The key to blowing up a successful asset bubble is that you must constantly attract new money into the asset class you’re trying to inflate. By that standard, yesterday’s Australia’s housing finance figures were better than expected but worse than required. The numbers were up. But new home buyers have not yet been bullied into the market by lower rates.
The value of home loans for owner-occupied housing rose 5.8% to $14.9 billion in March, according to the figures released yesterday by the Australian Bureau of Statistics. This was a firm rejection of our prediction that the numbers would suck. To be more specific, let’s put it in the form of a question: have rate cuts put a housing-led recovery back on the cards?
The numbers would have been welcome news to Glenn Stevens and the team at the Reserve Bank of Australia. They know Australia needs lower rates and more business investment to compensate for lower commodity prices and China’s shift to a consumption model. But there’s more to yesterday’s housing data than meets the eye.
First, new Australian home buyers aren’t convinced. New home buyers made up only 14.2% of demand. That’s the lowest percentage in nine years. What does it tell you?
Low interest rates are nice. And lower interest rates may be even nicer. But no matter how often a brain-damaged economist repeats it, lower interest rates don’t make a $600,000 house more affordable for someone on a $60,000 income. They just mean you’ll have to borrow more money now and repay it for longer in order to have a roof over your head.
What WAS interesting about the data is the big jump in new construction loans. They were up over 10% on the month and over 21.4% from the same time last year. This is a result of state governments creating incentives for new home buyers to actually build rather than buy. As public policy, it’s designed to increase housing stock, which should eventually actually lead to lower house prices.
That bit caught our eye because it suggests that some people are a lot more interested in building houses than, say, buying stocks. We’ve been working with our friend Phil Anderson on a project that explains and forecasts Australian property prices. The latest bit of data may confirm Phil’s view that Australia is actually on the verge of an 18-year boom in property prices.
That view certainly came as a shock to us when Phil first articulated it. But it’s based in part on the idea that land values move in cycles. Those cycles are determined by the availability of credit created by the banks and the willingness of people to borrow money. Phil has put the argument together in a presentation we’re going to make available in a few short weeks.
In the meantime, we have to say it’s certainly not our view. In Austrian economic terms, more investment in Australian property at these prices is simply a continued misallocation of resources based on an irrational view that property always goes up. There’s also the usual myth that Australians value housing more highly as a social goal than other countries, which has nothing to do with how ridiculously unaffordable prices still are.
But in a red pill/blue pill way, Mr Anderson’s views may make sense. That is, if you’re giving up on shares as an asset class to grow or preserve your wealth, you still have to do something with your money. Investment in land is really the only viable option for the middle class. At least it’s tangible.
And let’s consider what would happen if Australian interest rates were zero-bound. If the RBA lowers rates to around 2% in order to spur business investment, you’d expect to see a surge in non-bank lenders offering low-rate, high loan-to-value mortgages to anyone with a pulse. You can argue whether it’s a good idea to be deliberately imitating the US-subprime boom, given how disastrous that was for everyone involved. But it doesn’t mean it won’t happen anyway.
In any event, even though we find Phil’s ultimate conclusions controversial, we were impressed with the depth of his work on property cycles. Phil brings in the work of Nickolai Kondratiev and WD Gann as well. As a publisher, this is exactly the type of well thought out market research we’re keen to publish in Australia. Stay tuned.
Meanwhile, an Australian dollar crash can’t come soon enough for some Australian companies. Engineering firm Coffey International warned of an ‘increasing cascade’ in project cancellations and delays. It blamed the strong Australian dollar. Its share price cascaded down by 56%.
Coffey Managing director John Douglas told the press, ‘What we have been seeing is significant project delays or cancellations that were broader than simply mining.’ Coffey reckoned it would get some of the work at the $45 billion James Price Point liquefied natural gas plant. But that was one of just 54 projects to get shelved or cancelled. Oil, gas, mining and infrastructure spending have all peaked, if Coffey’s experience is any indicator.
All of this fits perfectly with Greg Canavan’s thesis that any positive macro economic data is really a tra p at this point. Greg’s basic idea is that all the benefits of the China infrastructure boom are behind us. If your portfolio — especially your asset allocation — doesn’t reflect that, you’re in for a rude awakening.
Speaking of which, burn tomorrow’s papers. If you don’t, you’ll have to endure page after agonising page of budget analysis. We’ll save you the trouble: Australia’s budget is put together by economic illiterates. The cost of that illiteracy is about $17 billion and a passport to Zombieland.
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From the Archives…
The Higher the Market, the Harder the Fall
10-05-13 – Vern Gowdie
India’s Balance of Trade — a World out of Balance
9-05-13 – Greg Canavan
How the Dow is Just Wall Street’s Marketing Tool
8-05-13 – Dan Denning
Watch Out For When Australia’s Terms of Trade Goes Back to ‘Normal’
7-05-13 – Greg Canavan
The Greatest Wealth Transfer in History
6-05-13 – Bill Bonner