Hi [subscriber-firstname],

When writing these newsletters, I do so in the effort of putting concepts to you that might hopefully spark a different line of thinking when it comes to real estate, money, economics and the profound affect they have on all of our lives.  In keeping with that theme, this week I will offer a commentary on why I think banks, real estate & interest rates combine to affect the Australian economy more than any other domestic influences and why it is crucial our real estate sector continues to grow.

Everyone knows that low interest rates are good for home owners and generally anyone who is looking to borrow money, but how does the official cash rate affect the economy and what does this have to do with property?

The basic way to look at this would be to say that when interest rates are low, my loan repayments are less therefore I have more money to spend in retail and other sectors of the economy. Although this is true, it is really only one small piece of the puzzle.  In a lot of cases, when rates are low, people won't always reduce their re-payments, often people will actually just borrow more money and keep their monthly repayments the same.  So if a lot of people do this and do not have any extra 'spare cash' to spend in to the economy, how do low rates stimulate growth in our economy?  The answer is actually quite interesting.

I think we would all agree that when interest rates are low, people are encouraged to borrow money from banks and for most people, the largest amount they ever borrow will be for the purchase of a house.  So how does this affect the economy?  Unbeknownst to most people, the majority of money in our economy is not coins and notes.  In fact physical currency makes up only about 3.5% or $56.5 billion dollars (December 2013 - RBA Monetary Aggregates Chart) of our total money supply.  So where did the other $1.556 trillion dollars (December 2013 - RBA Monetary Aggregates Chart) come from?  The short answer is, that money exists solely in the computer systems of Commercial Banks and was created when they (Banks) issued loans.

Every time you borrow money from a bank, that money is simply typed in to your account and the banks deposit accounts remain unchanged.  To put it another way, when you take out a mortgage, the bank creates that loan amount out of nothing by simply adjusting the numbers in your account.  This is how 96.5% of all new money is created.  CLICK HERE to learn more.

According to the RBA's monetary Aggregates chart, in the 12 months to December 2013, Commercial Banks have created $61.8 billion dollars of new money which is now circulating in our economy and they did this by way of issuing loans.  When we understand the process of money creation, it doesn't take long to connect the dots and to realise that the more people borrow, the more money there is in our economy.  The less we borrow, the less money there is.  So when the interest rates are low, people are encouraged to take out more loans and thus the banks create more money.

It isn't a coincidence that low rates bring economic growth and now you know why.  With an extra 61.8 billion now in circulation compared to 12 months ago, basic maths says that there is just simply more to go around.  When we look at property transactions in Brisbane, we see that the rolling average is currently sitting at 4,070 transactions per month compared to roughly 3,000 per month this time last year.  Nationally, the rolling average of property transactions is 42,842 per month, compared with 36,287 per month 12 months ago. 

For the reasons just mentioned, it is clear to see why the Australian economy relies very heavily on the buoyancy of the real estate sector.  Right now, the real estate sector is travelling solidly. With consumer confidence being high, transaction numbers increasing and mortgage activity also on the up, there will be progressively more and more money flowing throughout the economy, starting in the property sector.  With this being the case now, should conditions continue on this path for a prolonged period, we should also see continued economic growth.

For evidence as to how the housing market affects the economy in both the positive and negative direction, one need look no further than the GFC.  In a previous edition of this newsletter I have explained the GFC and how the property market played a key role in this historic event.  You can access this newsletter (and all previous editions) by CLICKING HERE.

In summary, my theory about predicting property market movements relates specifically to 'following the flow of money'.  Where money is being spent, there will be growth. Right now we are seeing property transaction rates sitting at a 6 year high and are closing in on record levels.  This of course means that there is a lot of money being created and spent in this area of the economy.  Whilst this trend continues, as will the growth in both the property sector and the general economy.  My prediction is for clear sailing and consistent growth for the foreseeable future but the key question is... for how long? 

If you are looking to sell, we have not seen a better marketplace in which to do so, for many years.  If you are looking to buy, my advice would be to get in now to take advantage of the low interest rates and potential future growth.

If you liked the content in this newsletter, let me know, I always enjoy getting feedback from my subscribers.  If you would like more information about the global system of money creation, I have put together various content in the 'economy' section of my web site which you can view by CLICKING HERE.

Once again, thank you for tuning in.  Until next fortnight, make it a great day and I look forward to speaking with you again soon.