Total Meltdown of the Aussie Housing Market

[mRx 16]

By Dan Denning

August 28th, 2009

Total Meltdown of the Aussie Housing Market

"Dude...those drugs are messing with your head. You should step away from the typewriter and get your mind right," a friend told us last night. "You haven't really been reckoning...you've just been kind of wandering. It's sad to see. Take a nap."

The "drugs" he's talking about are antibiotics, and your editor choked down the last of them this morning. Hopefully, we'll be less infected from now on. So we're going to push on and hope our mind clears up enough to figure out if the easing of one emergency can actually cause another.

We're talking about the total meltdown of the Aussie housing market, which is, after all, just a matter of time. Next Wednesday will see the release of the national accounts for June. Those figures will probably show the economy being less bad than previously expected. That might lead to the end of the "emergency setting" of the RBA cash rate at 3%, which will precipitate the decline and fall of ridiculously high Australian house prices (although this could be good for equities).

Hang on a second though. The GDP numbers will be tough to read because they're distorted by government stimulus spending, which spits in the soup of the economy. In other words, it'll be hard to tell at a glance how well the economy is really travelling on its own momentum versus how much of it is Kevin Rudd, Lindsay Tanner, and Wayne Swan with their hands on the boot of the economy pushing it down the road. Will the engine catch or sputter?

Right now, it's coughing a bit. Figures yesterday from the Australian Bureau of Statistics showed that business investment was up 3.3% in the June quarter. Most of the increase came from a 5.3% rise in investment in machinery, plant and equipment. It looks like businesses are taking advantage of Federal tax break to front-load future investment now. Whether they really need it now, who knows?

For instance, we received this note yesterday from a reader who paints a different picture:

Good Afternoon. I am a subscriber to your Daily Reckoning newsletter and thank you for this great service. I subscribe to the Grays online website for their daily online auctions and lately I have noticed a substantial increase in the amount of capital equipment auctions and often for equipment that are still under service agreement.

Here is an example of one of today's listings...

This might not be an accurate measure of what's going on with business in Australia, however, I just wanted to bring to your attention for further investigation. Thank you again for your daily newsletter. Much appreciated.

Best Regards

M.

You're welcome M. And who knew it was a bull market in forklifts!? Maybe it's not as surprising as you first think. You'd need a forklift to carry away the amount of BS being shovelled out by free-spending Keynesian politicians and the brainless economists who give them covering fire in the spineless media.

But we'll have to take it is a given that the June quarter GDP figures are distorted in a way that makes it nearly impossible to find out how well the economy is doing. That uncertainty (government intervention diminishes the quality of our knowledge because it interferes with price signals) may prevent the RBA from raising the cash rate. Or it may not. We won't know until the bank does something. Or nothing.

We've been saying all along, though, that the biggest threat to Aussie housing prices is the beginning of the tightening cycle in interest rates. The Aussie dollar was up overnight near 84 cents versus the greenback, partially in anticipation of the growing interest rate differential between the two countries. The U.S. dollar also fell against oil, which took a dip below US$70 on the front-month crude futures contract and then decided it liked it back above $70, which is just where it went.

You can take your pick of reasons for rising Aussie dollar strength...growing economy, yield difference versus the greenback...commodity currency benefitting from secular decline of the USD. But after you pick, you have to ask the next question: will the RBA raise rates because the economy here is healing? If it does, it will send the Aussie higher. But what will it do to house prices?

If you're in the real estate industry, you'll say "Nothing! House prices go up in all markets at all times regardless." But if you have a brain and use it from time to time, you would have to at least entertain the possibility that climbing interest rates and the end of the first home buyers grant spell real trouble for the housing market and the marginal buyers who support it.

The housing market requires a constant stream of new buyers and a fresh supply of credit to keep demand for mortgage finance up. That's the only way for new buyers to bridge the gap between stupidly high median house prices and real wages that are not keeping up with home price inflation. Yet as we pointed out yesterday, the government-backed mortgage finance operations are nearing the legislative limit on funding. Something is going to have to give.

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[almaty 19]

bullshit and just another example of the tainted american media picking on Oz..where is brother boo..to set the record straight