Sunday, August 1, 2010

Cliff or plateau?

This week saw the release of the RBA's June credit aggregates, as well as the first concrete evidence that house prices are rolling over from RPData. Neither was terrifying but neither also was reassuring.

As usual, the mainstream media offered up a plate of bullish slop, preferring to quote quarterly growth figures over the much less encouraging monthly numbers, which are indicating that June was the pivot month, after a still reasonable April and May in which the mortgage credit growth for owner occupiers and investors was still around 9% annualised and house price growth was intact.

Seasonally adjusted figures for June saw the annualised owner-occupier growth number almost halve to 4.4%. Investment mortgage growth was unchanged on the month at 7.6%. Other personal debt is showing an increasing slide towards deleveraging, shrinking at a -5.8% rate, down from -1.1% in May. Business lending resumed its shrinking too at a -3.9% rate, after May's brief pop to plus 0.3% growth (and yes, that's an annualsied figure too).

In short, the Australian private sector is one shock away from outright deleveraging. How any commentator could maintain this week that an August rate rise was on the agenda is beyond me.

Do I see this as the beginning of the end for housing? and yes. I expect a rerun of Sydney 2003, after the boom caused by the first iteration of the First Home Buyers Grant came a-cropper. Back then, the mid-ring of housing around the poplar inner-city surged hugely for 18 months then collapsed 20-odd percent. Those who sold moved further in, driving up inner-city prices. Those who bought found themselves suddenly with negative equity and could not sell and move further in themselves. This stalled inner-city prices too. In effect, several rungs on the move-up ladder broke and the market went nowhere for five years.

I expect much the same on a national basis this time. And I don't think immigration will change it. The immigrant boom in housing is further out, in fringe suburbs and McMansion developments. This can been seen in the shift away from inner-city apartments to greenfields developments amongst big developers like Stockland.

No, the disaster in Australian housing will have to wait until we have a financial crisis triggered by a structural slowdown in China and commodity prices correcting lower for good. When that happens Australia's sovereign credit will no longer be able to support the banks' gigantic ponzi scheme of offshore borrowing.

Consider this, however. If prices do stall here and the China adjustment transpires in five years time, national house prices are as high now as they're going to get for a generation.

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