The idea of a multiverse is that multiple (infinite) universes can exist parallel to one another. Therefore, in some universe parallel to this one, the Australian housing bubble has already deflated, China’s credit bubble has also deflated, and America’s looming stock of unsold housing has reached a clearing price.
But in the universe in which your editor woke up this morning, none of that has yet happened. That makes this world, at least to these eyes, surreal. It’s not like the facts aren’t evident. In Australia, for example, the average house price remains so far out of reach for the new buyer that it’s laughable. Yet day after day, everyone in the press (and in polite society) pretends that things are going along quite normally.
Well, for another day they are. But there are signs of abnormality. Take the number of Australians looking for new mortgages and actually getting them. New home loan approvals fell by 5.6% from October to November, according to data released by the ABS. It was the steepest month to month fall in 18 months.
So is housing going to drive economic growth in Australia this year? Not according to the data. Higher rates may be preventing buyers from looking for new mortgages. Or it could be prices, which continued to rise. While the number of new mortgages fell, the aggregate value of the mortgages made actually rose slightly. Fewer mortgages but a higher aggregate value means rising prices.
The First Home Buyers went missing, as well. Well, not missing. But first home buyers as a percentage of new mortgages fell from 26% in November to 22.1% in October. You’d expect that the higher short interest rates go – and they do seem to be headed higher – the more FHBs will be squeezed from the market. So what?
Well, it doesn’t really matter whether housing drives the economy or not. No one buys a house because he thinks it’s going to be good for the economy. You buy a house because you want one, and it’s a financially sensible decision. With higher rates, high prices, and wage growth below the rate of inflation, the forces of financial gravity (in this universe) are conspiring against new home buyers.
Of course that doesn’t mean home prices will fall, as property spruikers will readily tell you. We’ve never lived in a place where you are assaulted by so many bullish (and bullying) messages about buying property as you are in Australia. For a largely secular country, property is nearly a religion.
Get on the ladder! You can never lose money buying property! House prices always go up! And all of God’s children said Amen!
Still, we can’t help but compare the emotional state of today’s Australian property bulls with the dot.com crowd circa 2000 and the U.S. housing crowd circa 2004. It’s not just a feeling, though. It’s a reality. House prices in Australia are not affordable. And with rising rates, they’ll get less so every day…until prices fall.
And by the way, all the FHB grant did last year was steal demand from this year. It accelerated the time frame people had for getting into a house by altering the financial incentives. The net result is lower demand this year…and a whole slew of Australians carrying huge variable rate mortgages as interest rates begin a new up-cycle. Nice work, politicians.
But what about shares? Is that a good place to have your money instead? Lately we’ve expressed doubts about commodity and metals prices for 2010. China’s regulators lifted reserve requirement s at Chinese banks since we wrote you yesterday. This is an anti-inflationary policy designed to cool off asset markets in China and lead to more responsible bank lending. Will it trigger a correction in metals prices, which have soared since the mid-point of last year?
“NO!,” says the Sweden-based Raw Materials Group. RMG does expect a first half correction. It argues that high metals prices have attracted production increases in recent months. But in the bigger picture, it says the metals industry hasn’t added enough capacity to meet growing demand following the big wipe-out in 2008. It cites two big bullish factors for this year: physical demand from China and financial demand from everywhere else.
Hmm. That sounds so…2007. Like we went back in a time machine. Same universe, same argument, different day. Except we know what happened last time an explosion in credit triggered huge price rises in asset markets. It went supernova and then…destroyed everything in sight by at least 50%.
Of course how much wealth is destroyed in a credit bust depends on what you bought with the borrowed money. China bought itself a lot of factories and fixed capital, including residential real estate. Maybe it will simply grow into all that added capacity over time, even if it has overbuilt today.
William Pesek from Bloomberg says, “The real problem is the quality of growth. The trillions of yuan lavished on the [Chinese] economy last year won’t boost demand for exports. Nor will it soon morph the nation’s rabid savers into enthusiastic consumers. If today’s public borrowing doesn’t create a domestic-demand-driven economy, then it’s risky.”
Getting out of bed is risky, too. But you more or less have to do it. You don’t have to invest in China. Pesek says you should be wary. He writes that, “China’s overinvestment in 2009 may have delayed this day of reckoning, not averted it. Officials in Beijing are on notice that savvy short-sellers are delving into their books.”
Not that a China reckoning is automatically negative for Aussie stocks. Granted, Aussie stocks were down yesterday. But so was Wall Street. So was gold. And so was oil. And meanwhile in the trenches of the economy, China’s Bright Food Group made a $1.5 billion offer for the sugar and renewable energy assets of CSR. This shows that regardless of what happens in the credit markets, Chinese companies are looking to own more Australian assets.
The Chinese certainly have an eye for underperforming assets. CSR is down 23.9% over the last five years while the ASX/200 is up 19.6%. Shareholders would expect better and might be amenable to Chinese overtures. But as we said yesterday, you have to get ahead of these moves, not trade their wake. Kris Sayce just put a “buy” recommendation out on one of 2009’s worst performing stocks. We’ll see how that goes.
In the meanwhile, there are many more questions to take up; including the one we closed with yesterday: who is going to pay for America’s $3 trillion in borrowing over the next 12 months. Tomorrow, the answer, and what it means to global markets.
for The Daily Reckoning Australia