So Low Rates Mean Housing Boom?

An ugly outlook for Australia's housing market...

TAX-EATING, power-mongering, pseudo-intellectual moralistic bullies are like terminator roaches, says Dan Denning in The Daily Reckoning Australia.

They never go away and they just seem to keep multiplying.

We had hoped to return from our quick trip to Seattle to find that the resource super profits tax and been beaten into the submission and defeat which it so richly deserve. But alas, through sheer stubbornness, ineptitude, or calculated determination, the government is persisting with a policy that's already destroyed shareholder wealth, made Australia a less stable and desirable place for foreign capital, and clouded the future of both existing and profitable resource projects as well as future ones that may never get off the ground now.

We haven't caught up on all the fake negotiations in the last week. And we're just guessing...but our guess is that the government will just try and wait out the public. The public will lose interest. Or, if the government repeats often enough that this is an issue of tax fairness - instead of the wanton act of vandalism on the nation's wealth producing assets that it is - the big lie will eventually stick as oft repeated big lies eventually do.

Anyway, we'll get back to that story with more precision in due course. Today, we again note that an intrusive outside (much like our self) is calling for an Aussie house price crash. It's Jeremy Grantham again, of global investment manager GMO. Granted, Mr. Grantham may not be aware that there is a secret force field that girds this land which makes its housing market immune to the same forces that have caused bubbles and busts in other countries.

But you have to give him credit for calling it as he sees it. And he says Aussie house prices would fall 42% were they to return to trend. You cannot possibly miss it," he told The Australian.

"The price of housing typically trades about 3.5 times of family income and in bubble it goes to 6 or...7.5 (times)...Australia is having one now. You are at near 7.5 times family income...which suggests you are twice the size that you should be."

Not everyone got the memo. But seriously, we can see that being daily assaulted by the forces of house price spruiking in Australia, it is easy to give up the good fight (stop using your common sense) and just go along with the group think. You begin to question your own sanity when everyone around you behaves insanely.

Grantham says Aussie house prices are a "time bomb." The trouble with credit bombs is that they cannot be defused. They eventually blow in the form of falling asset prices (deflation). This is happening all over the world right now. You could say that continued excessive credit creation funnelled into an asset class is one way of defusing the bomb. But that's really just credit carpet bombing.

In any event, the Reserve Bank of Australia, which is an Australian institution run by Australians, begs to differ with Mr. Grantham. In a speech earlier this week, RBA Governor Ric Battelino said that Australian households have taken advantage of a "structural" decline in interest rates to load up on debt. True, this higher household debt level exposes Aussie households to "shocks," like higher interest rates. But Battelino says there ain't no bubble.

Specifically, he rubbishes the price-to-income ratio Grantham quotes. The deputy Governor says, "The ratio of house prices to income that are published for Australia tend to focus mainly on prices in the cities, and they are quite elevated. But, if you look across the whole country, the ratio of house prices to income is not that different from most other countries."

But with nearly 65% of the population living in Australia's capital cities, according to ABS data, the fact that prices outside the cities are "not that different from other countries" is a hugely unuseful fact. The lending bubble has been concentrated in the capital cities, where most people live, and where price-to-income levels are most unsustainable.

Of course you might argue that the dense urbanisation of Australia's population is exactly what supports higher structural house prices. People have to live somewhere. And if they are going to live in a capital city, it's going to cost them. That's fair enough, as long as they can afford it without going into ruinous debt.

The last and obvious point will make is that it's pretty stupid to assume interest rates will remain structurally low from now on. Low interest rates are always trotted out as a justification for house prices. But if the world is in a credit depression, Aussie interest rates are not going to stay low. You will have had millions of people buy homes at the top of the price cycle and the bottom of the rate cycle.

How do you think that's going to end? When thing are unsustainable, the end comes eventually. Flying from Seattle to Los Angeles on Monday, we saw what looked like fault lines all along the California coast. These are the places where huge forces collide and eventually one gives way sending waves of damage in all directions. Naturally, it made us think of the Aussie housing market, even if there are many in Australia who say it can't happen here. Just wait.

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