La La Land. According to answers.com, La La Land is “a place renowned for its frivolous activity,” and “a state of mind characterised by unrealistic expectations and a lack of seriousness.” Welcome, then, to Australian financial markets.
The real economy is not La La Land, mind you. By that mean we mean extractive industries that dig and drill the earth for real assets. That is not frivolous. It’s pretty serious. But the stock and housing markets…
The stock market has opened lower today. Wall Street was only down mildly on Friday. But Aussie stocks are on tenterhooks this morning. The RBA meets tomorrow to decide whether to increase interest rates a third time in a row. The economist money is on a cash rate hike of 25 basis points. That would bring short-term rates to 4%.
Meanwhile, conflicting data is coming out of the housing market. Imagine that. Data from the Australian Finance Group shows that borrowing fell to a five-year low in December. AFG reported a 19% fall in mortgage activity. It was the lowest figure in any one month since 2005. And according to AFG’s data, first home buyers as a percentage of new mortgages fell by half from the same time last year. They were just 13% of the market in the AFG survey.
Part of the falling mortgage demand is explained by rising rates. Part is explained by the expiration of the first home buyer’s grant. And part is the expectation of rising rates. All three conspired for a huge surge in prices in the December quarter which ran out of steam in the last month.
The result was that median December prices were quite high. The Real Estate Institute of Victoria reports that Victoria’s quarterly median price was $540,500. It was just over $405,000 in the March quarter. The Institute said the difference is explained by more sales to first home buyers in March (at lower prices) compared to more sales to more established buyers at higher prices in December.
That’s the property ladder, isn’t it? Investors sell starter homes to the newbies and turn around move on up. The question now is, with credit getting tighter and all that first home buyer demand having been brought forward, where is the new demand going to come from? Oh that’s right…immigration!
We have our doubts about how long all this can last, even with government support. But no point in beating a dead drum here.
We’re still about six weeks away from last year’s March 9th bear market lows. The big issue for investors at the moment is whether this is a buyable correction or a path to new lows. The bulls are hoping this dip below 5,000 on the All Ordinaries and the ASX/200 is just a pause on the way to bigger and bullier things to come.
The bears, your editor included, think the March lows will be retested and taken out. We just don’t know when. For the record, we did say on January 15th we thought it was the best time in a long time to reduce your allocation to stocks and liquidate some positions. The All Ords is down 6.75% since that.
Our old friend Marc Faber thinks there is more pain ahead for stocks. He told Bloomberg that he thinks the S&P 500 could drop 20% from its 15-month highs. He says profit and growth expectations are overdone in the U.S. and stocks are expensive.
The picture here in Australia is a bit murkier. Stocks are definitely expensive. But the press is again referring to Australia as a “miracle economy.” And with inflation up and GDP positive, the mood is pretty good. Whether that will translate into higher stock prices is another matter.
One way to guarantee that stock prices go higher – and that profits at financial firms are high – is to increase the mandatory contribution to super annuation. That’s just what the government should do, says the Investment and Financial Services Association!
IFSA says compulsory super contributions should be increased from nine percent of your earnings to twelve percent. This will prevent a “disaster for retirement savings” says IFSA director John Brogden. He says Australians face a collective $700 billion “shortfall” between what they’ll have to retire and what they need.
Last we checked, retirement was something you did privately, not collectively. Thus, whether you have a shortfall or not depends on your own wealth game plan. Nonetheless, you could see this coming a mile away.
It’s being done for your own good, of course. But day by day and step by step, your money is less your own and more the government’s and the financial industry’s. No doubt some of this new super money will buy Aussie stocks. But you can bet some of it’s going to buy government bonds too, to fund Australia’s deficits. Yep, definitely time for a survival strategy.
for Markets and Money