Greece is behind us (apparently) but a interest rate rise from the Reserve Bank of Australia is ahead of us (possibly). So what will Australian stocks do? And is the world still meandering its way to a systemic collapse?
You’ll pardon the sense of inevitability in today’s Markets and Money. After all it’s raining. But even so, with over $1 billion in Melbourne property clearing auctions this week (at a clearance rate of 86%) it definitely feels like Australians have found a way to hasten their own financial day of reckoning. Of course not everyone agrees.
“We have never reached a billion-dollar figure in a week, especially coming off a very quiet period,” says Real Estate Institute of Victoria executive Enzo Raimondo in today’s Adelaide Now. “The significance is that if it starts off like this it could be an indication the residential property market in Melbourne probably will be the same as in 2007 when we had some double-digit price growth.”
Ah yes. 2007. The year the global credit bubble began deflating. Maybe Mr. Raimondo is right. If he is, the great reflation from March 2009 could end in one big orgy of housing spending. Followed by?
President of the Real Estate Institute of Australia, David Airey told the same paper that the increases in sale prices and total properties listed reflected the “surging confidence” in the housing sector. He said that after the financial crisis, Australians were more interested in investing in property than on the stock market.
Airey says that, “This latest data shows buyer confidence in the sector, and particularly the auction system, has significantly increased clearance rates under the hammer…In every capital we’ve got strong sales and that says that the buyers – despite the likelihood of higher interest rates – are still wanting to invest in property.”
Is this a good sign? Despite rising – or perhaps because of them – you have people entering the market even when they know interest rates are rising. This is obviously a sign that investors are chasing short term capital gains. Of course, they may also think they will never get another chance to get on the property latter at these prices. But that also is the sign of a mania.
Airey reckons it’s just Australians showing a preference for property after being disappointed by stocks. “Australians have taken the lessons learned through the economic downturn and have decided this time round to put their money in property… it’s encouraging and it’s good news for buyers and sellers alike.”
It’s certainly good news for the real estate industry. Some in the industry, like Tim Fletcher of Fletchers Real Estate said that median home prices in Melbourne will “hit $650,000 in a few months and $1 million within six years….We have too many buyers chasing too few properties, and unless something drastic is done about urban consolidation and freeing up more land on the fringes it’s only going to get worse.”
It’s going to get worse. On that we can agree.
While Australians go barking mad for property, there is relief in financial markets that the can of Greek debt has been kicked down the road. European leaders, along with the IMF, arranged an aid package for Greece should it be unable to sell €15.5 billion at the end of May. Mind you, the Greeks are getting eaten alive by higher interest rates. According to Bloomberg, the yield on a 10-year Green bond is 6.19% compared to 3.04% on German securities of a similar duration.
Borrower beware! And let us not forget, Europe is filled with other sovereign nations that have equally problematic finances. They all have to borrow. And rates are going up. Who’s going to lend? And how long can the euro stay strong?
Perhaps the more important but less urgent question is how long the U.S. dollar rally can last. The Wall Street Journal is reporting that, “A sudden drop-off in investor demand for U.S. Treasury notes is raising questions about whether interest rates will finally begin a march higher – a climb that would jack up the government’s borrowing costs and spell trouble for the fragile housing market.”
“For months, investors have focused their attention on the debt crisis in Europe, but there are signs the spotlight is turning to the ability of the U.S. to finance its own budget deficit. This week, some investors turned up their noses at three big U.S. Treasury offerings. Demand was weak for a $44 billion 2-year-note auction on Tuesday, a $42 billion sale of 5-year debt on Wednesday and a $32 billion 7-year-note sale Thursday.”
If foreign central banks are losing their appetite for U.S. debt, the upward pressure on U.S. rates will be immense. We don’t think this makes the dollar more attractive on a yield basis, when you factor in how much annual deficit is growing (and how fast U.S. tax revenues are falling, and how social security payments now exceed payroll tax takings). The upward pressure on rates is going to make the Fed’s exit from the mortgage market that much more problematic.
So what’s Plan B? Can the Fed really exit the market just when rates are headed up? Is the U.S. headed for a de-facto devaluation? Do the U.S monetary and fiscal authorities – Fed Chairman Bernanke, Treasury Secretary Geithner, and President Obama – even have a plan? Or do they think things are all better? And do they think the world will keep lending to America?
Perhaps we’re over-caffeinated, but our sense is that trouble is coming. Big trouble. And soon. Party while you can. But you might think about preparing too.
for Markets and Money