Beware Misleading Data on the Australian Property Market

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As a highly leveraged asset class, the Australian property market is very sensitive to interest rates. I’ve written previously to subscribers of Sound Money. Sound Investments. about this. Given the interest rate lag, I estimated that peak stimulus hit the housing market towards the end of last year. Growth slowed throughout the first quarter of 2014, and I then predicted the market would basically plateau from around April to June, before coming under pressure (absent another rate cut) in the latter half of the year.

I won’t know how that prediction looks until we get June quarter house price data from the Australian Bureau of Statistics and Australian Property Monitors, so I’ll wait and see.

But I can say you’d be best to take the RP data daily house price index with a grain of salt. This is a lagging indicator which isn’t seasonally adjusted. It shows prices fall every May, which is bizarre. Given the lag in accurate data collection, it more than likely relates to the lull in summer listings.

I mention this because in today’s AFR, Chris Joye writes that the index rebounded by 1.7% nationally since June 11, after falling 2.6% in May and early June. In other words, after a brief pause, the bull is back.

When more accurate data comes out in the following months, I think you’ll find that the bull never went away. But it probably will show that he is getting tired. And without further interest rate cuts, he’s at risk of having a nap in the second half of the year.

Chris Joye’s article does raise other issues though. It quotes a UBS study that shows foreign buyers are driving the boom in Sydney and Melbourne, with up to 40% of new home sales, and 12% of overall sales, made by foreign buyers.

Foreigners make for a great scapegoat when locals whinge about crazy property prices. But for a nation utterly dependent on foreign capital to maintain its standard of living, it’s a bit much to complain about the type or direction of the capital imports that sustain our latte lifestyle.

I complain about property prices too… but I direct my ire at politicians and policymakers who facilitate a system of property speculation that is ruinous to our long term wellbeing. Take the latest credit growth figures from the Reserve Bank of Australia, for example. Housing credit continues to power higher as personal and business credit remain subdued. Investor credit is now running at an annual pace of around 8.5%, and that doesn’t include foreigners!

The data also showed the share of loans going to housing hit an all-time high at 60.5%, while loans to businesses hit an all-time low of 33.2%. No wonder productivity is in the toilet and our economy has an unhealthy dependence on easy money.

Getting back to the foreigner scourge, critics may have one point. It seems kind of odd, or coincidental, that the crackdown on corruption in China happened around the same time that ‘foreigners’ became increasingly interested in our overvalued property market.

Part of this crackdown meant that many corrupt Chinese communist party officials had to dump property in China — the usual storage place for ill-gotten gains. Now if that money is simply making its way to a different storage container, then aggrieved Aussie locals have a right to complain.

Easy money begets dirty money; there’s no way around that. And corruption is everywhere, especially when it comes to politics. But China tends to do things on a grand scale…credit bubbles, property booms, foreign exchange reserves, railways, cities…and corruption.

A tide of dirty money (as opposed to the usual trickle) has the potential to create real social tensions as Australians see themselves (and their kids) increasingly priced out of basic housing. But the property owning classes in parliament don’t dare do anything about it.

Meanwhile, in China, the housing market continues to slow. The Wall Street Journal reports:

China’s housing prices fell in June for the second straight month as property developers cut prices to stoke sales amid a glut of housing in many cities.

Many home buyers have stayed on the sidelines in anticipation of further price cuts, while cases of default among smaller developers are rising as companies struggle to repay debt in a souring property market.

Does this mean capital continues to pour into the Australian housing boom as the epic Chinese boom begins to fade? I don’t know. But with new data showing foreign buying having a much larger impact than the government or the Reserve Bank of Australia have been willing to acknowledge thus far, it’s an issue that isn’t going away.

Regards,

Greg Canavan
for The Daily Reckoning Australia

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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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4 Comments on "Beware Misleading Data on the Australian Property Market"

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Jason
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No suprise that Australian politicians and real estate agents are so blind to not check on wether the money used by Chinese ‘investors’ was money stolen from the Chinese taxpayers by corrupt politicians, state-owned business leaders and venal bureaucrats. What next, perhaps they turn a blind eye if drug dealers, Al-Qaida, mafioso of heroin smugglers decide to ‘invest’ their cash in the property market. The un-policed Australian property market is the best place to launder drug money, stolen money or money from any illegal activity than the casinos of Las Vagas. Another fine example of how Liberal and Labor are… Read more »
Melbourne - payments to the govts
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Melbourne - payments to the govts

So long as the Victorian state govt gets its 2% cut for stamp duty , the big banks donors the 2% foreign exchange input and 5% jmore on the higher mortgages to any competing locals , the council its 1% per annum rate, The construction industry donors their new apartment buildings ,
this will keep filling the Liberal party bucket.

Dirk
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How much longer can China keep pumping air into the balloon?
Creating an epic financial collapse is the polar opposite to affluenza, the latter which they are enjoying so much. If they wish to save face they should stop these wild speculations.

Mark Tomarket
Guest

Jason, methinks Governments of both persuasions can only blush when foreigners show up with bags full of money. They are completely insipid. And how’s the story of billions that went to PNG to set up asylum seeker camps being misappropriated by senior officials and finding its way back into palatial Aussie real estate. Once again Rudd could only blush and ignore.

wpDiscuz
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