Masking the Public Pain

I caught up with a friend for coffee yesterday. He's a commercial banker, and it wasn't long before the conversation turned to the state of the Australian economy.

His bank believes that interest rates have peaked and that there could be a couple of rate cuts toward the end of the year. That would put the cash rate at less than four per cent.

I suggested that those with mortgages or commercial borrowings would welcome any rate relief, but it would also indicate that the economy was slowing.

That got us on to the state of the property market.

He said house prices were still rising which was unusual given how interest rates had increased dramatically. I countered that inflation was making everything go up, and the prohibitive cost of construction was a partial factor in property revaluations.

This is particularly true for commercial property, which is usually sold on a yield basis.

When borrowing costs are low, the value usually rises as the actual yield is capitalised into the sale price. With higher borrowing costs, meaning less income return to the owner, how is it that prices continue to rise?

Neither of us had a definitive answer to that question, but we agreed something about the state of the economy feels surreal.

There's obvious financial pain out there, but it isn't showing up in most of the usual metrics.