The Consequences of Taking Government Financial Advice

Distortions galore...

 

IT GOES to show how confused things are on the ground when property developers and recent homebuyers are struggling while the economic talking heads babble about a renewed Australian property boom. Welcome to a world full of monetary distortions, writes Greg Canavan for the Daily Reckoning Australia.

 

Well, Stockland, one of Australia's largest property groups, provided a reality check yesterday with a profit downgrade. The reason? A weak Australian property market. Is that the same property market that's been inflating for years and is apparently at risk of going bubble-like again because of a few interest rate cuts from the RBA?

 

Yes, that's the one. If you're confused, don't worry. Australia's housing market has some major structural problems. In an efficient housing market, higher prices (reflecting strong demand) should bring about an increase in supply. But that hasn't happened. In fact, supply of new housing is very poor, given the decade long surge in Australian property prices.

 

Perhaps we need falling house prices — as in substantially falling prices — to reignite demand and bring about a supply response. And maybe if governments got their noses out of the property trough and encouraged new home construction (instead of just swapping existing homes in a credit fuelled boom) the Aussie property market might make a little more sense.

 

But what's this? In an astounding move, State Governments are enacting some mildly sensible changes by removing taxes and obstacles to building new houses. Credit where (some) credit is due.

 

Before you get too excited listening to the RBA and other assorted economists talking about a housing resurgence, take a look at this. It gives you an idea of what's really going on. It's about how 40% of people who bought homes just AFTER the financial crisis are now in a state of mortgage stress.

 

That's what happens when you take financial advice, or financial incentives, from the government. The property bubble peaked in 2010, it's enjoying a minor resurgence now but it's certainly not because of the RBA's recent interest rate cuts. The reasons for the property mini bounce are complex. But all you need to know is that the major trend is now down.