The bad news? Australian house prices are down 6.7% on an annual basis, according to data released yesterday from the Australian Bureau of Statistics. The good news? The stock market doesn't care!
If you were drawing up a plan for your dream economic recovery, this is how you would draw it up. The weakness emerging in the Australian housing sector (the fastest decline in prices in six years) would be made up for by resurgent Chinese demand for Aussie resources, led by the first growth in China's manufacturing sector in nine months.
Of course it may not be quite THAT simple. Australian data sent mixed signals yesterday. House prices fell in the first quarter despite the flood of first home buyers in the market. In fact, you could say it's the worst of all worlds in the housing market. At the low-end of the price spectrum, the grant is driving prices up, essentially wiping out the benefit of making prices more affordable. At the high end, prices are falling anyway as investors keep their powder dry (and realise that interest rate will rise again).
Prices at the lower-end of the market rare rising. "New figures from property analysts Residex show that 57 per cent of suburbs with average house values below $350,000 experienced a price increase of more than $7000 in the six months to March," reports the Sunday Age. "A similar rise was recorded in almost half the suburbs with house prices below $500,000," in the Melbourne property market.
"Average prices soared by $30,500 in Werribee South, $26,500 in Kilsyth South, and by $24,000 in Broadmeadows and Albion - all of which are suburbs with house prices at the lower end of the market favoured by first home buyers." Hmmmn.
Should it surprise anyone that housing values in these places have already grown to exceed the value of the first home buyers grant? It wouldn't surprise anyone who knows how markets (and real estate agents and mortgage lenders) work. And to be frank, state governments that generate income from stamp duty probably have no problem with higher home prices, even if the simple price inflation leaves new home buyers with a more unbearable mortgage and a less affordable home.
So how will the RBA wade into this morass of data today? It would have learned that job advertisements have fallen by 49.9% in the last year and 7.5% alone in April, according to a survey by the ANZ Group. If businesses aren't hiring now, won't it lead to higher unemployment later (which would put even more pressure on mortgage owners?) We'll have a better idea on Thursday, when the 'official' employment numbers come out from the ABS.
In the meantime, the TD Securities-Melbourne Institute Monthly Inflation Gauge says inflation is up just 2.1% in the last year. Couple that with the rise in the Aussie dollar lately as the "yield trade" is back in vogue, and you can make a pretty strong case for the Reserve Bank cutting rates when it meets today. Why?
The RBA doesn't have to defend the dollar. The markets are doing that. With inflation seemingly tame, the Bank can give mortgage owners more relief until the employment situation improves in Australia (if it does so this year, that is).
What do we think? Central Banks always overshoot in both directions. It's ridiculous to think that a small committee of men and women know exactly what the price of money and credit should be at any given moment. However, since the mandate of the bank is both price stability and growth, you can expect the bank to over-stimulate now, leading to much higher inflation later.
But really, who is worried about such things today? The S&P 500 has entered positive territory for the first time since early January. According to Swarm Trader technician Gabriel Andre in Money Morning, the Aussie market (measured by the S&P ASX/200) is now entering the second wave of a rebound rally up from last year's 48% decline.
S&P ASX/200 to Embark On Second Rebound Wave?
Source: www.moneymorning.com.au
Gabriel says wave one of the rally took the index from around 3,100 to around 3,700. It ran into resistance at 3,800. But it seems to have smashed through that this week. The second wave, he says, could take it up to 4,500. That would constitute a 50% rebound from the total decline between the 2008 high and the 2009 low.
We'll leave the technicals to Gabriel. But at the fundamental level, you'd certainly think the postponement of the government's Emissions Trading Scheme (ETS) is a breath of fresh air for the energy and mining stocks that would have been hit hardest by it. LNG producers and miners may see an especially big tailwind, especially when you factor in the idea that China's $781 billion stimulus is leading to a recovery in that economy.
So is it all over? The crash? The depression? The credit crisis?
