House prices up again

[TheBloods]

The incredible chasm between Australian housing and business investment is widening even further.

Later this morning the RP Data-Rismark house price index for April will come out, along with a revised number for the March quarter. It is expected to show that prices, amazingly, increased more strongly than previously thought in the quarter, and actually accelerated in the month of April. Recession? What recession?

These figures are based on the largest database of home sales (60,000 in the first quarter) and the index is hedonic, which means it is more sophisticated than the median price data used by the ABS because it adjusts for the differences in houses.

In other words, when RP Data-Rismark report, as they will, that home values have increased in every capital city except Perth in the first four months of 2009, we can be fairly sure it’s true.

In the United States house prices fell 7.1 per cent in the March quarter and 8.3 per cent in the December quarter. Basically, US values have been falling at an annual rate of 20 per cent since August 2006, and that pace has not yet materially slowed.

There seem to be three key reasons for this astonishing difference (bear in mind that Australia’s share prices have fallen more than America’s): the Australian government’s first home buyers' grant, the underlying shortage of houses in Australia, and the healthier state of our banks.

Meanwhile, there was confirmation yesterday that the downturn in Australian business investment had arrived. This is the recession.

ABS data showed that new capital expenditure fell 8.9 per cent in the March quarter, driven by a 10.8 per cent collapse in equipment – the largest fall since this survey began in 1987. Spending on non-residential buildings fell 4.7 per cent.

More importantly, business investment expectations have been cut 10 per cent, including 13 per cent for mining.

While the strength of house prices is the main thing that is cushioning the Australian economy from the global recession, the decline in business investment is the biggest concern.

The outlook for private investment is very poor and will lead to higher than expected unemployment. It will be offset to some extent by government infrastructure spending, but not enough.

In a speech yesterday, Ric Battelino, the deputy governor of the Reserve Bank, told us one of the reasons for the difference between the health of housing and the malaise in business – a big difference in borrowing costs.

The current standard variable mortgage rate is 5.16 per cent, according to Battelino, which is 1.7 per cent below the 10-year average.

The current borrowing rate for non-financial companies is 7.29 per cent, which is 0.62 per cent higher than the 10-year average.

There is a similar difference between housing and corporate borrowing rates in the United States, and housing and business there are sinking together; likewise the UK and Europe.

So the cost and availability of credit can’t be the only reason for the widening chasm between housing and business in Australia, but it’s an important one

Will it be resolved by an improvement in business investment because of the global green shoots or by a housing downturn caused by rising unemployment, the end of first home-buyers grant and tighter home lending?

That, of course, is the big question. I suspect it will be the latter, but then two years ago, like many, I found the property bears' predictions of a house-price slump convincing. These arguments, for Australia at least, now look to be completely wrong.

http://www.businessspectator.com.au/bs.nsf/Article/House-rules-pd20090529-SGSL7?OpenDocument&src=kgb

This can't continue. It's not a sensible economic outcome, it is of no benefit for householders, and must be setting us up for a bigger fall in the future.

 

[fairdinkum]

No surprises that the doom-and-gloom brigade haven't popped by this thread for a visit yet.

'There's gonna be an implosion, I tells ya! The longer it takes the worse it'll be!'

-G & D BearMarkets, 2007.

 

[Jumpin' Jimmy]

No surprises that the doom-and-gloom brigade haven't popped by this thread for a visit yet

You mean like those who also claimed the backside would fall out of the $A? They have been very, very quiet lately

 

[medusala]

Property in Oz is still too expensive in terms of incomes. Wait until the FHOG boost ends.

As for the AUD that is a reflection of the USD falling on the back of nervousness re Obama's grotesque spending and borrowing.

Even sterling only a few days after being put on downgrade watch is gaining vs the USD.

 

[morgoth]

You mean like those who also claimed the backside would fall out of the $A? They have been very, very quiet lately

Just been busy. Major concerns re the devalution of the $USD with mainly American investors looking for currencies that are commodity backed as commodity prices tend to have an inverse relationship to the $USD. It is why BHP has held despite falling prices and looks like it might be getting to rock and roll.

Lots of conflicting views out there, some saying recovery is underway, others that we will have a severe recession on the back of falling private sector investment.

As for the earlier housing comment, I have no problems with it spiking, will just make the ineviatable correction worse. The fundamental problem remains, its over-valued, its now just a question of timing. Remember in 2007 everyone said the ASX was over-valued, it fell, rallied and then absoutely tanked.

 

[Jumpin' Jimmy]

Property in Oz is still too expensive in terms of incomes. Wait until the FHOG boost ends.

