It's pretty bad out there. Before he left to have his Visa renewed in New Zealand, our technical analyst Gabriel Andre told us to watch 5,050 on the All Ordinaries. We're watching. The All Ords opened up and promptly fell two percent to 5,105. It's a new 52-week low.
What about that data yesterday on the housing market and retail sales? Retail sales rose by 0.7% in May. Apparently that was stronger than analysts expected. Should it surprise anyone? People are good at spending money these days. We live in a spend at all costs society. Saving, not so much.
New building approvals fell 6.5% in May. There are two ways to read this (more probably, but two that we can think of). The first is that tight credit conditions are choking off demand. Investors and builders aren't interested in borrowing to build, especially if potential buyers are less likely to take loans out at higher rates.
The other way to read it is that builders don't see demand for housing so they're not building houses. Yes, yes. That must sound like utter nonsense if you believe there's a genuine housing crisis. But is there a crisis in Australia's stock of available housing? Or is it an affordability crisis? There's a huge difference.
Why are price signals not working in the Australian housing market? High prices tend to attract production. New production-more new houses- brings prices down. It's all text book stuff.
Price signals can be distorted by bad public policy or bad monetary policy. Are Aussie builders stymied from building new houses by rising input costs and a minefield of regulations? Is it just too expensive to borrow money right now? Or do the builders realise there are already plenty of houses? There just aren't any inexpensive ones in places people really want to live.
Oil traded up again on the NYMEX overnight. August light sweet crude traded at US$144.15 in after-hours trading. The U.S. Energy Information Administration said U.S. crude oil inventories fell by 2 million barrels. Everyone else expected them to rise. It was a disappointing result.
Here's the thing. High oil prices are going to cause even more economic pain. If investors think they can flock to oil and ride its rise as the global economy goes to hell, they should remember that if the global economy goes to hell, the oil price is going to fall.
Right now it's just the stock market that's falling to pieces. This is the markets way of telling us that the second half of 2008 is going to be bad for corporate earnings. High petrol prices, tight credit, more expensive imports...gloom, gloom, and more gloom. We're sticking with our call that oil is topping.
Dan Denning
The Daily Reckoning Australia
P.S. to get The Daily Reckoning direct to your inbox sign up to our free e-mail newsletter or if you prefer to use RSS, subscribe to the Daily Reckoning RSS feed.
Related Articles:
- Inventory of Unsold Houses Will Probably Continue to Hold Prices Down
- Mortgage Crisis: Shark With an Appetite
- Homebuilding Goes Down While Economy Gathers Strength
- Geithner Says it Would Take a “Long Time” to Repair the Housing Market
- Housing Is a Buy
About the Author
Dan Denning is the author of 2005's best-selling The Bull Hunter (John Wiley & Sons). He began his financial publishing career in 1997 and has covered financial markets form Baltimore, Paris, London and, beginning in 2005 Melbourne. He’s the editor of The Daily Reckoning Australia and the Publisher of Port Phillip Publishing.
Comment by karl on 4 July 2008:
I find it really, really hard to believe there is a shortage of housing in Australia. I walk past several real estate agencies on my way to work and there has never been a sign in the window of any of them saying "Sorry, nothing for sale today.". I would be surprised, and interested to know if any real estate agencies in all of Australia have ever had nothing for sale because everything available was sold. Until that day, there is not a shortage of housing, just a shortage of buyers.
Because of that, I suspect the media and people/agents who cry out about a housing shortage are simply trying to whip up the buyers into buying.
Comment by Nils on 6 July 2008:
I remember the last housig recession in Sweden - back in 91. We went from a severe housing shortage to (at least what appeared to be) a glut from the onset of the recession to the bottom a few years later. One year you had to advertise to find a flat to rent (correct - the RENTER advertised)and even then you'd be third in the queue. A few years later empty dwellings were everywhere.
My theory is that people's living habits change during economic contraction. Friends share houses, kids stay home longer and falling prices force landlords to maximise occupancy for cashflow. As housing availability is a marginal phenomonon it doesn't take much to tip the equilibrium from scarcity to glut. I now live in Brisbane and things seem to repeat. I could be wrong.
Comment by Zaphod on 6 July 2008:
Here, Here Karl!
Totally agree! it's the same with this so called rental crisis. I see the same thing here. Houses that just sit empty for sometimes over 12 months.Bit of a crisis for the landlord no doubt, but come on.It's true that a good house for a good price in a good location will always have some heavy competition for it.But we're lead to believe that all of these immigrants are flooding in with millions of dollars, buying up property.I'm sick of all this crap and it's good to see more people are waking up tp it.
Comment by POPEYE on 6 July 2008:
When they talk about property going up/down/sideways over x amount of time, are they quoting in real-terms, or are they ignoring inflation?
I see the following happening:
1. RBA will puss out of stinging the debt laden public properly because of risk that the market will crash.
2. This will therefore cause inflation.
3. Property will not increase in line with inflation because of the huge external pressures facing "investors", therefore housing will come back towards the mean in real terms only....I assume over a LONG period.
Saw an investor on mainstream television today forecasting a significant drop in house prices over the next year....haha...you never hear bearish comments about realestate in the mainstream...was so refreshing I didnt need to take a shower and wash off all the TV filth.
And riddle me this, why could a "layman" like me in the health industry predict the ASX crash and my goldman sachs cousin and his buddies not?
Comment by darrus on 8 July 2008:
Hey Popeye,
Answer to your riddle. Healthcarians are paid to spot the unwell, hopefully before they splutter and expire on the couch in the waiting room!
Pingback by Wall Street Bankers: The World’s Most Privileged Outcasts | Bear Market Investments on 6 February 2009:
[...] All Ordinaries Reach 52 Week Low [...]