For anyone who had the hairbrained idea that the latest stock market rally was a sign of the return of the good ol’ days, news signaling future woes continues to flood the financial rags.
The housing market in the US and UK is still extending people’s abilities to accept ever more bad news. The Financial Times reports:
The 25 per cent auction discount and the sluggish market give a strong signal that prices have further to fall. But the recent uptick in the auction market also shows the gap is narrowing.
This can mean either of two things; either the housing market is still tanking (in the UK and US), but a turn-around is coming soon, or the housing market is still tanking, and the increase in sales at auction is due to people who have to live somewhere buying at the 25% discount that results at auction, not realizing that prices will fall further still as more mortgate defaults accumulate (since, in the US, as many as 30% of mortgages are still bigger than the asset value). It certainly suggests that the Australian housing market is not at all a safe place to invest currently, although the statistics still look amazingly good there thanks to the naive First Home Buyers.
China, fearing an inflationary spiral, is restricting credit:
Chinese bank lending slowed dramatically in April because of fears that loan growth in the first quarter had been excessive and could pave the way for loans of deteriorating quality, so possibly creating a new round of asset bubbles.
This suggests that nobody there has any real confidence that life is going to get any easier in the near future. Whatever is said of China’s increase in manufacturing, it is occurring in the face of worsening deflation and therefore falling demand. Again we ask, where are the markets going to come from to restart China’s furry toy and other plastic-junk factories? The banks have probably overstepped their mark in spreading around the easy-money:
There have been signs that China’s economy is starting to regain momentum after weak growth in the early months of this year. There was significant growth in fixed-asset investment and industrial output in March. Chinese banks have also lent 4.6 trillion yuan (£460bn) in the first quarter of the year, nearly the total for the whole of last year.
As we described earlier, this is like flogging a dead horse by ramming it with a speeding freight train. Of course the horse will move, but it’s still dead. But according to central bankers such as Jean-Claude Trichet, the recession is over. He is ignoring the magical freight train (the ridiculous amount of new money spirited into existence over the past year) which governments and bankers alike are hoping people will not notice, or at least forget very quickly.
The problems won’t pass until some serious restructuring occurs in advanced economies in order to make them viable. This will take years and, in countries such as Australia, planing for this kind of restructuring (in the form of infrastructure upgrades) is still only talk. Most of this stuff isn’t even on the Parliamentary floor yet.
ABC News (Australia) reports:
The Newcastle University index projects 15 per cent of the suburbs examined are at a significant risk of sliding into high levels of unemployment. … “Because of the reliance on particular type of industries; manufacturing, construction and those types of industries,”
It’s not unexpected. It is just a matter of time before unemployment hits Australia with people defaulting on mortgages and going back from being “owners” to “renters”. For most people, not a great deal changes in terms of their de facto serfdom. They go from renting from a bank to renting from a property investor. After all, only 34% of homes are owned out-right. It is a very ominous statistic indeed.
Soon will be the time when the cashed-up individuals who got out of the stock market before its crash will get rid of much of their spare money in buying up cheap houses throughout Melbourne and Sydney’s working class suburbs. Housing prices in these areas are set to fall sharply, as will rent (because the capacity to pay will be low).
There are other major changes taking place, with the previously highly paid mining workforce returning from mining towns in the western parts of Australia to the Eastern belt of cities. These people will also find themselves unable to find work. They will crowd out temporary residents from many areas of employment which will result in them returning to their countries of origin. The difference is that these people are more likely to be “cashed up” and are unlikely to be in the situation of defaulting on mortgages or being forced to rent. How this will affect housing demand or rental prices is uncertain, but it could turn out to be a buffer against a cataclysmic housing price collapse.
On balance, however, I would guess that, in poorer parts of big cities, housing prices will fall dramatically as the desire to live in those areas vanishes, dragging the market down as a whole. Many up-market areas will also suffer as businesses go to the wall. Again, not unexpected. Top-end real estate has always been the most volatile.
However, farming and the food production industry is an area whose produce is not experiencing any dip in demand. People still have to eat. It is in areas which service these needs where I would think that real estate prices won’t fall much at all. Country towns and regions where food processing takes place, one would think, should be relatively immune from what is otherwise an manufacturing and minerals export slump for Australia.
There is no shortage of bad news. It’s all the rage, but not a lot of news is particularly helpful. For example, the knowledge that the Dow Jones index is now half of its high in 2007 is wonderful but no one is able to guess where the bottom of the market is. Predictions that the Dow will reach 5000 points before it rises are looking realistic, or even somewhat optimistic. On the other hand, I would take no serious notice of stories of rioting and protesting. These events are not as spontaneous as they may seem. Anyone who has been involved in activism can tell you that a demonstration, even a riot, is not easy to trigger except through careful, coordinated effort. That is, until people are hungry, at which point you can very well predict real, disorganized chaos.
In Ireland, there are predictions that housing prices will topple by 80% (eighty percent), owing to an exodus of migrant workers as well as native Irish. There are three hundred thousand empty homes for a population of a little over four million. That’s some serious imbalance!
But what about Australia? The housing market has been flat, mortgage defaults are rising steadily, but there is nothing as dramatic as what is happening in Ireland or Iceland.
There are about 250,000 temporary residents in Australia at the moment. I couldn’t find the break-down of these, but my guess is that most of these are issued on basis of employment or study in Australia. Let’s say that about 150,000 dwellings are occupied by these temporary residents. They are a significant part of the rental market.
What would happen if suddenly they all left due to loss of employment? Certainly nothing would match the scale of what occurred in Ireland, but it would be enough to give the rental market around the country a good shake. Add to that the precipitating rise in unemployment generally and the sharp increase in mortgage defaults this would cause, and pretty soon those investment properties will start looking rather unattractive to own, if you are one of those who bought in the peak of the market.
Most people are gamblers at heart. They are reluctant to sell at the beginning of a downward trend, as they ignore or fail to recognize the telltale signs of impending doom. They wait until the downward trend is at its fastest and, in desperation, sell. Others hold on until the bottom or until their hand is forced. It is this knowledge that lets the market manipulators make their “easily killings”.
There are not many people who are alive to tell you this, but one of the most important things people fail to do, shortly before they die of a fatal accident, is to listen to the little voice inside saying “hmm…that’s a little odd…”. Most people just shrug and keep going.
If you look at the Australian economic situation and read about the self-congratulating politicians, the up-beat talk of Australia’s resilience and how wonderful it is to have a banking cartel, you might well think “this is rather odd”, given how desperately bad things are everywhere else. Very odd indeed!
Whereas most people, even though they are rather pessimistic already, are hoping and holding on, anyone who has sold up to eliminate debt has done so just in time. The full depth of the economic problems is yet to be plumbed. It is only at that point, when one can say with some certainty that the bottom has been found, that one can then make estimates of the fallout. At this point, it looks like there is no end in sight.
With the culling of capital and the destruction of productive capacity, there is going to be a glut of unemployed men (and women) with nothing to do. Furthermore, today’s families are indebted to an unprecedented degree. What will happen when they do get hungry? I am sure that the respective Governments of these people have tidy answers. Population reduction could well occur (temporary or permanent, as a result of war), which would put further downward pressure on real estate prices.