On the 18th of March 2020, the RBA conducted an emergency meeting to combat the unprecedented impact of the Coronavirus on the Australian economy. It was announced the following day that the RBA board had agreed to follow a comprehensive package to support the economy during this time. One of which is the implementation of Quantitative Easing, or QE to inject funds into the financial system through the purchase of government bonds in the secondary market.

What is Quantitative Easing?

Quantitative Easing is an unconventional type of monetary policy in which the central bank (the RBA) purchases government securities like government bonds in order to flush money into the financial system. In essence, the RBA will draw upon its cash reserves, aka print money, to buy government bonds in the hope that these funds will increase the liquidity of the economy.

Government bonds are a low-risk form of investment in which an investor will lend money to the government for an agreed period of time at a predetermined rate of return, also known as the yield to maturity. These bonds are considered to be low-risk as the financial collapse of the government is often very unlikely to occur. In this case, the RBA will be purchasing these bonds from the secondary market and not directly from the government.

Why is Quantitative Easing Utilised?

There are a few reasons as to why Central Banks go for this form of monetary policy. As the global economy continues to plummet, the RBA is implementing QE alongside other monetary policies in a bid to curb the imminent arrival of a potential global recession. This unconventional form of monetary policy is utilised when the conventional monetary policy; the lowering of interest rates is no longer effective. As of March 19, 2020, the RBA has officially lowered rates to an unprecedented low of 0.25% The theory behind the lowering of interest rates is it helps the economy to grow; currently, at a record low cash rate of 0.25%, unemployment should be at absolute rock bottom and inflation should be through the roof, however, despite these incredibly low rates, quite the opposite is happening, leaving the RBA with no choice but to pull out the unconventional ammo to fight the coming downturn.

During RBA Governor Philip Lowe’s speech, he mentioned that another reason for the RBA to purchase bonds is to provide support for low funding costs across the entire economy. The quantitative aspect of this method helps to lower the benchmark interest rate, which allows the RBA to add downward pressure on borrowing costs for financial institutions, households and businesses. By purchasing bonds in the secondary market, the RBA increases the aggregate demand for bonds, which in turn lowers the interest rate, or the rate of return.

Quantitative Easing and the Property Market

The theory behind monetary policy is it allows the RBA to effectively manage the Australian economic landscape. As mentioned above, during economic downturns, conventional monetary policy is to lower the interest rates to increase lending and boost consumer spending, this alongside QE should, in theory, lower the overall cost for financial institutions such as banks to increase lending. With additional funds in the financial market and record-low interest rates, it would make more financial sense for institutions to lend to borrowers than to hold. Therefore, in theory, with low rates, borrowers should be able to obtain larger loans which would further inflate property values.

However, in this unprecedented time, the normal circumstances go right out the window. The implementation of these monetary policies is more focused on easing the impact of the Coronavirus and assisting the Australian economy in building a bridge to recovery. As the property market is a lagging economic indicator, the impact of the Coronavirus has only just brushed the surface. At this current point in time, the volatility of the global situation combined with the fragility of the economy makes it difficult to expect a continued rise in the housing market over the next few months. As the impact of the Coronavirus begins to take hold through social distancing, unemployment, and lockdowns, and consumer confidence takes yet another dive due to the looming probability of a recession, the high-commitment decision of purchasing a property will likely take a backseat as both buyers and sellers retreat from the market.

However, another outcome of QE is it puts downward pressure on the Australian dollar. Coupled with historically low-interest rates, relaxed lending standards and an eventual slowdown in the property market, it opens up the property market to Australian ex-pats that are looking to purchase. For buyers that are willing to remain in the property market during this time, it is likely that many properties will be available at competitive prices.

On the ground, we are still seeing competition on great investor grade properties, as opportunistic investors see value in the timing of purchases made now. Whilst we believe Sydney and Melbourne will retreat slightly (5-6%) in the next 6-months, markets like Brisbane and Adelaide will remain strong as they have been behind the eight balls for a while. Canberra is underpinned by an extremely strong and stable economy, and recently we have missed out on two auctions where there were 11 and 13 registered bidders.

For Sydney and Melbourne buyers, the time is now to buy in whilst there is some uncertainty, because, as we believe, once the virus steadies and we have more uncertainty, these markets will reboot given the recent federal and RBA stimulus measures.

Historically, the Australian property market is relatively volatile to the economic cycles and shocks due to high levels of economic openness to the global economy. However, looking through the long-term horizon, the property market has weathered through many significant downturns, generating consistent returns to homeowners and investors.

Monthly Change in Values versus RBA Cash RateSource: RBA, CoreLogic — Monthly Change in Values versus RBA Cash Rate
Source: RBA, CoreLogic

Get in touch to find out how we can help you with your property journey.

If you like this post, we’d love it if you could share :)

Disclaimer: All data and information provided on this site are for informational purposes only. Milk Chocolate makes no representations as to accuracy, completeness, currentness, suitability, or validity of any information on this site and will not be liable for any errors, omissions, or delays in this information or any losses, injuries, or damages arising from its display or use. All information is provided on an as-is basis.