Three Ways the US Housing Crash is Affecting Australia

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“The dollar is mired in weakness,” Nobuaki Kubo from Brown Brothers Harriman told Bloomberg. You can say that again, Kubo-san. Durable goods orders in Team America are set to slow down, according to data from the US Commerce Department. And of course Americans are spending less on big-ticket items. That biggest-ticket item of all—the family home—is declining in value and sitting on the market for longer.

The National Association of Realtors reported that existing home sales fell by 4.3% in August. Over the last twelve months, sales are down by 13%. And with falling sales, you have falling prices. In 15 of 20 cities tracked by the Case/Schiller Housing index, prices fell.

The average decline in home prices nationwide was 13.9%. It’s the worst slump in 16 years for the American housing market. And the inventory of unsold homes now stands at 10 months. Later this week, data on new home sales will be published. You can expect it to confirm that sentiment—America’s slow-motion housing meltdown is alive and unwell.

So what, you may be wondering. What does any of this have to do with Australia? America’s housing crash has three effects on Australia. First, the US housing crash is pushing the American economy into recession. The Fed has lowered rates to head the recession off at the pass. The resulting fall in the dollar is driving global investors away from US dollar denominated assets and mortgage-backed debt to real assets…like BHP. Impact number one: higher Australian stock prices, as evidenced by the resource-driven record run on the ASX.

Impact number two is higher interest rates. This is largely a consequence of the credit crunch and has already been much discussed. What’s notable here is that while the Federal Reserve moved short-term interest rates down in the States, the market moved long-term interest rates—including 30-year mortgage rates—up. That shouldn’t be shocking. In the face of obviously inflationary policies from central banks, bond investors are demanding much higher yields for longer-maturity bond issues.

Impact number three is less obvious. But it gets to whether Australia has an American-style housing problem. We are told—based on the number of subprime style loans—that Australia has no such problem. But we’d respectfully suggest that the larger problem is not a particular style of risky loans—but an entire financial system that emphasises the accumulation of huge household debts.

Dan Denning
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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5 Comments on "Three Ways the US Housing Crash is Affecting Australia"

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J
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Now this is a valuable article as it can relate to us in Australia. Good one because what happens in Australia is not the primary concern of us denizens of Australia…

J
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coorection…. what happens in the US I should say

Alan
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I am not sure about the supposed short term movements of long bonds as a response to inflationary expectations.Bond traders go day by day,at a stretch, week by week.The move was probably related to reweighting to shorter maturities,a move into equities and overseas selling on a weak dollar.Incremental changes as time passes might signal inflation….but then the Fed may fiddle, considering the importance of these longer maturities.

kayle
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I think I’ve left this question before, but it bears repeating – based on what do Australians continue to insist they DON’T have a “subprime” situation in home mortgages? Even basic logic contradicts that claim. Unless wages have appreciated in line with home prices (clue: they haven’t), then the only way Australians could “afford” current home prices are through the use of low-doc loans. IOW, easy credit to mask the low earning power of their wages. Your post points out the precarious state of Australia’s “credit economy” – good catch. But in the context of home prices – the housing… Read more »
JGCS
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There is absolutely zero doubt in my mind that Australia will exactly mimic the problems in the USA. The story repeated on all major TV News channels tonight was that approx 300,000 families are in danger of losing their homes if the RBA raises interest rates on Tuesday the 5th of February. This story annoyed me enormously because that fact has been obvious for at least 12 months and only now has the main stream media decided to warn people of this situation. It is also true that South Africa, Bulgaria, Italy, Spain, etc etc face exactly the same situation.… Read more »
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