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With RBA in their corner, investors are treating shares and property as sure bets — and that's risky
Asset prices are now regularly soaring to new heights.
To be clear, this is not normal.
Asset prices, including property and share prices, rise over time, sure, but not to brave new heights daily.
Why is this happening? And are these once-risky financial markets now perceived as a sure bet?
These questions and the future of the Australian economy and 15 million jobs attached to it are what worry investment experts and economists.
Tracking the Australian property market's upward momentum is straightforward.
On the demand side, investment tax breaks, lower interest rates and a steady flow of migrants generate plenty of demand.
Indeed, the number of new investor loan commitments for dwellings rose 3.5 per cent in the June quarter, which drove overall lending activity.
On the supply side, a chronic housing shortage, despite efforts from both state and federal governments to break more ground on housing, has also supported house prices.
Under the government's lofty 1.2 million homes target, roughly 240,000 new homes need to be built every year to meet growing demand, but we're falling short of that mark by about 60,000 homes a year.
The lack of available property is also pushing up rents, with Sydney and Brisbane leading the charge, according to property market analysis firm Cotality (formerly CoreLogic).
Cotality's capital city rental value index rose 3.0 per cent in the year to July, up from 2.7 per cent in June, marking the end of a 16-month run of moderating or stable rental growth.
Meanwhile, the share market has produced several record highs in recent weeks.
On Friday, the benchmark S&P/ASX 200 index — the main index tracking the ups and downs of the market — surpassed 8,900 points.
That's an all-time high, following several records this week and last.
It means the share market is up 22 per cent since it belly-flopped after US President Donald Trump's so-called "liberation day" tariff hikes.
Bitcoin and gold, too, are also consistently at or approaching all-time highs weekly.
Analysts say there is a direct link between this asset price appreciation and record levels of liquidity, or cash, in the economy.
Central banks can increase levels of liquidity by lowering interest rates and buying bonds — anything that puts cash in the economy.
It's worth bringing up a bit of economic jargon at this point.
"Moral hazard" is an economic concept that describes the pickle firms get into when they know they'll be bailed out — for example, by a central bank or government — if they make mistakes or take on too much risk.
You could argue moral hazard was created in 2008 when the US government bailed out some of Wall Street's biggest banks with the "troubled assets relief program" and the Emergency Economic Stabilisation Act.
It set a global precedent that implicitly stated: If you make recklessly risky financial investments that eventually sour, governments and central banks will bail you out because the alternative is too horrific.
But is there more going on here?
Is it possible that central bank "liquidity-at-the-ready" is not just emboldening companies to make riskier financial decisions, but a signal to investors that their investments aren't as risky as they had thought?
I asked Reserve Bank governor Michele Bullock on Tuesday if she accepted that the RBA had effectively underwritten financial markets, taking away significant levels of risk for investors.
"The guiding light here has to be inflation and employment [in terms of monetary policy]," she said.
"[The RBA] also has responsibility for financial stability matters and it will be there [to support the markets], but it's not going to come in just for the sake of protecting asset prices.
"We don't aim at asset prices.
"We are focused on inflation and employment."
Financial stability is becoming increasingly important for Australia.
Our superannuation industry is now worth more than $4 trillion and is increasingly exposed to Wall Street, which is riddled with financial risks, analysts say.
But there's also a heavy concentration of ownership in a few big-name Australian stocks, too.
When the price of Commonwealth Bank shares slumped this week, boss Matt Comyn highlighted that 13 million Australians, directly or indirectly, owned the stock.
Montgomery Investments founder Roger Montgomery said the RBA applied this approach to policy — focusing on its financial stability responsibilities — during the global financial crisis of 2008-2009.
"The Reserve Bank's actions, particularly during crises like the [2009 financial crisis] and the COVID-19 pandemic, have shaped markets but the impact on risk isn't straightforward," he said.
"The RBA has a mandate to maintain economic stability, including price stability, full employment and financial system stability.
"During crises, it can inject liquidity into the financial system through measures like quantitative easing or providing funding to banks via facilities like the term funding facility (TFF) introduced during COVID-19.
"These actions aim to stabilise markets, ensure credit availability and prevent systemic collapses."
But the mere presence of this backstop now also seems to be supporting asset prices.
"However, this expectation can encourage excessive risk-taking.
"Investors may overweight riskier assets or overpay for stock, disregarding their price."
There was an increased chance, he said, that investors would be "more inclined to FOMO [fear of missing out]".
"The central bank's action may shorten the pain but it won't prevent the decline," he said.
It all raises a crucial question for asset markets more broadly — has the very concept of risk changed?
For example, you know if you put your cash in an Australian bank, it's very safe.
You also know if you buy an Australian government security, you're highly likely to get your money back with some interest.
But now it seems the more we invest in the share market or property market, and the bigger those markets grow, the more pressure builds on both the government and RBA to safeguard those markets.
Why? Because a collapse in either market would be a wrecking ball through the economy.
You can see why next week's economic reform round table is so important.
Without robust levels of productivity, a credit crunch would be catastrophic to an economy propped up on mining, banking and the property market.
The Reserve Bank can be there to support financial stability, but has it distracted us from building a strong backbone for the Australian economy?
