Today’s Markets and Money will be mercifully short. Your editor is working on two projects for paid subscribers that need to be finished before we head off to South Africa on Friday. It’s okay though. There doesn’t appear to be anything to worry about in the markets at the moment.
Stocks are surfing a sigh of relief that Dubai hasn’t precipitated a global crisis. Plus, huge amounts of liquidity in the market are bound to take it higher for now. This makes valuing stocks a risky – dare we say futile – proposition. But we’ll push on.
Someone has called us out on the message board and demanded we put an exact date on our prediction for an Aussie house price collapse. This is a moronic suggestion. The claim is that if you say anything often enough, sooner or later you’re going to be right…only you’re not really right…you’re just repetitive…and lucky.
But we’ve done plenty of homework on the Aussie housing market. We’re either right or we’re wrong. Our forecast is not an option. There is no time decay. True, there may be people out there who are weighing up whether now is a good time to buy a house based on predictions about the direction of prices.
However this more or less proves our point. Buying a house is one of the most important financial decisions you make in your life. It should be based on whether you can afford it, leaving plenty of wiggle room for rising interest rates, the loss of income, and, of course valuations.
On the last subject, we couldn’t be clearer about what we think of Aussie house valuations. They are outrageous. Even if demand is being fuelled by foreign buyers, this simply makes them more unaffordable to people just getting on the property ladder. Besides, getting into the property market now with a huge mortgage at a variable interest rate because you think you can sell to a foreigner for a capital gain is not an investment. It’s a gamble.
Aussies have been gambling on houses for at least ten years now (credit to Steve Keen for that description). We don’t know when it will end. But we know that it has to end eventually. It could end if something drove up unemployment or down existing wages.
But we think the more likely shock will be an external one. There are two big looming factors out there. The first is the rising cost of capital which makes importing funding more expensive for the big banks. The government is trying to soften this blow by supporting the housing market with the AOFM’s purchase of residential mortgage backed securities.
The other big factor is China. And for the sake of argument, let’s just put this out there: China’s boom is entirely a function of the credit cycle. The expansion in Chinese fixed asset investment and productive capacity is fuelled by a trade surplus and a currency policy that are on borrowed time. China’s economy is every bit a symptom of the credit bubble as the U.S. housing market.
Obviously a pop in the China bubble is a game-changer for Australia. Specifically, national income would go down (export volumes and prices probably plunging). Australia already has a mountain of debt to service. At higher rates with lower national income, that debt gets even more burdensome.
The only realistic argument is that the government will not let house prices fall. Too many people have too much to lose. The banks, the real estate industry, the builders, the spruikers, the tax man, and Australians with mortgages. In other words, Australia’s housing market is too important to fail.
But even this argument fails. Just because the government wants it doesn’t mean it will happen. As we are learning, national governments have limited resources too in a global credit crunch. Pouring them into the housing market to support prices is one part wasteful and two parts stupid.
Besides, a nation doesn’t get wealthier buying and selling houses. The ability to purchase your own home and elevate your standard of living begins with rising incomes, and those come from productivity increases and innovation and trade.
For the Australian government to make housing the centrepiece of the national wealth strategy is every bit as disastrous as the Wall Street/Washington axis making finance the crown jewel of the American economy at the expense of manufacturing. It’s a massive selling-out of Australia’s long-term economic future for short-term political gain.
This Anglo obsession with getting rich off of houses is just that: an obsession. It’s also lazy, and perhaps a sign of civilisastional decadence/fatigue. We wrote a report in 2004 called, in subtle fashion, “The Total Destruction of the U.S. Housing Market.” Excuse the formatting there. It’s the only on-line copy we could find.
You should have a look at it – but don’t order yet, we’re working with a friend to relaunch the product shortly. And if you think our advertising copy is hyperbolic, of course it is. We’re operating at the margins of the financial publishing world, writing about the kinds of scenarios that terrify the mainstream media because they alienate advertisers. They laughed when we first made the claim, and those were just the people who weren’t calling us “un-American” and a “fear monger.”
Of course it turns out we were two years early on our call. Did that make us wrong? Well, if it was a trade, yes. Way wrong. But as a macroeconomic call about an unsustainable set of circumstances, it was right. And that’s the call we’re making here about Australia. If you want a date, check out the online personal ads.
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