Why asset price inflation is set to continue
Soaring house prices in Australia and overseas are but one aspect of the asset price inflation that is now gripping much of the world. While this may be good for the owners of those assets, it is leading to increased inequality within and between countries. And that’s a phenomenon that, history shows, often ends badly.
When we explain the extraordinary central bank and government fiscal policies since the Global Financial Crisis that have given rise to a multitude of imbalances, one of the most frequent, yet difficult to answer, questions we are asked is: what is the end game?
The news last week that Sydney house prices have risen 24 per cent in the last 12 months, to a median $1.41 million, and that prices are forecast to rise 22 per cent this year, will be received as both good and frustrating news by an equal number. Quite simply, Australian house prices are booming. Melbourne and Canberra rose 16.2 per cent and 29.2 per cent, respectively, while prices in Hobart jumped 28.4 per cent and double-digit rises were recorded in the other capitals Darwin, Brisbane, Adelaide and Perth.
Asset inflation is symptomatic of the fiscal and monetary policies adopted by governments and central banks. And Australia’s experience is not unique.
Importantly, and despite rumours Australian Prudential Regulation Authority (APRA) will implement macroprudential measures at the end of the year to let some air out of the property boom, the imbalances are entrenched.
Note for example the Government’s response to complaints about collapsing housing affordability is never “You’re right, we need to bring property prices down”. Instead, the policy response has always been to extend greater assistance to property market debutants to meet the higher prices.
You see, the greater cost of carrying the now obvious imbalances is a real loss of capital. And admittedly, even this cost is seen by some economists as relatively minor compared to the upheaval associated with clearing the system (a genuine end game). Clearing the record deficits and debt is an economic, social, political and geopolitical pill no government, regulator or central bank wants to swallow.
So, expect more of the same for now. UK economists, Macrostrategy, suggest investors should expect the imbalances to even widen. While their own end game forecast is for real yields to collapse, and with them, real GDP – into a deep recession – the capacity exists for current imbalances to continue widening, potentially, for another decade.
Kicking the can down the road is certainly no solution but, while it occurs, the problems can be ignored. In any case, doing so serves the interests of those who don’t want egg on their faces. Investors, therefore, are probably right to expect asset inflation to continue.
Lower long-term consumer price inflation expectations also help the bullish case. We have written previously about why wage ‘disinflation’ is likely structural; thank lower levels of unionized labour and accelerating investment in automation for the long-term downward pressure on wages. With lower wage growth, high sustained consumer price inflation is unlikely. And that means lower bond rates and flatter yield curves. Witness, for example the decline in the US 10yr Treasury Bond rate from almost 1.80 per cent in March, to 1.23 per cent today, despite more inflation in the last three months than we have seen in years. Expectations are that inflation is transitory.
Economic imbalances are an unfair distribution of resources among countries, organizations, and individuals. And make no mistake, there are huge economic imbalances evident wherever a stone is upturned. While the pandemic has exaggerated these in the short term, the imbalances associated with monopoly power, increased poverty, unfunded off-balance sheet liabilities, the impact of ageing on economic growth and the switch from fossil fuels to renewables, are expected to worsen.
Global CEOs and political leaders, however, are optimistic that global economic growth will improve. That is their endgame. It’s not a plan. It’s merely a hope. And while that doesn’t inspire confidence, you can be confident current settings – those that have supported asset inflation thus far – will remain in place for the foreseeable future.