As for the AUD that is a reflection of the USD falling on the back of nervousness re Obama's grotesque spending and borrowing.

Even sterling only a few days after being put on downgrade watch is gaining vs the USD

So why has it strengthened against all the other major currencies in the last 6 months as well?

 

[medusala]

So why has it strengthened against all the other major currencies in the last 6 months as well?

VS £ its not far off where it was 12 mths ago. ie 2.02 vs 2.05

vs EUR its 1.77 vs 1.65

 

[TheBloods]

No surprises that the doom-and-gloom brigade haven't popped by this thread for a visit yet.

'There's gonna be an implosion, I tells ya! The longer it takes the worse it'll be!'

-G & D BearMarkets, 2007.

This is not a good news story. Read the article again.

 

[Ripper]

So why has it strengthened against all the other major currencies in the last 6 months as well?

All the fiat currencies are depreciating in real terms, ours is just ho;ding up a bit better.

A barrel of oil cost ~ A$57 on March 1 - A$83 tonight

An Oz of silver cost A$15.94 on Jan 1st - A$19.57 tonight.

An Oz of gold cost ~ A$1242 on Jan 1st - A$1221 tonight.

An oz of Platimun cost ~ A$1339 on Jan 1st - A$1469 tonight.

 

[TheBloods]

What currency isn't fiat?

 

[Ripper]

What currency isn't fiat?

None since 1971 AFAIK

Look what has happened since


A 'basket' of goods and services in the year 1971 that cost $1000
£ s d
in the year 2008 would have cost $8345.57

Total change in cost 734.6 per cent Time series spanned 36 year(s) Average annual rate of inflation 6.1 per cent
http://www.rba.gov.au/calculator/calc.go


So if you put a grand under the bed in 1971 , forgot about it and found it last year you have had 88% of it stolen off you by stealth.

 

[fairdinkum]

This is not a good news story.

I know, I know.

The philosophy around here is 'no news is good news, bad news is better!'.

Until we start seeing the massive falls predicted by the pundits around here some time ago, there will be no such thing as 'good news'.

 

[medusala]

I know, I know.

The philosophy around here is 'no news is good news, bad news is better!'.

FD, what would you expect punters to do ahead of the withdrawal of govt cash?

Would you not expect people to grab cash whilst they could?

 

[Jumpin' Jimmy]

VS £ its not far off where it was 12 mths ago. ie 2.02 vs 2.05

vs EUR its 1.77 vs 1.65

That's ancient history Meds

Fact is the $A has strengthened against all the major currencies since the "fit hit the shan" last October.

 

[TheBloods]

None since 1971 AFAIK

Look what has happened since


A 'basket' of goods and services in the year 1971 that cost $1000
£ s d
in the year 2008 would have cost $8345.57

Total change in cost 734.6 per cent Time series spanned 36 year(s) Average annual rate of inflation 6.1 per cent
http://www.rba.gov.au/calculator/calc.go


So if you put a grand under the bed in 1971 , forgot about it and found it last year you have had 88% of it stolen off you by stealth.

Why do people have this quaint notion still that a currency needs to be backed by a metal?

 

[Ripper]

Why do people have this quaint notion still that a currency needs to be backed by a metal?

Because it enforces the discipline not to enlarge (inflate) the money supply, forcing people and gov'ts to live within their means.

Not doing so has been the downfall of every fiat currency in history.

Now more and more people are starting to lose confidence in the "free market"

http://www.businessinsider.com/bears-lose-2009-5

The unbelievable strength of this rally is why so many traders are absolutely convinced that there must be manipulation going on, whether it's the government's plunge-protection team or Goldman Sachs (GS).

Whatever it is, after languishing through much of the day, stocks soared in the final minutes out of nowhere, signalling a healthy thirst for stocks ahead of the weekend.

Incidentally , if you put $1000 worth of gold under your mattress in 1971 it would be worth ~ $15000 today.

 

[Jumpin' Jimmy]

So if you put a grand under the bed in 1971, forgot about it and found it last year you have had 88% of it stolen off you by stealth

Assuming the Reds and the rats didn't find it first

PS That's one advantage of storing gold...... at least the rats don't eat it

 

[TheBloods]

Because it enforces the discipline not to enlarge (inflate) the money supply, forcing people and gov'ts to live within their means.

And linking money to a finite source of material limits how big an economy can grow, hence wealth around the world would be reduced.

Not doing so has been the downfall of every fiat currency in history.

Calling the end of modern currencies is a pretty big call.

