For the past few years I have had in mind a double dip scenario for property prices. Such as it was, the thesis ran that the extraordinary headwinds that hit property after 2016 would drive prices down so sharply that the RBA would be forced to slash interest rates much more than anybody expected. That, in turn, would trigger a price recovery of sorts.
But, said rebound would be weak owing to the central bank running out of ammunition. And because we were, and are, clearly at the wrong end of the business cycle, there was a material risk of an external shock landing on a still weak property market and finding the RBA naked.
Moreover, the thesis ran, even if the business cycle bumbled through, Chinese growth is grinding lower at a pace that means bulk commodities prices will resume their crash into the early 2020s and that income shock would roll weak house prices over again as fiscal policy was also constrained just at the wrong moment. So it was something of a double bet.
Since the thesis was first mooted, the election result shocked, and that has raised hopes that public support will drive a big rebound in prices. But it really doesn’t change much at all. Sure, there’ll still be negative gearing but these dynamics are bigger than that. We’re talking about the grand macro-economic inputs of the long cycle:
- decadal national income recession;
- peak household debt;
- zero interest rate policy;
- fiscal Armageddon;
- structural adjustment to a failing economic model.
A few tax giveaways cannot stand up to this kind of psychological assault.
And so, today, as the US/China trade war rages, iron ore begins its great fall and Brexit looms as another European crisis, it’s now odds on for global recession in 2020. And Australia is so ill-prepared for it that it makes me cringe:
- L-plated Treasurer Recessionberg has engineered a hard landing for public investment;
- the bulk commodity bubble that has funded federal government consumption is about to pop and state governments are already doing austerity on stamp duty busts;
- house prices have barely gotten off the floor and household consumption is still buggered;
- dwelling construction is in a growing crash as shadow bank lending hits the wall;
- wages growth never recovered and is about to fall as unemployment rises materially;
- the net exports ramp up is over.
That is every input into GDP growth under pressure all at once, already delivering the worst growth since the GFC, artificially supported by mass immigration, and in a three quarter per capita recession.
And to this enfeebled joke, you are going to add a global shock replete with stock market crash, blown credit spreads for banks, crashing commodity prices, China being butchered by a rampant Donald Trump, Europe literally falling apart, and offset it with only two rate cuts, both of which will not be fully passed on?
I fear that the property bull trap is about to snap shut.