Australian Housing Market Getting Stronger Despite Fear of Inflation

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MELBOURNE AUSTRALIA (Daily Reckoning): While the United States housing and mortgage market appears to be falling down around everyone’s ears, the Australian housing market continues to go from strength to strength.  However, the inline jobs figures released on Friday night in the US did help bolster some of the market sentiment towards construction stocks.

Last week we heard about US subprime mortgage lenders – companies that finance loans for the least financially capable – having to potentially write-off millions of dollars worth of outstanding debt as defaults increased rapidly.

Interestingly, the news of the impending disaster in subprime mortgages came as Forbes magazine released its latest list of billionaires.  Or to be more precise, multibillionaires.  Of course, many of them are nothing more than ‘paper’ billionaires who have benefited greatly from rising commodity prices.

A slump in the value of commodities could see them go the same way as the dot-com billionaires.  However, we would like to think that the resources boom has a little more substance to it than online pet shops.

But back to the point.  According to data released by the Australian Bureau of Statistics, the number of home loan approvals granted in January gained by 0.3% to 61,969 for the December period.

Rob Henderson, an economist at National Australia Bank, told Bloomberg News, “We will see a turnaround in the housing market.  The fundamental pressures remain in place to support housing.  There is strong underlying demand and not much new supply.”

Looking at the chart for mortgage financing growth, there is a definite sign that the market has picked up the pace again after falling in 2005 and 2006.  Peter Jones, chief economist at the Master Builders Association, told the Australian Financial Review, “Home builders can look forward to gradually improving conditions over the course of the year, provided the Reserve Bank does not tighten monetary policy again.”

In addition, the number of financings for investment properties has increased.  The ABS statistics noted an increase of 4.6% in January, “following an increase of 4.1% in December 2006.”  The overall figures are still some way off the heady numbers reached during the height of the investment property boom in late 2003.  Up to that point the value of “investment housing commitments” had increased by three-times the amount in two years.

However, alarm bells concerning inflation start to ring when we combine rising financing with a pick up in the cost of wages. Inflation is at the higher end of the Reserve Bank of Australia’s target range, and even with the price of bananas falling to below AUD $3 a kilo (your correspondent has started buying them again!), pricing pressures still remain.

On top of that, there is China’s burgeoning surplus, which was more than three times analysts’ expectations.  This not only showed that imports have increased by 13%, helping Australia’s resources sector, but also that exports had increased by 52%.  Although Australia may have only received a small percentage of exported goods from China, this is a clear indication that consumers and businesses that rely on China are buying up big.

The strong Aussie dollar is undoubtedly affecting consumers spending on imported goods.  Individually, these issues could create some problems for Australia.  Combined, they could work to push inflation to unmanageable levels.

Kris Sayce
for The Daily Reckoning Australia

Kris Sayce
Kris Sayce, dubbed the ‘Jeremy Clarkson of Australian finance’, began as a London finance broker specialising in small-cap stock analysis on London’s Alternative Investment Market (AIM). Kris then spent several years at one of Australia's leading wealth management firms. A fully accredited advisor in shares, options, warrants and foreign-exchange investments, Kris was instrumental in helping to establish the Australian version of the Daily Reckoning e-newsletter in 2005. He is currently the Publisher, Investment Director and Editor in Chief of Australia's most outspoken financial news service — Money Morning.
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