this one from the current US Treasury Secretary, Tim Geithner speaking to Chairman Greenspan, which inflated house prices:

'I'd like the record to show that I think you're pretty terrific, too. [Laughter] And thinking in terms of probabilities, I think the risk that we decide in the future that you're even better than we think is higher than the alternative. [Laughter]'

If they found that funny, imagine what a qualified laughologist could achieve.

And so, we'd like to make the humble suggestion of hiring a few laughologists to attend RBA board meetings. Perhaps they could draw the occasional smirk out of RBA Governor Glenn Stevens, sending house prices surging. And property owners could all feel rich again.

Savers Not Amused

Of course, it's far more likely the RBA will continue to lower interest rates as the housing bust continues. That might seem like good news at first. But taking a quick look at how it has served the Americans, Europeans and Japanese might make you think twice.

You see, lower interest rates are going to be a royal pain in the neck for savers who have grown gun shy of riskier investments. Like the share and property markets. You've seen the stock market bubble come and go. The ASX is down 35% from its October 2007 high. And you're probably seeing the Australian housing bubble going, going gone. Unless the RBA does hire a laughologist soon.

After seeing their shares tumble and only bounce back slightly - and the value of their properties fall - no doubt many Australians will consider throwing in the towel and locking their savings into term deposits. Our congratulations if you did at the higher rates of a few months ago. The problem is that window of opportunity for safe investments with acceptable returns could be slammed shut by central bankers. Australian rates may be headed where their overseas counterparts have been for some time - near 0.

How badly are savers in low-interest countries suffering right now? And are we really in for the same?

Overseas newspapers are full of stories about savers forced to go to the government for assistance, or gamble their remaining wealth in an attempt to get a return on their money. From the Wall Street Journal:

'Ruth Marcotte can't afford to play it safe anymore. With interest rates likely stuck near zero for nearly three more years, the 61-year-old retired telephone-company manager is about to ramp up his holding of stocks and municipal bonds, using money now at the bank in certificates of deposit.'

Canadian business website Macleans summed up the overall figures nicely in September last year:

'Last month, figures from the Bank of England showed that since 2008, when the central bank slashed the interest rate to 0.5 per cent, savers there have lost out on $66 billion of interest income. What's more, the bank estimates mortgage borrowers have benefited to the tune of $79 billion. 

'Meanwhile in the U.S., where rates are virtually zero and the Federal Reserve recently vowed to hold them there until 2013, the suffering inflicted on the saving crowd is especially severe. In a recent analysis for the American Institute for Economic Research, William Ford, a former president of the Federal Reserve Bank of Atlanta, estimated American savers have seen anywhere from US$256 billion to US$587 billion in potential income vanish. 

'None of the supposedly favourable effects [of low interest rates] are actually happening, and instead it's having a very strong negative impact on savers," Ford told Maclean's. "It's killing savers. Retirees are getting negative returns on their life savings.'

The same retirees who were burnt when asset markets blew up in 2008 are now being burnt by low interest rates. To make matters worse, nobody at the Federal Reserve is laughing much, which is putting further downward pressure on house prices. 

In Britain, Bank of England Governor Sir Mervyn King has said he has 'deep sympathy' with savers who are receiving 'negligible' returns. Thanks Merv.

There is, however, some small consolation for savers in the UK. You see, each time the Governor of the Bank of England fails to keep inflation close to the 1-2% target, he must write an embarrassing letter to the Chancellor of the Exchequer (i.e. the Treasurer) and explain himself. The Chancellor then responds with a letter of his own. 

This little correspondence leads to some humour on the part of distressed savers. Maybe an attempt to increase house prices? The organisation SaveOurSavers has posted a spoof reply from the current notoriously posh Chancellor to Governor King, which includes the following:

'At my fifth birthday party we had a top-hole magician. Made a Cartier watch appear from my top hat. But he was nothing compared to you, conjuring money out of thin air. I take my (top) hat off to you.'

In Japan, where rates have been near 0 for 16 years, the notoriously frugal Japanese population is ageing. With vast amounts of their savings invested in Japanese government bonds, Japanese retirees have been getting negligible returns for a long time. 

16 Years of 0% Interest Rates

Without income off their savings for so many years, things have turned rather desperate for the Japanese elderly.

Bloomberg reported in 2008 that...

'more senior citizens are picking pockets and shoplifting in Japan to cope with cuts in government welfare spending and rising health-care costs in a fast-ageing society. Criminal offences by people 65 or older doubled to 48,605 in the five years to 2008, the most since police began compiling national statistics in 1978, a Ministry of Justice report said. Theft is the most common crime of senior citizens, many of whom face declining health, low incomes and a sense of isolation, the report said.'

The Real Interest Rate

All this paints a rather depressing picture of a low-interest-rate world. The underlying problem is the imbalance between inflation and interest rates. Put differently, the real interest rate is negative in many countries around the world. 

This means that prices are rising faster than savings are earning interest. You are a loser in the long run, even if you are earning some meagre return. That makes people take a gamble. They go for the higher return assets - which means higher risk.

When lower rates come to Australia, where will investors look to get reasonable returns? There are a few options. High-dividend yielding stocks, bonds and property. Property where the rental yield is high, that is.

We'll be telling the After America Symposium attendees what we think is the best bet, with a twist, in just 23 days time. 

Nick Hubble
Editor, Weekend Daily Reckoning