Market Bears, Ready To Dance

Lemmings With Credit

I'm a real market bear when it comes to the property market, especially because I still live in Sydney and I think valuations on the whole are unhinged when compared to the rest of the world.

I get it, Sydney's a great place to live and it has so much going for it, but it also isn't exactly London, New  York, Tokyo, Berlin or Paris in the culture stakes. So if people living here are bidding up the prices houses off their own bat, there seems to be a level of narcissistic parochialism to value one's place so highly. Especially when the whole local market agrees. That's more lemming than bulls or bears. But for the price of a 2BR apartment Strathfield, buy can buy a gorgeous condominium on a Greek Island facing the Aegean Sea. Forget whether you want to liven a cash-stapled Greece or not for a moment, the disparity in what you get for the same money is rather stupidly large.

With that I bring you this link today. It's David Murray, former head of the CBA saying that the RBA is in a bind exactly because the economy is not doing well, but housing prices are irrationally exuberant (to borrow from Alan Greenspan of yore).

Mr Murray, who previously headed the Commonwealth Bank, said the low-interest rate environment had seen house prices rising in capital cities like Sydney and Melbourne - which was not only making housing unaffordable, but putting the entire financial system at severe risk. 

"It is a serious issue and if interest rates continue to fall, there will have to be prudential offsets to limit the risks in the housing market," he warned.
Asked whether that should include a cap on borrowing, Mr Murray said: "There's different ways it can be done; in other countries they've limited the loan-to-value ratios for second properties. 

"Singapore and Hong Kong have done that, for example, but the lower these rates get, the more governments will have to consider these responses." 

The Reserve Bank of Australia signalled its concerns about an overheating property market when it left rates on hold on Tuesday, and flagged it was working with other agencies on how the issue might be tackled.

It's interesting that the former head of the CBA wants to come forward and say all this. The RBA and Federal government have been hosing down concerns about the property market for some time, trying to portray the irrational exuberance as a good thing. Of course if it contributes to rents rising, it does offset the massive deflation we're also importing, which I commented on in the previous post. The problem as it were, is that they keep rewriting how they measure inflation so they have been under-reporting the inflation coming through from property rises and rents, while they've been factoring in deflation of things with more elasticity than food, shelter, and energy.

Anyway, I don't know if it's a typo, but this bit caught my eye:

In the event of another global financial crisis, Australia would probably not be in as a strong a position as it was economically last time, and could lose 20 to 150 per cent of its GDP as well as see up to 1 million jobs lost, he said. 

It was the severity that had to be managed.

"It's just not the case [that] we're immune from trouble here," he said.
It would be a real concern if the cash rate was to fall to the 1 per cent range. 

"In the post-crisis world we're in, asset prices - with monetary easing - keep getting inflated," he said, pointing to the high price-to-income ratio for houses in Australia. 

"There only needs to be a noticeable pick-up in employment and this can turn very very difficult … APRA and the Reserve Bank have a real problem here."

So, the first eye-popping figure is the possibility of losing 150% of GDP. We talk about growth in the developed world in terms of single digits: 3% is desirable, 5% is great 7.4% is practically Chinese propaganda. 150% means we wipe out as much as our annual output in asset losses, and then another half. That's an unimaginably huge bite, and if that should happen, I don't see how the four pillar banks and Macquarie survive this impact. Not to mention the 20-25years worth of 3% growth it would need to re-reach from whence it falls.

The other weird one is the "pick-up in employment" - by which I think he means un-employment. Otherwise it doesn't make sense. If un-employment picks up,  there are whole portions of the market that are in debt up to their eyeballs who are going to suffer and fold on their mortgages - and that's surely going to be ugly enough for APRA and the RBA. I figure if employment picks up and the economy starts over-heating, they'd just raise rates.

Seriously. I want to figure out how to short Australian real estate.

And Equities Are Overpriced They Say

The other burgeoning asset bubble is in equities. Lots of elderly people and retired Baby Boomers are moving out of bonds and into equities because a) interest rates are too low b) dividend yields are attractive, c) the share market is less complicated than other financial instruments.

So here's today's scare-campaign article:

"Economic fundamentals are offering limited justification for surging share prices. Rising unemployment, falling business investment, stalling inflation, weak confidence, a decade of dysfunctional government and inconsistent policy are weighing on confidence and restricting much-needed investment for growth," he said. 

Mathan Somasundaram, a Baillieu Holst equity analyst and author of market newsletter Sunset Strip, is comparing current conditions to what happened prior to the 1987 stock market crash and the GFC, which saw the sharemarket nearly halve in value. 

"If you look at the market forward PE (price-to-earnings) series since 1986, any PE expansion above 15 has not ended well," he said. The current PE is around 15 times earnings compared to a historical average of 14 times, as shown in this graph:

If you're a retiree, what are you gonna do?

If you read Zero Hedge like I do, you'd know those guys are screaming the US markets are overpriced, rigged and non-indicative of the true state of the US economy. Moment like this I'm tempted to say they'd have a good case to argue the same about Australia's equities market.

All the same, I don't think we're seeing that much of a peak. the current scuttlebutt is whether the AllOrds will break 6000, but even that is neither here nor there in as much as much of what was devastated in the GFC hasn't really come back as far as the Allures companies' share prices. Compared to the property markets, it's hardly as if the equities markets are far away from historic norms. The Australian property market on the other hand is sitting at a place that is much whackier than that. 

And Our Cities Are Broken Anyway

Here's something from Ross Gittins that might be of interest. 

Researchers at the Reserve Bank have shown that if you draw a graph with home prices on the vertical axis and distance from the CBD on the horizontal axis and then plot actual prices, you get an almost perfectly downward-sloping curve for Sydney, Melbourne, Perth or Brisbane. On average, prices are highest close in and lowest far out. 

For the five mainland state capitals, 60 per cent of all the employment growth over the five years to 2011 occurred within 10 kilometres of the centre. But here's the problem: no doubt because inner-city house prices were so high, about 55 per cent of the population growth occurred 20 kilometres or more from the centre. 

In other words, we've been developing a big economic and social problem few economists have noticed: a growing spatial divide between where the jobs are and where people live. 

It's an economic problem because it increases the economy-wide costs of each day's production of goods and services. It's a social problem because, for the most part, those costs fall on the less-wealthy working families living in outer suburbs. Some of the costs come as dollars paid, some as time wasted and some as opportunities forgone. 

The growing distance between where we live and where we work means car travel in peak periods is getting slower in all capital cities. Traffic is slowest on inner-suburban roads, because that's where most people are travelling to or from.

And is the State Government of NSW in a position to do anything about it? Probably. Will they do anything about it? Nope. But they watts to vote for them in exchange of an illusion that they're doing something about it. Honestly, Westconnex is not the solution, it's more crony-capitalist excess.

I think the healthiest thing to do for the electorate is to vote out each and every government at every election until a government gets in and starts solving these problems. Until then it's going to be Morbid Obeidity meets Nick-Greiner's pension-funding.