Another Day, Another Anxious Property Collapse Call

Let me tell you I’ve never been more certain of anything in my life.

Philip Parker

If you’re like me, you probably never heard of Philip Parker…until last week. Parker is Altair Asset Management’s chairman and chief investment officer. I pulled his quote above from The Sydney Morning Herald.

As you’re probably aware, last week, Parker made the decision to liquidate his firm’s Australian share funds and return all the money — hundreds of millions of dollars — to his clients.

Parker says there is an impending property market ‘calamity’ coming. In fact, he’s certain of it.

And he’s not alone. We had two calls for an imminent Australian economic collapse last week. The other one came from Citigroup’s chief economist, Willem Buiter, quoted in The Age.

Buiter said Australia is experiencing a ‘spectacular housing bubble,’ which needs to be addressed.

And now for the facts

Rather than present you with more ‘opinions’, let’s review the facts. We’ve got four of them for you today.

Fact one: Clayton, a Melbourne suburb about 15 kilometres east of the CBD, is about to undergo a serious transformation. It involves a $400 million, 35,000-square-metre project that will become home to four apartment towers, a Mantra hotel, commercial offices and a retail precinct anchored by Kmart and Woolworths.

Cinemas, retail stores, cafes and restaurants will be part of the shopping and entertainment precinct, renamed M-City. It’s close to Monash University, and will help accommodate the huge surge in overseas students needing somewhere to stay.

The first stage of the project launches in July. It will start with a hotel, shops and a 12-level apartment tower.

There’s another very large project about to get underway in Melbourne as well. A $2.5 billion plan for the Maribyrnong defence land, just west of Melbourne. Very close to the central Melbourne CBD, in fact. It’s prime developable land…once they clean it up.

And it does need some cleaning up. It was used as a munitions dump by the Australian defence industry, among other things.

It’s on the Maribyrnong River. The developers — should they get the go-ahead — plan to carve another canal along the river to add to the already three kilometres of river frontage.

This would add extensively to the value of the site, and get even more riverfront housing.

These are big projects. Economies usually do not turn down while these are on the go. We know this from experience. Both from our own experience, and centuries of history. We can teach you how to read this too, over at Cycles, Trends and Forecasts.

Fact two: The relevant stock market charts are indicating a continued housing increase, not a bust. If you take even a cursory glance at these charts, you’ll see that they are going up, not down. That tells you housing sector earnings affecting these stocks are increasing, not decreasing.

We asked our co-editor at Money Morning Trader , Terence Duffy, to look into this. He first analysed global business conditions. You can do that via the Purchasing Managers’ Index (PMI). This global PMI has moved to its highest level since 2011.

The PMI takes into account production levels, new orders, supplier deliveries, inventories and employment levels. A measurement above 50 indicates economic expansion. It’s an important indicator for economies around the world.

Here’s what the chart looks like.

Source: AMP Capital

Click to enlarge

Globally, manufacturing and services sectors are both expanding. And the Eurozone is best performing in this regard.

Bringing it back to Australia, if housing was as stretched as Parker and Buiter proclaim, you’d expect it to show up in the banks as rising bad debts.

So Terence went straight to Australia’s biggest home lender, hunting for any signs of an impending crisis.

The Commonwealth Bank of Australia released its trading update for the March quarter in May. It revealed a 7.8% year-on-year increase in the volume of home loans sold, while bad loans fell.

If housing in Australia is ready to unwind, you’d think bad debts in Australia’s biggest home lender would be rising, not falling…right?

And if housing was really stretched, you’d think we’d see a softening in demand for companies connected to the housing sector. This is where we’d expect it to show up first. You’d see falling demand and housing orders slowing.

One area to keep an eye on here is the 52-week new highs. This, as the name implies, shows you the stocks trading at one-year highs. If you check this list, you’ll see building and construction-related stocks aplenty.

For example, the following companies are all on the new 52-week highs list: Adelaide Brighton Ltd [ASX:ABC], CSR Ltd [ASX:CSR], DuluxGroup Ltd [ASX:DLX], James Hardie Industries plc [ASX:JHX], and Lendlease Group [ASX:LLC], to name just a few.

If housing (read: land prices) has gone completely over the top, we’d start to see falling demand and declining revenues for these types of companies. In other words, in terms of the chart, they’d be breaking prior monthly lows from the past.

But the opposite is happening — they’re all breaking higher and punching around new highs. That generally means these stocks are growing revenues.

That tells us that Philip Parker’s decision to pull his clients out of all Australian shares is premature, to say the least. This building cycle still has plenty of steam to run.

Fact three: Worldwide, there are some massive infrastructure plans on the go, and there are trillions of dollars sitting on the sidelines.

First the infrastructure…

The Chinese government is committed to spending US$1.6 trillion over the next decade to get its ‘One Belt, One Road’ initiative underway throughout Asia, Africa and the Middle East.

(An amount that will feed straight into land value in the areas where it is spent, by the way.)

And they’re not the only government spending big on such projects. India’s Prime Minister, Narendra Modi, wants to bring far more affordable homes to half a billion Indian citizens.

Bloomberg reports — via CLSA India Pvt, an Indian research firm — that some 60 million new homes are to be built between 2018 and 2024, creating about two million jobs annually. CLSA sees this adding as much as 0.75% to India’s GDP.

The volume of social and affordable housing will rise by almost 70%, to 10.5 million annually, by 2024. That’s a US$1.3 trillion wave of investment in Indian housing over the next seven years.

And what about those trillions of dollars on the sidelines?

US company BlackRock estimates there is some US$70 trillion sitting on the sidelines around the world. Money that could easily go into the stock market if people weren’t so fearful presently.

Fact four: History shows that the US economy has a clear — crystal clear — 18.6-year real estate cycle. We are only just seven years into the current one.

All the current action in the US clearly shows this is exactly where we are. This is not an opinion. It’s underlined by some deeply researched economic science.

At this current time, all of our research confirms that land price in the US is not going to turn down anytime soon. History is against it. And Australia has never yet gone into recession without the US going first.

If you didn’t know this already, then you need to go here.

Phil Anderson

Phillip J Anderson is an Australian academic, author and student of stock, commodity and real estate cycles. Drawing on the work of British economist Fred Harrison and American technical analyst WD Gann, Phil developed his own theory about 18-year real estate cycles in the early 1990s. Since then, Phil has been using cycle theory to guide his own investment decisions — crediting the phenomenon with his decision to move to a 100% cash position in July of 2007, just before the GFC wreaked havoc on the Australian stock market. He has also built up a lucrative property portfolio here and in the UK. Phil is currently predicting a 14-year boom in Australian house prices; an idea he expands on more in a brand new Fat Tail Investment Research film, ‘Remembering the Future’.

Money Morning Australia