Now more and more people are starting to lose confidence in the "free market"

http://www.businessinsider.com/bears-lose-2009-5

What is the relevance of this article?

Incidentally , if you put $1000 worth of gold under your mattress in 1971 it would be worth ~ $15000 today.

And in 2005 it was worth the same as putting $1000 into government bonds. Or if you'd bought gold in 1983 then it would have been worth less in 2005 than if you'd bought government bonds in 1983.

Put $1000 into equities in 1971 and it would also be worth ~$15000 now and $19000 in 2005.

Hindsight is an easy thing, especially when gold has skyrocketed in the past few years.

Doesn't support the argument for the gold standard though.

Putting increase amounts of money into housing is a bigger problem than fiat currency.

 

[Ripper]

And linking money to a finite source of material limits how big an economy can grow, hence wealth around the world would be reduced.

Limits how big an economy cab inflate more like, the largest real growth in any economy antwhere was the US in the last half of the 1800's .

Calling the end of modern currencies is a pretty big call.

The fiat currencies will be replaced by commodoty backed ones in the future.

Putting increase amounts of money into housing is a bigger problem than fiat currency.

The increased money into housing is a direct result of the "going fiat" in 1971.

 

[TheBloods]

Limits how big an economy cab inflate more like, the largest real growth in any economy antwhere was the US in the last half of the 1800's .

It does prevent inflation, but it also limits the size of global wealth to a multiple of gold. If you don't find more gold you can't grow.

The fiat currencies will be replaced by commodoty backed ones in the future.

No they won't.

The increased money into housing is a direct result of the "going fiat" in 1971.

No it's not. Housing prices didn't take off until more recently.

 

[Hawkamania!]

Gold, inflation and the history of the US dollar (a good example to use) in one chart.

I know there are other factors that influence inflation and deflation, but its interesting to note the trend of the US$ in the last 40 years without a trace of gold backing it.

Another factor with this chart is the rules for determining inflation was changed by the Reagan and Clinton administrations to ease the rise in inflation during their terms and beyond.

We are lucky as a country to have an abundance of raw materials (that acts as a substitute for gold backing) to prop up our dollar.

On house prices being so high, this is a danger to those who have bought a home recently. In a few years when interest rates will increase to combat rising inflation, these home owners will be in for a shock. This will be due to rising payments and flattening out of house prices.

 

[Fire]

Why do people have this quaint notion still that a currency needs to be backed by a metal?

Why do people have the quaint notion that just because everything is holding up in June 2009, that everyone who made medium term predictions 6 months ago are completely wrong and that the good time will continue being better and better forever and ever and ever?

People are so quick to proclaim absolute victory. Sometimes all it takes is an article.

 

[Ripper]

It does prevent inflation, but it also limits the size of global wealth to a multiple of gold. If you don't find more gold you can't grow.

Of course you can as the US did in the late 1880's

All it means is your OZ of gold has more purchasinfg power.

No they won't.

Already happening.

http://www.kitco.com/ind/willie/may292009.html

No it's not. Housing prices didn't take off until more recently.

There was a delay as people adjusted to not saving when inflation (increase in fiat money - see Hawkmania's chart) took off in the 1970's.

That is what started off property as a "store of wealth" which soon turned into a bubble with all the extra money around.

 

[TheBloods]

Why do people have the quaint notion that just because everything is holding up in June 2009, that everyone who made medium term predictions 6 months ago are completely wrong and that the good time will continue being better and better forever and ever and ever?

People are so quick to proclaim absolute victory. Sometimes all it takes is an article.

I've not made that claim. I think, and have said many times and for many years, that a lot needs to change. I don't believe there is any likelihood nor justification for moving back to the gold standard though.

 

[TheBloods]

Of course you can as the US did in the late 1880's

They kept discovering gold and the size of wealth globally now dwarfs that of the 19thC.

All it means is your OZ of gold has more purchasinfg power.

No it doesn't. If wealth is backed by gold then wealth is limited to the amount of gold. If the multiple increases then all you are doing is eroding the value of gold and heading back toward fiat currency, which is exactly what happened in the early 1970s.

Already happening.

http://www.kitco.com/ind/willie/may292009.html

I don't put much credence in that.

There was a delay as people adjusted to not saving when inflation (increase in fiat money - see Hawkmania's chart) took off in the 1970's.

That is what started off property as a "store of wealth" which soon turned into a bubble with all the extra money around.

Houses should not be a store of wealth - they are shelter. Interestingly, during the gold standard less people owned houses.