Reserve Bank of Australia Will Meet to Determine the Price of Money

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If you were expecting the week to begin with a new age of thrift, prudence, and frugality, too bad! Australians opened their wallets and shelled out nearly $20 billion in retail spending in May. It was a one percent increase over the month before. It is also a testament to the power of government to distort reality by giving away other people’s money.

This denial of reality should be interesting to watch. When a credit bubble deflates and an economy breaks its addiction to reckless debt, the sensible thing to do (since you’re repairing your balance sheet) is dial things back a bit. Save. Cut back on the gadgets. Eat more staples. Wear a sack cloth.

But if you still believe that you can get something for nothing-well then yes-you’d continue to borrow and spend like a madman.

Speaking of borrowing, we’ll have an idea tomorrow of whether borrowing costs are headed up, down, or nowhere. The Reserve Bank of Australia meets to determine the price of money (in whatever mysterious way it manages to do this).

It will have to consider another piece of data from last week: a 12.5% seasonally adjusted decline in building approval for new homes. This is a provocative little nugget, isn’t it? That’s a steep month-over-month drop. Year-over-year, total approvals for new homes fell 22.4%. But wait…there’s more!

Approvals for multi-unit “other” dwellings fell 43.6% month-over-month and 57.5% year-over year. We assume this means multi-room apartments and not houses. But either way, that kind of one-month decline looks an awful lot like hitting a brick wall. The Australian Bureau of Statistics says that’s the lowest level of approvals since 1987.

What could it mean? There may be a perfectly reasonable explanation for such an ugly number. One that comes to mind immediately is that developers think there is plenty of existing inventory already (much of it unoccupied). With a large supply on hand, why build more?

Another reason is that developers don’t expect prices to rise higher. Why add more new housing stock if you conclude that A.) the housing market is adequately supplied (not short, as is so often claimed) and B) the demand for new mortgages (new housing finance) is also going to fall off a cliff when the first home buyer’s grant expires or interest rates begin rising (whichever comes first).

Dan Denning
for The Daily Reckoning Australia

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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Comments

  1. Is it selfish of me to hope our housing bubble collapses sooner rather then later so that a poor schmuck like me might be able to afford a decent house that is less than 10 times the average annual wage?

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  2. Definately not me. Im hoping the same. Farm peasants like myself need all the help they can get from prevailing makets. Good luck.

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  3. Is it selfish of me to hope our gold bubble collapses sooner rather then later so that a tired schmuck like me might be able to afford to plant shiny gold bars around my backyard, instead of soakwells?

    Biker Pete
    July 6, 2009
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  4. any developer would have to have rocks in there head to start anything for quite some time, development has been a mugs game except for the big players who have controled the market/councils with there power at the expense of smaller developers……………and just how many of those smaller devlopers are going to the wall?
    The risk versus return was bad enough before all of this, and there is no clear guide to where population density zonings will go, thus how can anybody workout any risk………….with the banks continuing to hold property it further distorts the entire equation………..development like we knew it is finished.

    And anybodies guess where the big players will go…………….most likely more back room deals with councils and goverment to get there infrastructure payed for free………….all gangsters

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  5. Probably me – Property collapses do seem to be setting the US and Brit economies back a tad. Although if it’s going to happen then a few people sitting on cash just might reckon that a collapse in cheap credit like interest rates going back up to 18% pa would be desirable trigger for it?

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  6. “Is it selfish of me to hope our housing bubble collapses sooner rather then later so that a poor schmuck like me might be able to afford a decent house that is less than 10 times the average annual wage”

    Probably no more selfish than those who want the opposite. But if housing prices really fall, how will you know when they’re low enough to buy? How will your lender know when it is safe to advance money on an asset that has been declining for one, two, three, five or ten years?

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  7. Aside from the housing circus, one reason consumer spending continues unabated is “planned obsolescence” which, because products on shelves are of such consistently poor quality (both materials and workmanship), things which would otherwise have been called “durables” wear out prematurely, forcing people (who mostly have no idea how to tell if a shiny object is well made) to buy again. Clothing and electronic goods in particular are being manufactured to ever leaner standards IMO and are receiving support by the makers for shorter periods. A mobile phone used to withstand being kicked across the road, even the cotton cycle in the washing machine, whereas today the things fail after a jog in the park.

    On housing, Shaun, it depends how you invest. If you are buying merely to speculate on price rises, then it’s actually much harder to make a buck than it looks – better off playing the share market (or the horses or greyhounds), where the cost of turnover is less. But if you are buying housing as an income generating asset, then the right price is easy to calculate (something like cost of purchase including interest payments, if any, plus rates, maintenance costs, insurance etc, minus rental income (current and projected) and projected appreciation in value). And then it’s a matter of knowing about a bit about houses, having trustworthy tradesmen etc, and due diligence. Houses are a good way to invest, but they are no less work than any other method and require proper risk management. You have to read widely, be objective, disciplined and unhurried.

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  8. Dan it is the old story in that we import deflation via cheap imports and this then forces the domestic suppliers of these products to either close down or move their manufacturing offshore. When this happens the unions, media,politicians and public are all outraged that “Aussie” jobs are going offshore,(e.g Pacific Brands) but of course everyone keeps buying the cheap imports and the cycle continues. When I see groups of people rallying outside a closing factory I always wonder if anyone is wearing anything made in Australia!

    Anyway these cheap imports then put extra money into peoples pockets and as a result that 4 bedroom homes with two garages and home theatre room seems much more affordable. Thirty years ago people were happy with 1 TV, now it seems you need 2 or 3, a DVD player and a home theatre system to make it through the day…all imported.

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  9. The biggest consumer in the Australian market is the government – and it continues to prefer to buy imported goods from foreign owned companies. Why? Could be the kickbacks that Australian owned companies don’t dare provide? Or that Australian companies can’t provide since we are not supported by (foreign) governments?

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