As a highly leveraged asset class, the Australian property market is very sensitive to interest rates. I’ve written previously to subscribers of Sound Money. Sound Investments. about this. Given the interest rate lag, I estimated that peak stimulus hit the housing market towards the end of last year. Growth slowed throughout the first quarter of 2014, and I then predicted the market would basically plateau from around April to June, before coming under pressure (absent another rate cut) in the latter half of the year.
I won’t know how that prediction looks until we get June quarter house price data from the Australian Bureau of Statistics and Australian Property Monitors, so I’ll wait and see.
But I can say you’d be best to take the RP data daily house price index with a grain of salt. This is a lagging indicator which isn’t seasonally adjusted. It shows prices fall every May, which is bizarre. Given the lag in accurate data collection, it more than likely relates to the lull in summer listings.
I mention this because in today’s AFR, Chris Joye writes that the index rebounded by 1.7% nationally since June 11, after falling 2.6% in May and early June. In other words, after a brief pause, the bull is back.
When more accurate data comes out in the following months, I think you’ll find that the bull never went away. But it probably will show that he is getting tired. And without further interest rate cuts, he’s at risk of having a nap in the second half of the year.
Chris Joye’s article does raise other issues though. It quotes a UBS study that shows foreign buyers are driving the boom in Sydney and Melbourne, with up to 40% of new home sales, and 12% of overall sales, made by foreign buyers.
Foreigners make for a great scapegoat when locals whinge about crazy property prices. But for a nation utterly dependent on foreign capital to maintain its standard of living, it’s a bit much to complain about the type or direction of the capital imports that sustain our latte lifestyle.
I complain about property prices too… but I direct my ire at politicians and policymakers who facilitate a system of property speculation that is ruinous to our long term wellbeing. Take the latest credit growth figures from the Reserve Bank of Australia, for example. Housing credit continues to power higher as personal and business credit remain subdued. Investor credit is now running at an annual pace of around 8.5%, and that doesn’t include foreigners!
The data also showed the share of loans going to housing hit an all-time high at 60.5%, while loans to businesses hit an all-time low of 33.2%. No wonder productivity is in the toilet and our economy has an unhealthy dependence on easy money.
Getting back to the foreigner scourge, critics may have one point. It seems kind of odd, or coincidental, that the crackdown on corruption in China happened around the same time that ‘foreigners’ became increasingly interested in our overvalued property market.
Part of this crackdown meant that many corrupt Chinese communist party officials had to dump property in China — the usual storage place for ill-gotten gains. Now if that money is simply making its way to a different storage container, then aggrieved Aussie locals have a right to complain.
Easy money begets dirty money; there’s no way around that. And corruption is everywhere, especially when it comes to politics. But China tends to do things on a grand scale…credit bubbles, property booms, foreign exchange reserves, railways, cities…and corruption.
A tide of dirty money (as opposed to the usual trickle) has the potential to create real social tensions as Australians see themselves (and their kids) increasingly priced out of basic housing. But the property owning classes in parliament don’t dare do anything about it.
Meanwhile, in China, the housing market continues to slow. The Wall Street Journal reports:
‘China’s housing prices fell in June for the second straight month as property developers cut prices to stoke sales amid a glut of housing in many cities.
‘Many home buyers have stayed on the sidelines in anticipation of further price cuts, while cases of default among smaller developers are rising as companies struggle to repay debt in a souring property market.’
Does this mean capital continues to pour into the Australian housing boom as the epic Chinese boom begins to fade? I don’t know. But with new data showing foreign buying having a much larger impact than the government or the Reserve Bank of Australia have been willing to acknowledge thus far, it’s an issue that isn’t going away.