The Unconventional Economist posted on the bearish musings of Louis Christopher overnight. Mr Christopher’s thoughts looks fine and good, but made little sense to me. Here is the quote:
I still do not believe this is going to be the big one- that being the big 40% house price crash. However for many vendors, it’s certainly going to feel like it, given that the downturn is building momentum somewhere between a 5-10% decline (as an average for the capital cities), with Brisbane, Perth and Darwin potentially falling more. Sydney is likely to experience just a moderate downturn given its genuine shortage of rental accommodation and a stronger local economy.
The question is that if a 5-10% decline is already in the bag then what will be the limit to this downturn? Probably not much more than that. I fail to see how one can have a 40% decline when AT THIS TIME we have near full employment, we have a central bank that has plenty of room to cut interest rates and we have both sides of the government who have both publicly stated that they don’t want a housing crash and have the means to stop one. On top of this we have nominal GDP running at 9% and in a number of cities we have a very tight rental market as our vacancy rates illustrate.
However, there is an outside probability that future economic events can turn very negative while the Australian housing market is currently vulnerable, that would then potentially turn a 5-10% decline into something much greater. These events would have to include a major downturn in China and/or a sudden rationing of housing credit from some type of GFC II. Any sustained rationing of credit (through say fierce reduction in maximum LVRs) or major ongoing reductions in resources incomes would smash our national housing market and make it difficult for an effective stimulus response from the powers at be.
Yes that is a possible future outcome, however as stated above, we believe the most likely end game for this downturn is federal government and/or central bank intervention as what happened in 2008. The timing though is not likely to be soon. Indeed, the central bank is quite likely enjoying the housing price falls as it means the housing market is slowly deleveraging itself in a controlled way during a time of prosperity.
And that is why this downturn is now happening at pace with no imminent recovery in sight
Well…I am still managing to agree with the outcome that this is a correction and not a crash but my faith in this is sorely challenged by this analysis. NONE of these reasons stack up:
- Near full employment
Yes, and as we know, unemployment follows not precedes a crash. Low unemployment also drives up rates.
- We have a central bank that has plenty of room to cut interest rates
No, we don’t. The RBA has maybe enough room for a little cut to boost confidence. Unless there is a crash, it can’t cut more because the dollar will crash and simmering inflation will erupt with a rocketing oil price.
- We have both sides of the government who have both publicly stated that they don’t want a housing crash and have the means to stop one.
Again, only in the case of a crash.. All rhetoric is about austerity not stimulus. And, in effect, to stimulate housing would be to drive up rates anyway. Plus, there would be serious blowback at another FHOG. On the upside for investors, it’s inconceivable that the government will mess with negative gearing in this environment.
- On top of this we have nominal GDP running at 9%
See a, b and c.
- In a number of cities we have a very tight rental market as our vacancy rates illustrate.
Which is very slowly causing rents to rise and, sure, in five or ten years might make property an ok income return investment. Which is way too far away.
In my view, Mr Christopher, who is, I agree, the only objective property expert at large beyond MB bloggers, fundamentally misunderstands the current interplay between housing and the economy. The fact that house prices are backed by high levels of debt isn’t new. What is new is the sustained commodity boom that has huge income flows but also huge inflationary pressures in oil and therefore transport, as well as in anything that competes with the commodity sector for resources, which includes construction and utilities.
In short, all of the reasons cited by Mr Christopher for economic strength are the same reasons for why interest rates are going to go higher in the second half of the year. Economic strength, not weakness, is the Achilles heel of housing.
Truth is, the only reason I can think of for why Australian property won’t crash – the ONLY reason – is the psychology of the bubble. It’s big, it’s bad and it may mean that investors irrationally hold on through early losses. How strong is that lifeline do you think?
He is also a former gold trader and economic commentator at The Sydney Morning Herald, The Age, the ABC and Business Spectator. He is the co-author of The Great Crash of 2008 with Ross Garnaut and was the editor of the second Garnaut Climate Change Review.
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