Macrobusiness

Crystal Balls – When will Aussie house prices crash?

Nothing generates more interest in living rooms across Australia than predictions about the future of the Great Australian House Price bubble. Generally the Glass Pyramid avoids this “popcorn” pastime, and today is no exception, but here are a few tips on what some of the shimmering shapes in the mist might mean.

The most important thing to remember is that the current LNP government of Malcolm Turnbull loves the Great Australian House Price bubble. They (and their Banking Buddies) love it so much that they will do anything to protect and nuture it. Do NOT expect any enthusiasm from this government, the RBA or APRA for policies that will in any way endanger their precious housing bubble.

The most likely approach, by our somewhat baffled economic managers, if the bubble stops responding to their many other bubble blowing tools, will be to trim the RBA target rate a few more times to stimulate another surge in demand by households for debt. As Bank friendly economists are fond of reminding us, cutting rates makes housing more ‘affordable’ because it makes debt cheaper (though in practice most people just borrow more and drive house prices higher).

The AUD will ‘pay the price’ of this bubble blowing as a lower RBA target rate tends to put downward pressure on the AUD especially when rates offshore are higher and/or rising.

Allowing the AUD to do the dirty work has an important advantage for desperate politicians and the debt peddlers. To the extent that anyone has a clue what determines the AUD they generally just argue that everyone is to blame for a low AUD because, they argue, it reflects our ‘performance’ in some deep way that no pollitician can be blamed for.   It is unlikely that many will link a falling AUD to the house price bubble blowing by Mr Morrison, the RBA and APRA.

Given the preference of our economic managers to keep housing asset prices bubbling, with lower interest rates if necessary, the only variables outside of their control, are offshore interest rates and the terms of trade.  Those are the hard limits on Aussie house price bubble blowing as they have the capacity to drive the AUD down to banana republic territory.  As a country that has run current account deficits for decades, eventually the piper will play  a tune and a falling AUD and rising local interest rates will be what we will be dancing to.

We can be sure of the following.

1. The govt and the banker captured regulators are NOT going to allow a credit crunch to crash house prices.

Macroprudential action by APRA will be relaxed, the Royal Commission forgotten quickly or ignored, finance brokers let off the leash to complete loan applications with dodgy info, senior bank management again weaponised with bonuses, foreign investment and speculation in residential property encouraged, population growth maintained, new construction crunched and as a last resort the RBA target rate trimmed ALL to ensure that sufficient upward pressure on housing asset prices is maintained.

If the effect of reducing the RBA target rate is some additional downward pressure on the exchange rate, that will be accepted…..this will be explained as the exchange rate acting as a shock absorber.

Aussie “QE for Bankers” is very unlikely, simply because it is likely to result in larger falls in the AUD for any asset price support it gives. It will be a very expensive method of propping up asset prices compared to simply stuffing more “rats in the bucket” and encouraging them to gorge on bank credit to pay through the nose for a place to live. Shutting down the general public, irritated by congestion and chaos, by calling them “racist xenophobes” or worse “populist” can be outsourced by Big Business and Big Finance to their “all growth” is good minions and #fakeleft useful idiots.

2. If offshore interest rates rise

This is a real possibility considering US unemployment is already under 4% and they/Trump have not even started MAGA or seriously bringing jobs back home / or preparations for war.  Imagine the US at full employment and going gang busters.  Capital will be rushing to Wall Street quick sticks.

Interest rates might really take off if Europe realises that MEGA Making Europe Great Again involves stimulating domestic demand by ditching the failed theories of neoliberalism at the same time as the source (the USA) of those theories does the same.

Don’t pay too much attention to hot talk about the dangers of the US deficit and debt until people actually stop buying US treasuries.  In Europe the ECB is busily buying up all the government and corporate debt they can lay their hands on.

Debt doesn’t matter if your Central Banks buys it and sticks it in the filing cabinet. The only thing that matters is money in the wallets of real people.  If Trump or the EU finally understand that is the key issue we may find change is in the air.

If offshore rates do rise, the AUD will fall further for any given RBA target rate. At some point falls in the AUD (say to below 50) will start to cramp the house price bubble maintenance options (force the RBA to raise the target rate) but with the AUD at 75 that may not be anytime soon.

3. Terms of trade soften

If this happens there will be downward pressure on the AUD and it will fall further for any given RBA target rate.

If China slows or gets cranky (crankier) and stops buying our dirt for top dollar, the AUD will fall further for any given RBA target rate. At some point falls in the AUD (say to below 50) will start to cramp the house price bubble maintenance options but with the AUD at 75 that may not be anytime soon.

4. Selling off Australia

This will continue at speed as selling off capital assets, land and claims on our future income is upward pressure on the AUD and reduces any downward pressure from 1, 2 and 3 above.

So expect to see Mr Steve Ciobo, Mr Morrison and PM Turnbull on your screens waxing lyrical about the importance of selling off Australian assets to foreigners via the mislabelled “Free Trade Agreements”. They will lie and call it investment when in fact it is nothing more than the transfer of title of existing assets to foreigners to fund the lifestyles of our current crop of lotus eaters.

So the message remains.

Australian housing asset prices will continue to receive maximum support from the government and that will work so long as the terms of trade hold up (China keeps paying top dollar for our dirt) and offshore rates stay low (i.e. America is not made very great again and the Europeans keep acting like Europeans).

All you crashniks hanging out for lower house prices need to be patient and start praying for:

  • cranky China or slowing China depressing our terms of trade
  • success for Trump’s MAGA plan – bringing jobs back to the US – and stimulating the US economy to moderately high speed or
  • the Europeans (Italy in particular) giving the bankers running the EU the boot.

All of these will make it much harder for our economic managers to maintain a housing price bubble scam.

At some point the mindless group think that passes for ‘economic thought’ downunder will collapse and everyone will be wondering “What on earth were we thinking listening to scoundrels” and the building of a productive, balanced and sustainable economy can begin.

So get out your prayer books and tea leaves!

Categories: Macrobusiness

4 replies »

  1. “Banking was conceived in iniquity and was born in sin. The bankers own the earth. Take it away from them, but leave them the power to create money, and with the flick of the pen they will create enough deposits to buy it back again. However, take it away from them, and all the great fortunes like mine will disappear and they ought to disappear, for this would be a happier and better world to live in. But, if you wish to remain the slaves of bankers and pay the cost of your own slavery, let them continue to create money.” — Sir Josiah Stamp, Director of the Bank of England (appointed 1928). Reputed to be the 2nd wealthiest man in England at that time.

    I understand 007!

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  2. Cheers! Great analogy.

    Mad science is what we have been watching. Who else would think that cranking up debt levels post GFC was a smart idea other than mad scientists.

    Those beakers are very volatile and who knows what might fly in the laboratory windows at the worst possible time.

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  3. Nice assessment! 10 years go this month, the A dollar was ~ 0.95 USA. By Oct ’08 it had plunged to ~ 0.62. The pollies and RBA might think the beakers in the OZ Eco lab are nicely bubbling away and all reactions forthwith will be controlled and monitored with deft precision, but with retail debt across the land at outrageous levels, they should be more frightened than pleased. All that debt ( that cannot be repaid) will produce an exothermic state that is not even being considered atm.

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