What an uninspiring way to begin the new financial year. Aussie stocks started out the second half of the year down two percent, staggering home from the bender celebrating the end of the first half. Come on boys. Get it together.
But the task of today’s Daily Reckoning is not to figure out where stocks are headed in the second half of the calendar year. No one knows. Our strategies are focused on energy stocks-both the conventional and highly unconventional kind. We’re bearish on fixed income, a bit more bullish on cash, precious metals, and tangible assets.
What about housing? ANZ Bank published a report on the subject yesterday. Among other things, it declared that, “We expect dwelling prices to edge higher for much of the remainder of 2009 with upside risk presenting from intensification of strong fundamentals, a shift in price expectations and restoration of confidence.”
That is some seriously tortured syntax. What does “upside risk presenting from intensification of strong fundamentals” actually mean? Does that mean there is a risk prices could go up? Blah blah blah.
On the plane to Adelaide yesterday we had a much more down to earth conversation about property with the man sitting next to us in the exit row on our Boeing 737. He was reading a story in yesterday’s Australian about the new “boom in the bush.”
“According to RP Data-Rismark, the national median house price of $468,819 is just $520 shy of the record set in February last year, before the global economy sank into recession. Melbourne is leading the housing recovery, with a 6.1 per cent growth in prices between January 1 and May 31 and auction clearance rates in excess of 80 per cent for the past seven weeks. Sydney recorded 5.2 per cent growth in prices over the same period.”
Adelaide was not near the top of the list. And that had this passenger concerned.
“My wife and I decided to buy another property about 18 months ago. We thought the financial crisis was a good buying opportunity. You had a lot of people scared. But now, I just want to get rid of the thing. It’s keeping me up at night.”
“But I’ve heard Adelaide is a nice place to live.”
“It’s lovely. But I bought around $410k and already the median price is below that here. I don’t care what I get now. I’d be happy with $408. I’m going to call my agent and let him know. My wife tells me I’m being silly. But I just want out. I have my pay stubs from back when I bought my first house and I have the mortgage too. I made $8,000 a year and the house was $25,000. Today, though, we need that money for retirement…I don’t wanna be caught selling when everyone else is. I want out.”
It sounded like he wanted out of the market.
“I get worried when people saying prices always go up. I mean there must be some evidence to show that isn’t true. Wouldn’t people want to know that before they took out a big mortgage…especially with interest rates. They have to go up sometime don’t they?”
Your editor didn’t say much because he was nodding the whole time. Choir, meet preacher.
Of course this preacher and this choir may be excommunicated from the Church of Aussie Housing. Median home values are within shouting distance of their all-time highs, thanks for the first buyer’s grant. It’s a disaster in the making.
Demographics, immigration, the concentration of the population in urban centres, and the much ballyhooed supply gap are all trotted out as reasons why house prices always go structurally higher in Australia. This also explains, apparently, how Aussie house prices can defy household earnings gravity.
That is, people spend much larger multiples of their income on housing here than anywhere else in the world. How is that affordable? A reversion to the mean ratio (3:1) would mean a serious correction/crash. That seems impossible and psychologically impermissible to a lot of Aussies. But once you wrap your head around the idea that, historically, house prices don’t go up much faster than the rate of inflation, it begins to make sense.
There may be multi-year periods (we call them credit bubbles) when low interest rates create a boom in mortgage lending. This leads to house price inflation. But those booms always go bust.
Governments seek to avoid the bust by reigniting another round of inflation to keep household nominal wealth from utterly collapsing (or simply reverting to a more sensible mean). Hence, the Aussie government sparking a lending boom to those people in Australia with the most to lose from taking on huge mortgage at the low end of the interest rate cycle; young Aussies who are the most vulnerable workers in the job market and spend the highest percentage of their discretionary income (not much) on an asset they bought at the top of the boom.
Come to think of it, if you were deliberately trying to wipe out the financial prospects of an entire generation by saddling them with crushing debt, increasing the first buyer’s grant is probably exactly what you’d do. And you’d laugh along with your banker friends.
Incidentally, two of our confirmed panelists for the Debt Summit later this month will have a lot to say about Aussie property. Stay tuned.
Finally, some reader mail. It raises a problem that’s been growing in the back of our brain. Credit is not money. So what happens if the credit bubble deflates and the liquidity measures (which are not money) instituted by the Fed and other central banks never turn into new money supply. Does this invalidate our entire position on inflation, and the investment strategy that goes with it? No! More on why tomorrow.
I have just read today’s DR – good work as always – and refreshing to hear more analysis on the likelihood of deflation prior to potential (hyper-) inflation.
Two highly pertinent factors, it would seem to me, are invariably over-looked in this debate and I thought you might like to explore them for your DR readers.
1. Central bank’s ‘quantitative easing’ via the printing press certainly appears highly inflationary viewed against metrics such as M0, MZM etc. However, viewed against the scale of debt lurking in the ‘shadow money’ world of derivatives where the figures are a factor of 10 greater, it compares to a bit of loose change. As you point out, the coming tsunami of ALT-A et al. debt refinancing/default represents a huge deflationary force that will manifest significantly via the derivatives market.
2. Of course the banks are going to rebuild their capital base with bail-out funds and deposit such taxpayer largesse in the safest place possible: the Fed – they were always going to and I find it hard to believe that anyone thought otherwise. If the Government/Fed was serious about re-liquefying the credit markets all it basically has to do is start charging the banks for holding their reserves. The money-grubbers would soon have their funds out and lent where they could get a return – albeit at extortionate interest rates.
for The Daily Reckoning Australia