[Ed: This originally appeared in The Daily Reckoning on the 14/5/2013]
The key to blowing up a successful asset bubble is that you must constantly attract new money into the asset class you’re trying to inflate.
By that standard, recent Australian housing finance figures were better than expected but worse than required. The numbers were up. But new home buyers have not yet been bullied into the market by lower rates.
The value of home loans for owner-occupied housing rose 5.8% to $14.9 billion in March, according to the figures from the Australian Bureau of Statistics.
This was a firm rejection of our prediction that the numbers would suck. To be more specific, let’s put it in the form of a question: have rate cuts put a housing-led recovery back on the cards?
The numbers would have been welcome news to Glenn Stevens and the team at the Reserve Bank of Australia. They know Australia needs lower rates and more business investment to compensate for lower commodity prices and China’s shift to a consumption model. But there’s more to this housing data than meets the eye.
First, new home buyers aren’t convinced. New home buyers made up only 14.2% of demand. That’s the lowest percentage in nine years. What does it tell you?
Low interest rates are nice. And lower interest rates may be even nicer. But no matter how often a brain-damaged economist repeats it, lower interest rates don’t make a $600,000 house more affordable for someone on a $60,000 income. They just mean you’ll have to borrow more money now and repay it for longer in order to have a roof over your head.
What WAS interesting about the data is the big jump in new construction loans. They were up over 10% on the month and over 21.4% from the same time last year. This is a result of state governments creating incentives for new home buyers to actually build rather than buy. As public policy, it’s designed to increase housing stock, which should eventually actually lead to lower house prices.
That bit caught our eye because it suggests that some people are a lot more interested in building houses than, say, buying stocks. We’ve been working with our friend Phil Anderson on a project that explains and forecasts Australian property prices. The latest bit of data may confirm Phil’s view that Australia is actually on the verge of an 18-year boom in property prices.
That view certainly came as a shock to us when Phil first articulated it. But it’s based in part on the idea that land values move in cycles. Those cycles are determined by the availability of credit created by the banks and the willingness of people to borrow money. Phil has put the argument together in a presentation you can view here.
Look Out For This
In the meantime, we have to say it’s certainly not our view. In Austrian economic terms, more investment in Australian property at these prices is simply a continued misallocation of resources based on an irrational view that property always goes up.
There’s also the usual myth that Australians value housing more highly as a social goal than other countries, which has nothing to do with how ridiculously unaffordable prices still are.
But in a red pill/blue pill way, Mr Anderson’s views may make sense. That is, if you’re giving up on shares as an asset class to grow or preserve your wealth, you still have to do something with your money. Investment in land is really the only viable option for the middle class. At least it’s tangible.
And let’s consider what would happen if Australian interest rates were zero-bound. If the RBA lowers rates to around 2% in order to spur business investment, you’d expect to see a surge in non-bank lenders offering low-rate, high loan-to-value mortgages to anyone with a pulse.
You can argue whether it’s a good idea to be deliberately imitating the US-subprime boom, given how disastrous that was for everyone involved. But it doesn’t mean it won’t happen anyway.
In any event, even though we find Phil’s ultimate conclusions controversial, we were impressed with the depth of his work on property cycles. Phil brings in the work of Nickolai Kondratiev and WD Gann as well. As a publisher, this is exactly the type of well thought out market research we’re keen to publish in Australia.
Dan Denning+
Editor, The Denning Report
Visit the Remembering The Future Facebook Page for more on Phil Anderson.
From the Archives…
Why Invest ‘Hard’ When You Can Invest ‘Easy’?
19-07-2013 – Kris Sayce
Read This Before You Buy Another Stock or Bond…
18-07-2013 – Murray Dawes
Could Uranium be the Best Investment in 2013?
17-07-2013 – Dr Alex Cowie
Asteroid Mining and the Commercialisation of Space
16-07-2013 – Sam Volkering
Why the Australian Share Market is Heading Even Higher
15-07-2013 – Kris Sayce
