“The dollar is mired in weakness,” Nobuaki Kubo from Brown Brothers Harriman told Bloomberg. You can say that again, Kubo-san. Durable goods orders in Team America are set to slow down, according to data from the US Commerce Department. And of course Americans are spending less on big-ticket items. That biggest-ticket item of all—the family home—is declining in value and sitting on the market for longer.
The National Association of Realtors reported that existing home sales fell by 4.3% in August. Over the last twelve months, sales are down by 13%. And with falling sales, you have falling prices. In 15 of 20 cities tracked by the Case/Schiller Housing index, prices fell.
The average decline in home prices nationwide was 13.9%. It’s the worst slump in 16 years for the American housing market. And the inventory of unsold homes now stands at 10 months. Later this week, data on new home sales will be published. You can expect it to confirm that sentiment—America’s slow-motion housing meltdown is alive and unwell.
So what, you may be wondering. What does any of this have to do with Australia? America’s housing crash has three effects on Australia. First, the US housing crash is pushing the American economy into recession. The Fed has lowered rates to head the recession off at the pass. The resulting fall in the dollar is driving global investors away from US dollar denominated assets and mortgage-backed debt to real assets…like BHP. Impact number one: higher Australian stock prices, as evidenced by the resource-driven record run on the ASX.
Impact number two is higher interest rates. This is largely a consequence of the credit crunch and has already been much discussed. What’s notable here is that while the Federal Reserve moved short-term interest rates down in the States, the market moved long-term interest rates—including 30-year mortgage rates—up. That shouldn’t be shocking. In the face of obviously inflationary policies from central banks, bond investors are demanding much higher yields for longer-maturity bond issues.
Impact number three is less obvious. But it gets to whether Australia has an American-style housing problem. We are told—based on the number of subprime style loans—that Australia has no such problem. But we’d respectfully suggest that the larger problem is not a particular style of risky loans—but an entire financial system that emphasises the accumulation of huge household debts.
Markets and Money