Have you noticed how we are becoming fixated by the idea of other peoples’ wealth? Or rather, how the media is driving us to towards the hobby of watching the wealth and riches of the few. But its not so few. Now we have reporting of suburbs where everyone is a millionaire. Oh, how we wished we lived there. The latest share deal, the boats owned by the rich. Young people making fortunes from start ups, The list is almost endless.

Now Marketwatch has never been one for reading comics, but does check the pages of the The West Australian from time to time. Its taste for lurid headlines takes him back to the good old days of the UK tabloid market when the likes of the News of the World and The Sunday People slugged it out to give the worst possible take on the news.

His eye was caught today by the headline “First-home frenzy as 71 houses selling each day”.
Gosh. Breathtaking. Then there was the inevitable quote, “A lot of people can’t do the Europe trip, but they know they can buy a property on cheap interest rates.”

Compared with Australia, Perth property prices are relatively cheap so don’t panic. The headlines are all a bit overdone. The chart below shows the residential price index for here and Australia, and we can see that our overall prices have yet to get back to where they were in 2013/14. That, actually, makes us different.

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Source : Australian Bureau of Statistics

The increase in both markets for the last 12 months is both interesting and concerning. It is interesting because we are supposed to be in a near COVID-inspired slowdown, and concerning because it indicates that individual leverage in the form of debt may be increasing towards unsustainable levels.

But this is not an Australian phenomenon. It is being repeated all over the world. In the United States, the effect is more pronounced.

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Source: Standard & Poors Case-Shiller National Home Price Index

The story is the same in the United Kingdom. It is the same in Germany. Actually, it is the same wherever Marketwatch looked.

So, this is not especially Australian. And if it is not, what is it?

Last month, we looked at the events of history and what we might learn from the circumstances surrounding the many financial crises which have beset our global society. Honestly, you would think given the vast number of crises, we would have learnt a few lessons, but it appears not.

One of the critical factors in all crises is the availability of cheap money. Certainly, during the Global Financial Crisis, which had its roots in the housing market, this was the case. In 2008, and before, cheap money, and the relaxation of lending standards, were a critical factor in the crisis. The chart above shows the effect on housing prices.

All economies are sensitive to house prices. In the case of new houses, construction is a driver of many supply industries and well as providing demand for labour. In the existing home market, an increase in prices, and therefore individual wealth, is a driver of consumption as home-owners leverage their additional wealth caused by price increases.

In Australia, there are several risks to our situation and they are real, not supposed. These risks may act to dampen, if not reduce the level of house price growth:

• Inflation leading to a rise in interest rates as central banks work to control the impact to the economy. People who are highly leveraged at low interest rates are at risk.

• Lockdowns. Other countries which have managed their vaccine roll-out appear to be regarding this management technique as a last, rather than front line, resort. Although effective in managing the spread of infection, given you have a compliant population, the economic impact on earnings inevitably puts stress on loan repayments and raised the risk of default.

• Population growth. The other part of the quote from The West was “They’re planning to rent it out when the borders open, and then go travelling.” Leaving aside the wonderful optimism of the real estate agent, Australia does not have a natural birth rate which will sustain a growing residential housing market. Given the number of new homes being sold, and the lack of immigration, for the mid-term, the tight rental market may prove to be transitory. No-one knows where immigration will go in the future.

• Economic growth. Leaving aside resources and agriculture, both of which earn good money but are not massive employers, Australia’s two biggest industries and export earners are inbound tourism and education. Both have been comprehensively trashed by the pandemic and our relations with China.

Policy makers are right to be concerned. There is less of a risk of lax lending standards, most of the mainstream lenders have got the hang of that one. The risk is of boundless optimism on behalf of the borrower and excessive leveraging.

Unlike shares which can be attributed with an objective valuation, property is more subjective. The price of your castle is simply, no more, no less, than what the market is prepared to pay for it.

As part of a short break, Marketwatch and his dear wife spent a day cruising around the vineyards of the Swan Valley. Although I have mentioned it before, we had a most enjoyable sojourn at Upper Reach Winery and a splendid lunch. This winery produces some delicious wines and also offers some of the lesser-known wines such as Petit Verdot and Tempranillo (a particular favourite). Their rosé is admired by many of our friends. One to watch is their sparkling white which currently is only available in their restaurant due to supply limitations. This is definitely one to watch when it is on general release.

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