It’s the weekend again, my yard apes are tucked up for the night so it is time for a small post on what is rumbling around in my thought factory and I would be interested to hear others opinion on.
As noted by Jimbo this morning the REIV has suddenly decided a strategic capitulation is in order as sales volumes and stock on market in Victoria run off in opposite directions.
Melbourne’s property bubble is bursting, with $400 a day wiped off the average house price in the past three months.
After peaking at $601,000 late last year, the median price has fallen to $565,000 – down $36,000.
The 6 per cent slump is the biggest quarterly drop in more than two years and one of the biggest the Real Estate Insititute of Victoria has recorded since the height of the global financial crisis.
REIV chief executive Enzo Raimondo said that although it was normal for prices to ease at the start of the year, it was clear the market had turned after an astonishing period of runaway growth.
“The honeymoon for sellers is over,” he said.
Mr Raimondo warned vendors would need to adjust their expectations.
So this seems to put Melbourne about 4 months behind the Gold Coast in terms of REA strategy. I noted the same type of talk spewing from their real estate agents back in the new year. I am also aware that the REIV is calling for the government to do more to help them out under the guise of helping young families in their latest submission to the Victorian government. (Spew warning!).
Back on Friday I linked to an article by Satyajit Das on QE effects. If you haven’t already I recommend you read the article in full as it is well worth it. In the article there was one paragraph that I caught my attention and I have been thinking about it.
Criticism of QE has focused on the risk of Weimar like hyperinflation. Debasement of a currency through debt monetisation can lead to very high levels of inflation.
In reality, the low velocity of money, the lack of demand and excess productive capacity in many industries means the inflation outlook in the near term remains subdued. Inflation will only result if bank lending accelerates and aggregate demand exceeds aggregate supply. America’s output gap is between 5% and 10% and considerably more monetisation would be necessary to create high levels of inflation.
QE’s real side effects are subtle. It discourages savings, drives a rush to re-risk, encourages volatile capital flows into emerging markets and forces up commodity prices.
Low interest rates perversely discourage saving, at a time when indebted countries, like America, need to increase saving to pay down high levels of debt. Low interest rates reduce the income of retirees or others living off savings, further reducing consumption.
Another thing that the large increase in the monetary base in the US is doing is driving down its value relative to other floating currencies. A weaker currency doesn’t directly lead to inflation, it makes imported goods and services more expensive and also makes debt denominated in foreign currency rise. In certain circumstances this is actually a good thing, because it re-directs purchases towards domestically sourced goods which leads to employment. It also makes your exports more competitive and there is some evidence that this has begun with LA port shipping data showing some large rises in export volumes.
I also think that it is important to understand how QE is being used, because there are some significant differences between various countries stimulus programs. The term “helicopter drop” is mentioned in the article, however this is not really what has been occurring in the US. “Helicopter drop” implies that the money is scattered in the wind and everyone gets to pick it up. However that is not the case in the US. What actually happened was that the money was provided to the banks directly through the Fed and various programs (TARP, TALF). The money was not provided to the public via direct payments. The money did not “circulate” around the economy at all, it resided with the banks and those that were in a position to be able to access those funds through the bank assistance programs. In reality this meant the rich and the rest of the financial sector and you would be well aware what they did with it amongst other things.
I will not go into the politics of why I think this occurred, but if the US government actually wanted to “helicopter drop” then they should have given direct payments to the lowest 25% cohort on the socio-economic scale and credit incentives to the middle class. I am in no way suggesting that this sort of behaviour is a good idea, I have posted previously about my lack of support for stimulating unproductive debt. But it is basically what the Australian government did and it was very successful in its attempts to re-inflate the economy. China did something in the middle but due to its political structure the government had no problems making sure the money left the banking system.
In my opinion the US “helicopter drop” was anything but, it was more like a “under the desk brown paper bag” operation. I have talked previously about banking operations. In an environment where the central bank would repo your cat reserves were never the issue for credit issuance. The fact that the US Fed began paying interest on reserves in a ZIRP environment suggests that this was never the plan anyway.
Just a short thought on China. In recent days it has become increasingly obvious that the Chinese government is stepping on house prices. If they continue to do so you can assume that housing is dead as a speculative tool in China. So assuming that you believe that China can perform the juggling act of slowing housing and keeping its economy strong ( I know it is a large assumption ) then where will the speculation go next. Will we suddenly see yet another massive property price boom in Hong Kong? Chinese Equities ? Gold ? Moon rocks ?
Gold bugs are very excited with the prediction from JPMorgan.
0147 GMT [Dow Jones] The slowdown in China’s property market, being directed by Beijing to rein in housing affordability issues, is driving gold demand by the country’s “mass affluent”, argues JP Morgan’s China equities and commodities MD Jing Ulrich. This group “has seen its investment options sharply affected by restrictive housing measures” such as property taxes, increases in down-payment requirements, and raised interest rates, “since these households possess sufficient capital to purchase investment property, but do not have the same degree of access to investment vehicles such as private equity funds and retail property” as the super-rich, she says, adding that equities, gold and alternative property investments are therefore the key beneficiaries. “Chinese demand for gold jewelry increased 13.5% (on year) in 2010, while demand for bars & coins rose 70.5%. Most market participants expect that China’s gold demand could grow at a still-stronger pace in 2011,” she notes. At 0137 GMT, spot gold is at $1,476.20/oz, off its earlier record peak.
If this prediction is true then $1476.20 is cheap.
Enjoy what’s left of your weekends.