Australia’s New Landed Gentry

In today’s Money Morning…one arm of the bureaucracy creates a crisis, other arms try to fix it…rising debt looks like rising wealth, but it isn’t…private empires built on poor foundations…and more…

Aussie stocks look set to start on the back foot today, after falls in iron ore and base metal prices overnight. Financials also declined in the US trading session overnight, which could translate to falls in the Aussie banking sector today too.

Before the open, futures indicated a loss of 10 points. Given the strong gains over the past week or so, this is hardly a concern.

The major event today is the Reserve Bank’s meeting. It’s blindingly obvious that they should increase interest rates to put a lid on the out of control housing market. It is also blindingly obvious that they will not do this.

Instead, they’re hoping that a directive from bank regulator APRA (discussed yesterday) will cool things down a bit. And now, corporate regulator ASIC is getting involved. From The Australian:

Regulators have doubled down on measures to quell runaway property prices, the corporate watchdog yesterday announcing a probe into banks’ and mortgage brokers’ handling of interest-only loans that now account for 40 per cent of the nation’s housing ­finance.

The Australian Securities & Investments Commission said it had also reached an agreement with eight lenders, including three of the big four banks, for remediation programs to fix past poor lending practices.

None of this would have been possible if interest rates weren’t so low. In true bureaucratic tradition, the RBA makes a mess, and other agencies come in and (try to) clean it up.

Remember, the RBA cut rates twice last year, in the hope that the dollar would fall and therefore support certain parts of the economy. A weaker dollar is good for a trade-dependent economy like Australia’s.

But it didn’t work out like that. The interest rate cuts were more than offset by resurgent commodity prices, so demand for our currency remained healthy. Instead of falling, the Aussie stayed where it was.

As you can see in the chart below, versus the greenback the Aussie dollar has been volatile, but essentially unchanged over the past year.

Australian dollar

Click to enlarge

It’s currently trading around US$0.76. The dollar fell slightly yesterday after retail sales data for February showed an unexpected fall of 0.1%.

That just goes to show how screwed up the Aussie economy is these days. Record high house prices and record ‘wealth’ are not translating into increased spending.

That’s because rising ‘wealth’ is just a mirror image of rising debt. When you increase your debt levels, it requires more income to service it.

With that in mind, here’s the equation for Australia: Growing debt and stagnant incomes mean an increase in debt servicing costs must come from somewhere. If it comes via reduced spending, that’s a worry, as household consumption is the largest component (around 70%) of economic growth.

This is the nightmare the RBA faces. The housing boom they deliberately engineered is now coming back to bite them through slower consumption growth.

To think that you can borrow your way to prosperity simply defies all economic laws. To think you can avoid recession or economic adjustment via lower interest rates defies the lessons of history.

Interest rates are a blunt instrument. In property obsessed Australia, the effect of lower interest rates goes into property prices…and property prices only.

But how do you take advantage of rising house prices? How do you access the equity in your home?

You can move to a cheaper city or suburb, or you can borrow against it. As most people don’t want to move away from Sydney or Melbourne (the populations of both cities are growing strongly) nor do they want to move back down the social ladder, they are clearly borrowing to ‘take out’ the equity in their homes.

At an individual level, this all makes sense. It’s easy to think you’re growing wealthier because your house is rising in value.

But at an aggregate level, it’s disastrous. One individual can only become wealthier if another individual borrows heavily to bid up the price of their house.

This is the dilemma now facing the RBA. It’s why they will sit on their hands today…and quite possibly for some time to come. They are caught in a trap of their own design.

But why is Australia so obsessed with property? Is any other country in the world so frothing at the mouth crazed about what their home is worth? Are we that shallow that a home that contains love, memories and history is reduced to a number…that our self-worth matches the worth of our house?

Perhaps it’s because most people who have came here since the convicts were banished by, or trying to escape from, the landed class.

If you want to boil history down to a few words, it’s always been a battle for scarce resources. Land is the resource. In land there is power.

The first land barons of Australia were those who simply occupied the land to farm sheep. They were squatters who ‘rode the sheep’s back’ to prosperity.

Ever since, Australia has offered immigrants a chance for a new life. A life that included a piece of land.

The latest incarnation of this is the wave of migration from China. China is a communist country. The land is owned by ‘the people’, not ‘you’. And anyway, there is no land on offer to the worker, only apartments.

But if you can manage it, you can own land for you and your family in Australia. And then pass it down through the generations.

This is why Australians are so obsessed with property. Everyone (or seemingly everyone) is trying to build an empire, having escaped a country where everyone else was trying to build an empire and stopped them from doing so.

And thanks to a beneficent RBA, nearly ‘everyone’ is able to do it.


Greg Canavan is a Feature Editor at Money Morning and Head of Research at Fat Tail Investment Research.

He likes to promote a seemingly weird investment philosophy based on the old adage that ‘ignorance is bliss’.

That is, investing in the Information Age means you have all the information you need at your fingertips. But how useful is this information? Much of it is noise and serves to confuse, rather than inform, investors.

And, through the process of confirmation bias, you tend to read what you already agree with. As a result, you often only think you know that you know what is going on. But, the fact is, you really don’t know. No one does. The world is far too complex to understand.

When you accept this, your newfound ignorance becomes a formidable investment weapon. That’s because you’re not a slave to your emotions and biases.

Greg puts this philosophy into action as the Editor of Crisis & Opportunity. As the name suggests, Greg sees opportunity in a crisis. To find the opportunities, he uses a process called the ‘Fusion Method’, which combines traditional valuation techniques with charting analysis.

Read correctly, a chart contains all the information you need. It contains no opinions or emotion. Combine that with traditional stock analysis and you have a robust stock-selection strategy.

With Greg’s help, you can implement a long-term wealth-building strategy into your financial planning, be better prepared for the financial challenges ahead, and stop making the basic, costly mistakes that most private investors do every time they buy a stock.

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