Opinions continue to fly about housing. It’s going to crash. It’s going to have an orderly correction. There’s no crash in sight. Bank shares are overvalued. Investors will flee the market.
So many opinions about an unknowable future.
More on that in a moment.
But first, the Aussie market looks set for a decent start to the week. Last week’s show of force by the US in Syria, which saw around 60 tomahawk missiles hurled into a Syrian airbase, didn’t have a noticeable effect on US markets on Friday.
US stocks finished flat; however, most commodities rose in price, the benefits of which flowed through the Aussie market yesterday.
Not surprisingly, while tensions flare in the Middle East, oil has jumped. The price of Brent crude is now trading at just under US$56 a barrel. In a plus for the bulls, the price has now made a series of higher lows, as you can see marked in the chart below [chart indicates price from Monday, 11 April].
[Click to enlarge]
The challenge for oil now will be to go on and make new highs. It may need a little more time to do that, but, judging by the scepticism around OPEC’s production cuts and its ability to push oil prices higher, I expect to see new highs in the oil price within the next few months.
I’m not just saying that to be a contrarian. But when you see a stock or asset price trending higher (as it is with Brent crude right now), there is a general vibe of scepticism around prices continuing higher. That’s often a good sign that prices will indeed continue to run.
Still all about housing
It’s a good analogy with the housing market right now. It’s a topic that everyone has an opinion on.
Everyone lives in a house or an apartment. That makes us ‘qualified’ to have a view on it.
I live in a house too. But, some time ago, I decided that it was no point having an opinion on whether the price of it (or housing in general) would continue to rise, or start to fall…or even crash. That’s because it’s an opinion that is too emotionally influenced.
Very few people can assess the facts about housing unemotionally and base their opinion on it. Which is why you see so many disparate views. Not surprisingly, those in the real estate industry don’t see a bubble. And those who can’t afford to live where they want to live see a crash coming.
And because it makes for good clickbait, there is generally a prediction about a house price crash making the headlines once a week in Australia.
Last week, the housing issue reached a crescendo. Bank regulator APRA told the banks to tighten lending conditions for investors and interest-only borrowers. The Reserve Bank issued a warning about risky lending.
Then came the predictions of how far the market will fall. ‘The market’ being Sydney and Melbourne, of course. The rest of the country doesn’t really get a look in when it comes to property. From the Financial Review on Friday:
‘Ask respected property analyst Martin North what form the coming downturn in the housing market might take and “orderly” is not the description he uses.
‘Instead North anticipates a much more significant downturn in the investor-driven, debt-laden markets like Sydney and Melbourne.’
Yet other voices quoted in the article expect an ‘orderly’ slowdown for Australia’s two biggest cities. That means house prices won’t fall — they will just grow at a slower rate.
It’s a housing correction, Aussie style. Let’s call it the ‘Claytons correction’.
And despite all the concern from the previous week, what did ‘the market’ do on the weekend?
‘The property market has stepped up another notch with both Sydney and Melbourne recording clearance rates above 80 per cent even as the volume of auctions nationally reached its highest so far this year.
‘Preliminary figures for Sydney, where the number of auctions listed rose to 1392 from 1104 over the previous week, show the clearance rate at 81.5 per cent. Last week it was 78 per cent, on CoreLogic figures.
‘In Melbourne, the clearance rate was 81 per cent, up from 79.6 per cent over the previous week. Amount of listings also increased to 1458 from 1143 last week.’
It’s too early for last week’s changes from APRA to have any impact, but clearly the psychology of the market hasn’t changed either. There is no buyer hesitation. When 80% of auctions clear, that tells you that buyers and sellers are quite happy with where the market is.
As I pointed out last week, the bottom line is that if interest rates stay as low as 1.5%, a housing bubble is going to inflate. And if the RBA doesn’t raise rates, there is not much chance of prices falling significantly.
Yet despite this fact, ask most people about house prices in Sydney or Melbourne and they will tell you they’re crazy, and in a bubble. And then they go to an auction and bid up prices…
Unlike shares, people have to own or occupy property. You can’t stay out of the market and wait for things to return to your version of normal. You need to live somewhere. Preferably somewhere close to work. And if interest rates stay on hold at 1.5%, as they are likely to do for a while, then the property market won’t return to normal (whatever that is).
What you’re seeing in the market now is a result of years of overreliance on monetary policy. Because we have had a dysfunctional political system for nearly a decade now (and with no end in sight), no meaningful structural reform can occur.
So it’s left to the RBA to wield its blunt and damaging interest-rate policy as a cure all. Its efforts to contain the fallout from the commodities bust resulted in the housing affordability crisis you’re now seeing in the major cities.
This was (and is) fuelled by a tax policy that rewards capital for speculating on housing. A smart and strong government should have curbed those incentives well before the bubble took off.
But successive governments in Australia have been neither smart nor strong. They timidly attempt to hang on to power, pleasing as many lobby groups as they can. They govern for themselves, not the country.
And we are to blame as well. In this nanny welfare state that Australia has become, every election is about ‘what’s in it for me’.
With this in mind, don’t expect too much of substance in the upcoming budget. There will be attempts to solve the affordability crisis but, more than likely, it will just involve pumping more money in, while removing none of the tax breaks.
For Markets & Money
Editor’s Note: This article was originally published in Money Morning.