As the reality hit home the entire world seemed to be heading for a lock down. However, as bad as the current situation is, comparing this most recent ‘downturn’ to the likes of the Global Financial Crisis (GFC), where global financial systems practically imploded, the Australian housing market barely stumbled in 2008.
Why? – Interest Rates
As the GFC hit, the RBA cut rates aggressively. By the time they were done they had cut rates over 4% in a matter of months. And it worked. As borrowing costs dropped, the economy came back to life. And as people were able to take out bigger mortgages, sentiment returned to the housing market, and prices rose.
There were definitely a few wobbles along the way, but with interest rates remaining low and heading lower, there was a permanent shift in housing market, and house prices moved higher. In fact, when the interest rate impulse combined with an income surge during the mining boom, it gave us one of the most spectacular property booms of living memory – and that was all thanks to low interest rates and cheap money.
Basic economics, cheap money makes asset prices go up. Low interest rates make asset prices go up. Printing money makes higher asset prices. Currently the RBA has cut rates as low as they can go (0.25%). It has launched Quantitative Easing (QE) to anchor short-term rates on government bonds. Some analytics think this is worth $50bn, but its open ended as the Reserve Bank of Australia (RBA) will do whatever it takes. The RBA has also set aside $90bn for a facility to support banks to lend to small and medium enterprises. So, QE1 in Australia is worth north of $140bn.