Well, no. We wouldn't expect the banks stress tests to reveal anything at all later this week. If bad news is already priced into bank stocks, less than bad news coming from the stress tests might even lead to a rally in financials. The market anticipated that result today, driving the financials up on the S&P. And in the end, perhaps the stress test was Tim Geithner's way of forcing the banks to raise capital more quickly than they otherwise might.
But in a lot of ways, this feels like a "catch up" rally, where timid investors "catch up" with the trend buy getting off the sidelines and into the market. Or should we say "ketchup" or perhaps "catsup?" It's the kind of rally that makes things seem (or taste) better than they are (like a meat pie at the footy). And it's driven by people who are afraid of missing out on an even bigger rally.
If that's correct, then it's exactly the sort of convincing move that the insiders would ride early while selling into retail strength. Get everyone back in the game, sell for a tidy 35-40% profit on a short-term basis, then hunker down to see what the second half brings.
After all, the old trading adage is to "Sell in May and go away." It's supposedly based on the idea that the stock market generates its biggest returns between November and May on the calendar. The gap between May and the last quarter is a kind of no man's land for investors. We have no idea if that's true.
We do know that there's more than one second wave out there, though. A second wave rally in the ASX is a great time to make trades and take some profits on recovering shares. But let's not forget the second wave of bad housing debt in the U.S. (Alt-A mortgage) and the second wave of real estate losses coming from commercial property.
Those losses are going to further impair bank capital, put pressure on lending, and lead to larger declines in employment. Economies that live and die by credit growth and residential real estate still have some dying to do, we reckon. But for us the living today, the rally is something to enjoy while it lasts.
Dan Denning
for The Daily Reckoning Australia
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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 Pete on 5 May 2009:
Dan Denning:
"If you were drawing up a plan for your dream economic recovery, this is how you would draw it up."
From who's perspective? A mini mining boom doesn't solve our economic problems. A 'recovery' from this very point could only occur with a HUGE influx of capital, directed into the right places. Mining revenue is not directed to the right places. Ultimately, mining revenue will not do a whole lot to fix the major credit issues we are facing.
...and where did I get this kind of idea? From right here!
The rest of the article was good though, a solid finish.
Comment by Pete on 5 May 2009:
Oh, and who else here thinks that a rally in stocks would mean higher oil prices?
Comment by Dan on 5 May 2009:
Re: Housing prices and the FHB grant.
You have rightly shown how the FHB is nearly a profit making exercise for governments - no wonder they are doing it! Talk about sugar coated poison! With results like that I shouldn't wonder that they'll extend the FHB at the next budget, since it's probably the only area where tax revenue has risen (or not fallen) recently.
Comment by Greg Atkinson on 5 May 2009:
The bottom line is that if you signed up to the gloom and doom story you have missed out on a nice little rally. As for the 'Swarm Trader"...well he seems to have changed camps now and is making more vague comments to try and be correct now matter which way the market goes
The annual fall in property prices of 6.7% is not a crash and another reason prices were down was because the higher interest rates in the first half of 2008 cooled the property market. Property prices may even fall further but calls of a 50% nationwide fall are looking pretty silly I would suggest.
It might just be that end of the world is not around the corner and this nasty bear market is in fact, just a nasty bear market.
Comment by Pat Donnelly on 10 May 2009:
The government stimulus appears to have had an effect on retails sales and also allowed savings to increase. I do foresee price falls, but small and over the medium term, essentially allowing inflation to do its work as the deflation isn't as bad here as elsewhere in the world. The agricultural sector is always very circumspect about expected bonus harvests and food prices are increasing. This too will have a positive effect. If the recovery from the drought continues, then a larger effect? But the house price rises are gone as interest rates are not going to stay low if inflation does its worst. Very much a muddle through?
Good article.
We are still the lucky country!
Comment by James on 13 June 2009:
Good article. Couldn't agree more.