Housing Crash Continues

It's been nearly a year since I started this blog. Unfortunately I haven't updated it for some time. It was interesting for me to look back at my first post in July 2007 - just by chance my timing in forecasting the beginning of the end for Australia's property bubble was pretty good. I did note however that the housing market would bring down the economy - in fact it may be the reverse - the overheating economy might bring down the housing market!

Anyway - will be interesting times through 2008 and 2009.

China's Bubbles

I've written before about the ramifications of a slowdown in China for companies that have heavily invested in new capacity. An even worse outcome would be a temporary slowdown that triggers political unrest in the world's largest nation.

There seems to be a belief that China will continue to grow forever that is not unlike the belief during the tech bubble that the internet would cause unlimited economic growth.

China is not particularly stable and any large investments on the back of China might work out but has far more risk than people think. I found this article an interesting read and recommend it:


http://www.bloomberg.com/apps/news?pid=20601039&sid=aDtVS4u8AFsg&refer=home

Is Monetary Policy Dead?

New Zealand has been raising rates aggressively to slow their overheating economy. The Australian central bank has been doing the same but perhaps not quite as aggressively. Yet both economies just yawn and keep charging ahead. The increases in rates don't seem to have any effect. Of course this is very hard to prove as you can never prove the counter-factual (i.e. what would have happened if they didn't increase rates?). Without the increase in rates NZ and Australia may be overcooking even more than they are now. But nevertheless, the central banks 'appear' powerless to slow things down.

On the other hand, Japan dropped their rates to almost 0% in the late 90s and again in 2001 in order to stimulate demand and end their recession. This had almost no effect whatsoever.

The USA fed just dropped their cash rate by 0.5% to head off a recession. My prediction is this also won't make an ounce of difference. Now that house prices are correcting people will feel less rich (the reverse of the wealth effect) and consumption will slump regardless of rates.

So .... does monetary policy work at all? What has changed in the modern economy that is rendering monetary policy useless?

What if China's economy has a "hick-up" ?

In my experience, everybody seems to assume that China will just keep on powering along. Many new capital investments in Australia and elsewhere is based on the premise that China will continue to grow. My question then is what will happen if China has a 'hick-up' that slows their growth for a year or two? I think many companies (and economies) are highly exposed.

I read recently that the Chinese government have increased the reserve requirements for banks in order to try and slow the economy. There are clear inflationary pressures as all the currency they pump out fixing their exchange rate makes its way back into the domestic economy. Their financial system is weak and definetly prone to mis-allocation of capital. The economy is also heavily reliant on investment and exports for its GDP - domestic demand is not strong enough to drive the economy on its own. Therefore their growth rate will be influenced by a slow down in the USA and elsewhere.

China's growth has been great - it has pulled millions of people out of poverty. However, businesses in the west should be prepared for a hick up in China's growth at some point. Investing billions on the assumption that 'China will grow at 10% forever' is very risky considering how little reliable data we get on the internal workings of the Chinese economy.

More thoughts on the US Housing Crash

For 3 years now I've been preaching about the illogical levels of house prices and the associated debt levels that exist in the UK, USA, Australia, and NZ. During this time I've been laughed at, ignored, or sometimes even treated as a bit of an outside 'nutcase'. This has been rather frustrating to say the least when the situation was so obvious to me - house prices going up because house prices are going to go up is hardly a sustainable path forward. So to be honest I actually feel a sense of satisfaction watching the shit hit the fan in the USA.

But I'm not sure I will feel the same way when the chaos makes its way to Australia. I think I'll have mixed feelings - some sense of satisfaction but also some sadness. When it gets here people I actually know (as opposed to people I don't know in the USA) will be hurt. Some of these people weren't greedy - they were just unlucky enough to buy their first home at the peak of a bubble. Or they added enormous leverage to some hard earned savings they had put together over many years and ploughed it into an investment property because everybody else was doing it - these people will probably have at least 50% of those savings wiped out if the market moves down by only 10%.

The group I don't feel sorry for are those that just kept borrowing and bought 3, 4, 5, 6 or more investment properties. They can go bankrupt for all I care - there's no law against stupidity but they were greedy and took on enormous risk.

Considering the chaos that will come I wonder what is the best path forward in terms of future public policy? Clearly this is a case of market failure so leaving the market to its own devices is probably not the best path forward. Should the Reserve Bank's charter be expanded to employment, inflation, and to lean against asset bubbles when necessary?

US House Price Crash

I have of course been following the credit squeeze and related house price crash in the USA. I read a good quote from Time magazine which sums up the whole situation nicely!

"Whenever the price people will pay today depends on the belief that other people will pay even more tomorrow, you've got a bubble. It takes only a slight letdown in those expectations to send the whole delightful, self-feeding process into reverse."

http://www.time.com/time/magazine/article/0,9171,1655723,00.html

It is very interesting that the media in the USA appears to be turning against the "house prices rise forever" story that they have been pushing for so long. Infact many are predicting an ongoing slump in housing. The psychology of this is interesting - the slump will definetly happen now because the media message is that there will be a slump!

Anyway - it is long overdue and Australia is in the same boat. It is only a matter of time for Australian housing.

Land Supply and House Prices

This was an interesting read. It is a paper by the Institute of Public Affairs on how poor land supply laws are increasing land prices. Looks like the 'lack of supply' theory has a lot more credibility to it than I first thought. This means the fix won't be quick which is dissapointing - I might have to pack up the family and my (partly) government funded education and leave the country!

http://ipa.org.au/files/STALEY&MORAN_VicHousing.pdf

I still believe the rampant speculation is an issue - when I meet people who are buying their 3rd investment home and I ask them what rental yield they are getting and they reply "dunno" there are obviously some issues in that market. The governments poor planning and the speculators are proabably reinforcing eachothers behaviour.

The fact of the matter is that the cause of this doesn't really matter. Whether it is speculation or whether it is poor planning, eventually prices will return to fundamentals and then Australia is in for a whole world of pain. Every man and his dog has borrowed against this so called "wealth" to buy stuff they don't need - suddenly, the wealth won't be there.