Media Watch: How House Prices are Saving Australia

House prices are proving to be a crucial factor in keeping Australia out of a US-style recession.

Reading central bank statements is a bit like cracking the enigma code – you need a guidebook at the ready so you can look up the phrases and see what they mean in plain English.

A lot of people have taken yesterday's statement by the Reserve Bank as an announcement that there will be no more rate cuts and that the next move will be up. That’s not quite correct, although it might be what happens.

Governor Glenn Stevens wrote: "the present … setting of monetary policy is appropriate…" Translation: "We can now do whatever the hell we like."

For six months the Governor has either been announcing a cut or saying that "the outlook for inflation allows more scope for easing of monetary policy if needed". In central bank speak that’s an "easing bias", now we have a "neutral bias". In other words, they’re sitting tight.

So why are Australia’s interest rates now stuck higher than anyone else's in the world, apart from China, India, Brazil and a few basket cases like Iceland?

It's not because of China, or the stimulus, which everyone else got - it’s because the value of our houses didn't fall, or at least recovered the small amount that was lost last year. The bursting of a world housing bubble was the main reason for the global financial crisis, and in most countries house prices are still falling.

In Australia, amazingly, they're going up. Yesterday the ABS reported an astonishing 4.2 per cent rise in the June quarter. We happily joined in the house price bubble between 2003 and 2007, and we're still bubbling away.

www.ninemsn.com.au article by Alan Kohler, dated 5/08/2009

General Advice Warning: This advice may not be suitable to you because it contains general advice that has not been tailored to your personal circumstances. Please seek personal financial advice prior to acting on this information.

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