Why the Market is Turning Against Aussie Property

Why the Market is Turning Against Aussie Property

Well well well…

More evidence that my recently voiced concerns about Australian government debt are filtering into mainstream thinking. From the Financial Review today…

Two of the nation’s big four banks have warned the federal government risks losing the patience of credit agencies, whose AAA rating for Australia has helped underwrite some of the lowest household mortgage rates on record.

With politicians likely to be tempted into new and underfunded spending promises in the looming federal election, National Australia Bank’s global head of policy research, Peter Jolly said Commonwealth debt was now “pushing against ratings agencies’ AAA boundary”.

To be honest, I’m surprised that the Aussie banks haven’t been all over this before. Not because of their altruistic concern for the good of Australia. But because they directly benefit from the government’s AAA credit rating…and stand to lose the most if that credit rating goes.

The quote above states that the governments AAA rating ‘has helped underwrite some of the lowest household mortgage rates on record.’ That is, banks are able to attract offshore funding and keep mortgage rates so low precisely because of the government’s AAA rating. The banks ‘borrow’ it from the government.

Once that goes, the market will see our banks as higher risk, and mortgage rates will rise. 

Will the government listen to the banks’ warnings though?

If it comes down to a choice between maintaining power or maintaining the AAA credit rating, I think I know what the outcome will be.

But it won’t happen overnight. The government has at least another 12 months of profligacy ahead of it before the credit agencies downgrade the rating. So the banks, and by extension, the housing market, can rely on a AAA rating for a little while yet.

Which is good news for the Australian housing market, because for the first time in a long time, Aussie property is under the pump from a range of sources.

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Most obviously, Aussie banks are under pressure. This means their ability to extend more and more housing credit is constrained. And thanks to the price boom of the past couple of years, the likelihood of continued strong gains is diminishing.

Even an establishment figure like Michael Pascoe is sounding the alarm on property as an investment. From the Sydney Morning Herald

Investors get carried away with optimism in every boom in an asset class but once the froth is blown off the top of the market, the herd generally understands the easy money has left the building and expectations become more realistic.

And the realistic residential real estate expectation now is that the average investor buying housing today is going to lose money over the next few years. That’s not because of any Doomsday Brigade price crash. It’s enough for prices to go flat for investors to lose money.

Pascoe is referring to the cost of buying property — stamp duty and the interest expense on debt being the mains ones — as being more than enough to offset the tepid gains expected over the next two or three years.

I’m sceptical that you can have a boom and avoid the bust. It just seems a little too convenient to have a massive run up in price followed by a few years of sideways movement. But I also know enough to know that I don’t know too much at all.

Anything can happen in a world devoid of free markets. We live an age of central bank intervention and involvement like never before. Who knows how it will play out?

I read a quote once that went along the lines of, ‘I never learned a single thing from someone who agreed with me.’

It’s a particularly important point for investors to think about. We tend to have views about things, and look for people to confirm those views. I’d imagine many of you read the Markets and Money because you happen to agree with most of the content.

Which is fine. But you should also make a point to read things that you don’t necessarily agree with. As long as the arguments are well reasoned, there’s much more to learn from reading something you disagree with, rather than just consuming stuff that confirms your views on a daily basis.

For example, I began reading Phil Anderson’s Cycles, Trends and Forecasts report a few years ago. A lot of people thought Phil and I were diametrically opposed in our view on markets. And I admit, I struggled to understand the rationale behind Phil’s general bullishness. But he made a compelling case. It was worth investigating.

I became interested in his cycle theory (his ‘14+4=18’ argument is incredibly insightful…I suggest you take a look) and read up on it. I read his book, The Secret Life of Real Estate, and found it one of the best books on monetary history I have read.

Phil introduced me to the works of WD Gann, an enigmatic Wall Street trader from the early to mid-1900s. Reading Gann has broadened my knowledge about life and markets immeasurably.

I’m not saying I now agree with Phil’s outlook. But I understand where he is coming from. It is well reasoned and plausible. But I am saying that I’ve learnt more from reading Phil’s stuff than I have from reading countless views that simply conform to my own.

But whether you agree with Phil’s outlook or not, his Cycles, Trends and Forecasts publication makes for compelling reading. If nothing else, each issue makes you think. If you haven’t seen his stuff, I suggest you take advantage of this special offer now.

Greg Canavan,
For Markets and Money

Greg Canavan

Greg Canavan is a contributing Editor of Markets and Money and is the foremost authority for retail investors on value investing in Australia. He is a former head of Australasian Research for an Australian asset-management group and has been a regular guest on CNBC, Sky Business’s The Perrett Report and Lateline Business. Greg is also the editor of Crisis & Opportunity, an investment publication designed to help investors profit from companies and stocks that are undervalued on the market.

To follow Greg's financial world view more closely you can subscribe to Markets and Money for free here. If you’re already a Markets and Money subscriber, then we recommend you also join him on Google+. It's where he shares investment research, commentary and ideas that he can't always fit into his regular Markets and Money emails. For more on Greg go here.

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