Buyer Beware !

Let us hope that the wise people at the Reserve Bank got their decision right on Tuesday when they lowered interest rates to an all time low.  The intention was to stimulate the economy by putting a little more money in the pockets of the public and the consequent increase in spending flowing on to investment and job creation.  In all probability, it will deliver very mixed results.

The self funded retirees will not be going on wild spending sprees.  In fact the drop in income flowing from their investments will see some applying for a part pension for the first time, and there is a danger that desperate people will be tempted to give serious thought to very insecure offers that promise higher profit returns.

Those with existing home mortgages are also unlikely to lower their monthly repayments.  The wise will use this opportunity to speed up the reduction in capital owed - and create a buffer against unforeseen future circumstances.  The more equity they have in the home they hope to one day fully own, the more insulation against swings in the money market.

The big danger is that this rate reduction will fuel the bubble that has expanded home prices to an insanity level.  In particular, prices in Sydney are way out of kilter with the rest of Australia and this phenomenon is duplicated in many overseas cities.   A similar replication exists in London.

The median Sydney price of a home is now over $900,000 and there is every chance that it will soon hit the million mark - and that means first home buyers need to get a foot on the rung of the ownership ladder or they will be forever priced out.  There is a danger that many will beg, borrow or steal enough to cobble together the minimum deposit lenders require and take the plunge with mortgage repayments that cripple their income level.

The housing market is very like that old parlour game of  "Musical Chairs ".   The loser is always the one left standing when the music stops - and in the housing market that is when prices stop rising and for sale signs become a glut.  It would be a very brave person who believes that the present low interest rates will hold well into the future - and that the Australian economy will remain free of cyclical downturns.

The history book says otherwise !   The world economy was experiencing a boom prior to 2008 and the slicing and dicing of  unwise home mortgages into investment packages granted AAA rating by the security industry suddenly threw the money market into a spin - from which we are still recovering.   At other times, just a rumour going the rounds can set off a disastrous run on the stock exchange.  Nobody has been able to factually explain what set off the chain of events that in 1929 sent the whole world into what became known as the "Great Depression "!

Just as sure as God made little green apples we will see interest rates rise and there will be changes between bull and bear markets on the stock exchange.   The only thing inexplicable is the timing in which these events will occur.   It is also an inevitability that such changes will be disastrous to some people and that others will actually gain prosperity from such adversity.

The pundits will pontificate and we will get varying shades of opinion of just what these changes in interest rates will deliver - and how they will play out on the world stage.   The wise will do their own thinking - and factor in the worst case scenario when making decisions !