New Australian Home Buyers Aren’t Convinced

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The key to blowing up a successful asset bubble is that you must constantly attract new money into the asset class you’re trying to inflate. By that standard, yesterday’s Australia’s housing finance figures were better than expected but worse than required. The numbers were up. But new home buyers have not yet been bullied into the market by lower rates.

The value of home loans for owner-occupied housing rose 5.8% to $14.9 billion in March, according to the figures released yesterday by the Australian Bureau of Statistics. This was a firm rejection of our prediction that the numbers would suck. To be more specific, let’s put it in the form of a question: have rate cuts put a housing-led recovery back on the cards?

The numbers would have been welcome news to Glenn Stevens and the team at the Reserve Bank of Australia. They know Australia needs lower rates and more business investment to compensate for lower commodity prices and China’s shift to a consumption model. But there’s more to yesterday’s housing data than meets the eye.

First, new Australian home buyers aren’t convinced. New home buyers made up only 14.2% of demand. That’s the lowest percentage in nine years. What does it tell you?

Low interest rates are nice. And lower interest rates may be even nicer. But no matter how often a brain-damaged economist repeats it, lower interest rates don’t make a $600,000 house more affordable for someone on a $60,000 income. They just mean you’ll have to borrow more money now and repay it for longer in order to have a roof over your head.

What WAS interesting about the data is the big jump in new construction loans. They were up over 10% on the month and over 21.4% from the same time last year. This is a result of state governments creating incentives for new home buyers to actually build rather than buy. As public policy, it’s designed to increase housing stock, which should eventually actually lead to lower house prices.

That bit caught our eye because it suggests that some people are a lot more interested in building houses than, say, buying stocks. We’ve been working with our friend Phil Anderson on a project that explains and forecasts Australian property prices. The latest bit of data may confirm Phil’s view that Australia is actually on the verge of an 18-year boom in property prices.

That view certainly came as a shock to us when Phil first articulated it. But it’s based in part on the idea that land values move in cycles. Those cycles are determined by the availability of credit created by the banks and the willingness of people to borrow money. Phil has put the argument together in a presentation we’re going to make available in a few short weeks.

In the meantime, we have to say it’s certainly not our view. In Austrian economic terms, more investment in Australian property at these prices is simply a continued misallocation of resources based on an irrational view that property always goes up. There’s also the usual myth that Australians value housing more highly as a social goal than other countries, which has nothing to do with how ridiculously unaffordable prices still are.

But in a red pill/blue pill way, Mr Anderson’s views may make sense. That is, if you’re giving up on shares as an asset class to grow or preserve your wealth, you still have to do something with your money. Investment in land is really the only viable option for the middle class. At least it’s tangible.

And let’s consider what would happen if Australian interest rates were zero-bound. If the RBA lowers rates to around 2% in order to spur business investment, you’d expect to see a surge in non-bank lenders offering low-rate, high loan-to-value mortgages to anyone with a pulse. You can argue whether it’s a good idea to be deliberately imitating the US-subprime boom, given how disastrous that was for everyone involved. But it doesn’t mean it won’t happen anyway.

In any event, even though we find Phil’s ultimate conclusions controversial, we were impressed with the depth of his work on property cycles. Phil brings in the work of Nickolai Kondratiev and WD Gann as well. As a publisher, this is exactly the type of well thought out market research we’re keen to publish in Australia. Stay tuned.

Meanwhile, an Australian dollar crash can’t come soon enough for some Australian companies. Engineering firm Coffey International warned of an ‘increasing cascade’ in project cancellations and delays. It blamed the strong Australian dollar. Its share price cascaded down by 56%.

Coffey Managing director John Douglas told the press, ‘What we have been seeing is significant project delays or cancellations that were broader than simply mining.’ Coffey reckoned it would get some of the work at the $45 billion James Price Point liquefied natural gas plant. But that was one of just 54 projects to get shelved or cancelled. Oil, gas, mining and infrastructure spending have all peaked, if Coffey’s experience is any indicator.

