Australia: Selling the Farm to Eat the Food

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In yesterday’s Daily Reckoning I said that household spending was about the only thing holding the economy up right now. It accounted for 70% of total headline growth of 2% for the year to June 30. Combined, household and government consumption accounted for 105% of growth. (Other parts of the economy went backwards, which is why consumption can account for more than 100%.)

Australia is indeed a consumption based economy!

But this flimsy growth model took a hit yesterday. Retail sales data for July fell 0.1%, the first such fall in over a year and well below economists’ forecasts. It suggests that households went into the third quarter with a little less spending power than many had hoped.

Ominously, the largest fall occurred in household goods. This follows on from the economic growth data released on Wednesday, which showed a fall in dwelling construction for the first time in two years.

Hmmm. If housing construction is at its peak, then there’s no need to keep buying household goods, right?

The market didn’t like the data, and stocks in the consumer discretionary sector were hit hard. The market thinks Australia is sliding towards recession…and it’s probably right.

At the very least, we’re stuck in a low growth environment. Of course you’d know all about this if you’ve been reading the Daily Reckoning for the past few years, or if you picked up a copy of Vern Gowdie’s free book, The End of Australia.

On the other hand, if you’d listened to Treasurer Joe Hockey or any of the government’s economic salesman, you’d be in for a bit of a shock. Hockey is still dribbling on about how the recent economic data is consistent with the government’s long term forecasts.

But anyone with a bit of common sense knows better. The Financial Review reports today that:

Sluggish growth looks firmly entrenched and hopes of a sustainable rebound above 3 per cent, the basis of Treasurer Joe Hockey’s long-term budget strategy, are increasingly fanciful, say experts.

“Australia does not have a credible path towards putting its budget in order over the long term,” said Ross Garnaut, one of the nation’s top economists and a professor at Melbourne University. “Until we are on such a path we are highly vulnerable to deterioration in external conditions.”

The ‘external conditions’ mentioned by Mr Garnaut refers to our complete and utter dependence on foreign capital to support our standard of living. As I mentioned yesterday, we had to borrow nearly $20 billion last quarter.

Most of this borrowing occurs via the banks, to fund our insatiable demand for property. You can also see this dynamic at work with the recent debates about foreign ownership of property.

This is a direct result of Australia’s broken economic system. That we have to borrow from offshore is a given. How that money comes into Australia is not really under our control.

It enters via banks borrowing from wholesale money markets…via foreign ownership of shares, or via direct ownership of property…whether it be commercial, residential or agricultural.

No doubt the biggest issue in housing right now is the belief that foreign buyers are helping to push prices of real estate higher, especially in the main centres of Sydney and Melbourne.

Fairfax Media, owner of property spruiking site Domain, is hopelessly conflicted in trying to report on the matter. Yesterday it cited ‘research’ from the University of Sydney that examined data from the foreign investment review board (FIRB), data that everyone knows is hopeless. That’s why the government recently took monitoring of foreign property buyers away from the FIRB and gave it to the tax office.

Anyway, here’s the Domain article:

New research has cast doubt on claims that foreign investment is pushing up Australian house prices, indicating offshore Chinese purchases totalled just 2 per cent of all transactions in 2014.

“It’s so low that it would be hard to argue that this is driving the affordability crisis in Australian real estate,” said the author of the research, University of Sydney professor Hans Hendrischke.

Dr Hendrischke compared the value of all residential property sales against Foreign Investment Review Board (FIRB) statistics, to calculate the impact of Chinese buyers – Australia’s largest source of foreign investment – on local housing markets.

And then there was this little gem further along in the article:

The research did not take into account the potential impact of illegal purchases by foreigners, which the Federal Government is presently investigating.

Fairfax followed this up with another article today in afr.com, this time citing the opinion of property valuer Herron Todd White. Funnily enough, this conclusion completely refutes the University of Sydney’s research. Check it out:

The lower Australian dollar makes property cheaper for foreign buyers and could increase the bubble prices being paid for apartments in areas of Sydney and Melbourne.

“A lower Australian dollar would lower the cost for overseas investors to purchase new properties in Sydney which would put upward pressure on the price of new properties,” says valuer Herron Todd White.

Its latest red-flag report warned some apartment buyers in Sydney and Melbourne were paying too much for properties in competition with foreign buyers, leaving owners and lenders exposed if the market suddenly turned.

The report says “two-tier” markets are starting to form in capital cities where developers of units are heavily dependent on foreign and interstate investors rather than local demand.

If you think foreign capital isn’t pushing up the price of Aussie property, you’re either naïve or conflicted. Don’t forget, universities depend on foreign students for their income. The vast majority of foreign students in Sydney are Asian. And keep in mind that Professor Hans Hendrishke is a professor of…Chinese Business and Management!

Now before anyone wants to play the race card here, let me point out I’m only calling out phoneys for talking their book. It is absolutely within the rules for foreign investors, whether they are Chinese or Malaysian or whatever, to buy newly built homes or apartments.

But it is absolutely against the law for foreign nationals to buy established homes or apartments. And it’s a law that real estate agents, lawyers and the buyers themselves have completely disrespected for years now…to the detriment of our society.

These are the sorts of problems you face when you live beyond your means for years. You start to sell off assets to keep the dream alive. This is the beginning of the end for Australia.

Regards,

Greg Canavan,

Editor, The Daily Reckoning

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Greg Canavan
Greg Canavan is the Managing Editor of The Daily Reckoning and is the foremost authority for retail investors on value investing in Australia. He is a former head of Australasian Research for an Australian asset-management group and has been a regular guest on CNBC, Sky Business’s The Perrett Report and Lateline Business. Greg is also the editor of Crisis & Opportunity, an investment publication designed to help investors profit from companies and stocks that are undervalued on the market. To follow Greg's financial world view more closely you can subscribe to The Daily Reckoning for free here. If you’re already a Daily Reckoning subscriber, then we recommend you also join him on Google+. It's where he shares investment research, commentary and ideas that he can't always fit into his regular Daily Reckoning emails. For more on Greg go here.
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