Two weekend stories in the AFR capture the conundrum facing Australian property right now. The first is the wildly bullish Louis Christopher:
Mr Christopher is now even more comfortable with his forecast of late last year for Sydney homes to win 15 per cent to 20 per cent in capital growth this year.
…“For clearances to start straight off in the late 70 per cent to low 80 per cent range implies there has been no softening in market conditions since we finished off last year.
“There is strong confidence from buyers out there that the capital gains are likely to continue well into this year.
“There is sense of ‘we’d better buy now before we miss out’.”
Low interest rates, strong demand and historically low listings were driving the Sydney pace.
“There is very little stock out there and plenty of buyers,” Mr Christopher said. “That spells one thing: higher prices.”
Juxtapose this with Chris Joye:
Sublime stability. Is that really what the climb in Australia’s official jobless rate from 5.8 per cent in December 2013 to 6.0 per cent in January, a touch above the 5.9 per cent peak reached in the global financial crisis, perversely portends?
Perhaps, if you ignore the risks housing and inflation pose to the Reserve Bank of Australia’s central outlook.
The RBA’s base case presumes…house prices will continue to boom on the back of ultra-low borrowing rates, loosening lending standards and lubricated credit growth. The Aussie dollar drifts down to between US80¢ and US90¢, which is a level the RBA thinks is closer to “fair value”. A boisterous banking sector, record iron ore and coal exports, and higher household spending ensure the equities market avoids a sharp correction. And the bond guys dodge the date with death that is long-term interest rates returning to normal.
…The RBA’s position also subsumes an other-worldly perspective on Australia’s frothy housing market, which becomes more divorced from credible estimates of fair value each day. In its February statement, the central bank blithely ignored the building imbalances.
Instead of noting that Australia’s 133.6 per cent housing debt-to-income ratio was statistically indistinguishable from the all-time peak of 134.2 per cent recorded in mid-2010, the RBA simply said this ratio was “little changed”.
…One thing I can say with certainty: at the current pace of house price inflation, we are five months away from having the most expensive real-estate market ever.
So is it a wild opportunity or a wild risk? To make your judgement I would add one more story, this time from Alan Mitchell today:
Here’s an important reminder for investors and business managers from the International Monetary Fund: the mining boom that has increased Australia’s prosperity also has made the economy more sensitive to swings in commodity prices and the terms of trade.
…The terms of trade have peaked and the official projections are for a long, gradual decline. However, economists warn that we could be in for a much wilder ride. A stronger-than-expected expansion of global supply, or a serious downturn in China and the other emerging market economies, could see a big fall in mineral prices.
The impact on the Australian economy would be cushioned by the real depreciation of the exchange rate, labour market flexibility and the RBA. But it would be very damaging.
…For a start, the government has warned that a secular decline in the terms of trade means prolonged low per-capita income growth.
True, incomes will be high, but some industries depend on growth for their demand. The construction industry is an obvious example, but growth also is an important part of the demand for durable goods…their distribution employs a substantial chunk of the retail, wholesale and transport sectors.
Moreover, the inherent volatility of commodity prices means they will fluctuate around their declining long-run trend, potentially causing large swings in a real exchange rate that is prone to overshoot.
That will generate new pressures to expand or contract, not just on the trade-exposed producers but on the so-called “non-traded” service industries as well. Among the latter will be governments that will have to live within their more volatile means.
A hugely overvalued and illiquid asset class rests atop an increasingly volatile economy with eroding incomes…hmmm…
The only real support for sustained house price gains is the politico-housing complex of media, spruikers and authorities that distort every rule to keep it going. The question you must ask yourself then is does this apparatus have the power to prop up the quango when the next time bust rolls around, whenever that is?
Interest rates are close to exhausted so I’d say “no” on the monetary side. We have perhaps two or three rate cuts left in the tank before we’re effectively at the bottom of what’s possible for interest rates in a current account deficit nation. On the fiscal side, there is one more decent stimulus still in the tank before the sovereign rating is stripped, though not enough for a repeat of the 2008 extravaganza. Perhaps half that size is possible. First home buyer incentives can roll out again and will be politically feasible given the current FHB drought, but with states having shifted their versions to new homes any federal scheme would need to be enormous to generate a good return. The UK did that so perhaps it’s possible. There are the usual protections of population ponzis and selling out our children to foreigners.
My best guess is that real house prices continue in their elevated channel, oscillating up and down around the inflated price to income measure in force since 2003 without being able to break meaningfully higher, and sooner or later succumb to the inevitable. That’s an argument for trading property (if you think you can get the timing right) not buy and hold for retirement.