All of this fits perfectly with Greg Canavan’s thesis that any positive macro economic data is really a tra p at this point. Greg’s basic idea is that all the benefits of the China infrastructure boom are behind us. If your portfolio — especially your asset allocation — doesn’t reflect that, you’re in for a rude awakening.

Speaking of which, burn tomorrow’s papers. If you don’t, you’ll have to endure page after agonising page of budget analysis. We’ll save you the trouble: Australia’s budget is put together by economic illiterates. The cost of that illiteracy is about $17 billion and a passport to Zombieland.

Regards,
Dan Denning
for The Daily Reckoning Australia

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From the Archives…

The Higher the Market, the Harder the Fall
10-05-13 – Vern Gowdie

India’s Balance of Trade — a World out of Balance
9-05-13 – Greg Canavan

How the Dow is Just Wall Street’s Marketing Tool
8-05-13 ­– Dan Denning

Watch Out For When Australia’s Terms of Trade Goes Back to ‘Normal’
7-05-13 – Greg Canavan

The Greatest Wealth Transfer in History
6-05-13 – Bill Bonner

Dan Denning
Dan Denning examines the geopolitical and economic events that can affect your investments domestically. He raises the questions you need to answer, in order to survive financially in these turbulent times.
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7 Comments on "New Australian Home Buyers Aren’t Convinced"

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slewie the pi-rat
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“Let the dead bury the dead.”
get it?
ask Bonner what he’s coming up with?

truth and integrity
Guest
The effect not the cause. Beware the $A debasement. The international financiers from the US and Euro will burn us. Remember assets A = equity E + debt D. When you drop the $A by 10% say from $1.05 to $0.95 it will cost 10% more to purchase an asset. The equity remains constant in the short term. Take A $1 = E $0.50 + D $0.50. Increasing the cost of an asset by 10% we have A $1.10 = E $.50 + D $0.60. This is a 20% increase in debt. And a 20% drop in dollar requires a… Read more »
garry
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Dan, an interesting call, however it seems a bit too mainstream to explain why these high house prices persist. Whereas another slant might explain things better Whether you are aware of it or not, Canberra has exposed Australians to the full brunt of competition from China. Yes, our own domestic housing has long been up for grabs in China, thanks to Wayne Swan and his lust for foreign cash. A quick visit to ‘Gifang’ – ‘Ironfish’ – or a raft of other portals for doing business here will make this abundantly clear. Then to compound things further – physical auctions… Read more »
Ross
Guest

This is on the fiat (money) ….

http://www.prudentbear.com/2013/05/bubbles-inflating-faster-than-gdp.html#.UZLlTsomP_M

and just importantly … right on the reserve bankers swollem balance sheets

Ross
Guest

remember how our 4 pillars got off the hook with BIS and Fitch because Glenn Stevens claimed they couldn’t load up on sufficient stocks of AU government bonds?

http://www.bankingday.com/nl06_news_selected.php?act=2&stream=1&selkey=14798&hlc=2&hlw=

plenty of AU T bonds coming

There’s very few spots unreserved in Ken Henry’s entrepeneurial new wombat hole business, those currently being bought up by serving and former public servants (especially those having sat on Bank & Super Boards or those having recently sold out their consulting business to a big 4 multinational).

Shane Saunders
Guest

Its seems pretty simple the government should not spend what we don’t have. wont take us long to catch up to the US.

Tel
Guest

In 2010, 2011 the Aus govt was running deficits around $40 billion mostly consisting of bonds sold to China. For the purpose of balance of trade, this behaves like an export and it was driving our dollar up. In the recent 12 months they reduced the deficit (didn’t get rid of it like they promised) so the reduced deficit means fewer “exported” bonds. Thus, the AUD came down a bit. On top of that Australian interest rates have been gradually falling, making us less attractive for foreign investors.

A strong $ does not in any way imply a strong economy.

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