Your usual editor, Dan Denning is on the road up in the big smoke of Sydney. So for today only your guest editor has made the move upstairs at the Old Hat Factory to do some reckoning.
In fact, it’s pretty good timing. In yesterday’s Money Morning we opened a proverbial Pandora’s box of vipers on our readers by bringing up the subject of ‘climate change.’ You can read it online now if you so wish by clicking here.
But for today’s reckoning there’s another subject that we’ve been pumping away at for some time, and which Dan has also challenged head on here.
Of course, I mean housing.
You’d think after nearly two years of credit crunching the bureaucratic boffins would have surprised us all and developed some common sense.
That was probably a little too much to ask for.
So perhaps it isn’t any surprise that according to yesterday’s Washington Post, “US Considers Remaking Mortgage Giants.”
The story states:
“The Obama administration is considering an overhaul of Fannie Mae and Freddie Mac that would strip the mortgage finance giants of hundreds of billions of dollars in trouble loans and create a new structure to support the home-loan market.”
To be honest, it’s almost not worth commenting on. Is it really possible that these supposedly educated public servants and politicians are acting naively? Is it really possible that they haven’t considered the consequences of their actions?
Of course not.
They know exactly what they’re doing. It’s why the term ‘unintended consequences’ has become a misnomer.
It is the consequences that are unintended – they are fully known in advance – it is the timing of the consequences that the pollies are getting wrong.
Their goal isn’t to stop a housing boom followed by a housing bust. Their goal is to try and make sure it doesn’t happen on their watch. The vagaries of the election cycle has given Obama a free kick.
Still only seven months into the job he can easily blame everyone else – Bush, free markets (laugh!) – and claim that everyone else has handled things wrong and that his solution is the only one to ‘cure’ the supposedly broken free-market.
Of course, Obama’s policies are no different to any other meddling politician. There’s no point in just singling out presidents Hoover, FDR, Nixon and Bush Minor, they’ve all had their fingers in the till.
Every president at least since Hoover (and maybe before) has either meddled to help a boom, or meddled to help a bust. Sometimes they’ve done both… simultaneously – ie. Obama.
But if you think you’ve seen the worst of the housing slump. Think again.
According to a report from Reuters, “The percentage of US homeowners who owe more than their house is worth will nearly double to 48 percent in 2011 from 26 percent at the end of March.”
The statement was based on a report from Deutsche Bank. But get this, “We project the next phase of the housing decline will have a far greater impact on prime borrowers.”
You’ve seen the charts already that show the next wave of adjustable-rate mortgages resetting over the next two years. When that happens in the prime as well as sub prime market, the last twelve months will look like a teddy bears picnic compared to the next slump.
That the Australian housing market is “recovering” is a cause for even more concern.
As we said at the ‘Australia in the Red’ debt summit, “recovering from what?” For something to recover you generally need to show symptoms of sickness. So far all the Australian property market has shown is a couple of spots.
But these ‘spots’ are potentially hiding something much, much worse. The fact that we are reading so many news stories and even emails coming into the Money Morning mailbag telling us that property doubles in value every seven years is concerning.
We’re also told that the Australian property market is different to the US and the UK, and that Australians have a ‘deep desire’ to own their own home.
That these subjective arguments are passed off as fact should be seen as the biggest sign yet that property is about to burst.
It reminds us very clearly of the comments from financial planners and fund managers who used to claim that share prices ‘always go up.’ That argument has looked a little less convincing over the last ten-year bear market.
Just as share prices have stagnated for ten years despite boom and bust periods, why shouldn’t property prices do the same? There is absolutely no logical reason to suggest that property prices always go up. It isn’t possible.
The only reason property prices have been able to sustain the astronomic rise of the last thirty years is down to one reason, and one reason alone…
Government interference. You can argue that slack lending standards and a rising population are all to blame, but they are only as a consequence of government meddling.
The fact is the Australian property market is the most unfree market in Australia. At every step of the property buying/selling process there is interference from either federal, state or local governments.
Each level of interference has a consequence on either supply, demand or price.
It is this distortion that has caused the property market to reach bubble proportions. And it is the continuance of these distortions that will guarantee property price slump in the near future.
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