It’s a bit of a confusing lead from the U.S. markets today. U.S. stocks finished up for the most part. The Dow tacked on 189 points. But it was in the face of bad news.
American GDP contracted by 0.3%, according the U.S. Commerce Department. Not a big surprise, really. But it was, apparently, a better result than the ‘experts’ were expecting. And so stocks rallied!
Did you see that U.S. government debt grew by $800 billion between September 1st and yesterday? Seriously. Nearly half that is since the first of October alone. There’s more on the ongoing expansion of the U.S. balance sheet below. But how about some local market news first?
There as an interesting contrast of positions on the state of the Australian housing market over the last few days. First, RBA Deputy Governor Ric Battellino gave a speech in Sydney earlier this week in which he gave three reasons why the Australian housing market is different than the U.S. market. Don’t worry about a crash here, he seemed to be saying.
Battellino says the Aussie housing market actually leads the U.S. by about three years, and doesn’t follow it all. The correction in home values has already happened, he says. Why? Well, when the tech boom hit in the U.S. and drove the Nadsaq up, it did not drive Aussie stocks up.
Instead, Battellino says that excess global savings found their way into Australia via the housing market. The banks increased their lending to low-geared conservative households looking to trade up to a bigger home or buy an investment property. Property rose.
The second big difference, he says, is that the response to the lending boom in the U.S. (after rising house prices) was a huge increase in the inventory of new homes being built. Supply exploded in the U.S. as homebuilders over-built. The same, he says, did not happen in Australia.
“The shortage of housing here,” he says of Australia,” means that there are buyers waiting for better circumstances – e.g. lower interest rates or rising incomes – to facilitate their entry to the market. This latent underlying demand for housing is a factor that will support the market”
Finally, the lending boom in Australia-though much of it came from non-bank lenders who have since been crushed the credit crunch-never extended to the same kind of marginal borrowers it did in the States. Battellino says the lending boom was concentrated on existing home owners who were not nearly as likely to go into default as the sup-prime buyers driving the U.S. boom.
All in all, it is a spirited defence of the Aussie housing market. He does not believe buying a house priced at ten times your annual income is a sure-fire path toward perpetual debt and servitude to the bank. Battellino concludes that the boom is over, but there won’t be U.S.-style double-digit correction in house prices. He says, “The Australian housing boom ended because prices rose to levels that severely strained the financial capacity of buyers to pay higher prices, not because too many houses were built, as in the US.”
The trouble is, prices still aren’t affordable, incomes aren’t going to improve much in a recession, and lower interest rates won’t power a new boom if banks don’t lend (which they seem reluctant to do, unless it’s to people who don’t need it). So without new buyers entering the market, how will prices rise, or even be supported at current levels? Mark Latham thinks the problem is with inflated household expectations, Fed by cynical government policy.
In a spirited article in yesterday’s Financial Review, Latham writs, “Forget Kevin Rudd’s populist claptrap about extreme capitalism. The root cause of the crisis is extreme politics.” Getting away from politics-which is really just pathology-has improved Latham’s thinking.
“Internationally,” he writes, “governments have fostered the myth of universal home ownership, offering large subsidies for families that put themselves into mortgage debt beyond their means…In Australia, subsidies and tax expenditures for the property sector exceed $70 billion a year.”
“As in the US, these incentives have distorted the market in favour of housing and encouraged an unsustainable base of household debt. The impact of an international recession in Australia will be severe as risk takers in the small business and housing sectors find themselves underemployed and overleveraged.”
Latham is spot on in pointing out that the deflation of a financial bubble is nothing new. “The novel aspect of the crisis is its origins in the household sector.” The economy, rather than going through the normal booms and busts of the credit cycle, is now being affected by “the household cycle.”
“Advanced capitalism has made finance available to consumers on a mass scale. Higher social expectations about material goods have led to highly leveraged balance sheets, in turn creating a new source of economic volatility.” In other words, the entire consumption economy hinges on the health of household balance sheets.
Yet the mythologising of housing as socially desirable goal AND a way to get rich has put households in more debt than ever, and put the whole economy (through securitisation and derivatives) at risk. Houses aren’t immune from the global crisis. They’re at the epicentre of it. And if Nouriel Roubini is right (see below) house prices everywhere are going down.
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