Before I get to the promised topic of why the Aussie property market won’t crash, let’s have a quick look at how the bounce back in markets is travelling.
Yesterday, Aussie stocks shrugged off a weak start to the day and finished strongly. But as you can see in the chart of the ASX200 below, it’s now approaching a region where it has previously struggled.
Yesterday, the Aussie market closed just below the highs reached in April and May 2017. When the market eventually broke through this area late last year, it subsequently acted as an area of support. That is, it did until the Wall Street Panic hit in early February.
On the second day of the panic selling, the index plunged right through here. But now it’s back.
So, where to from here?
My guess is the bounce back rally will likely stall for the time being. While it’s not impossible, it’s unlikely that you will see a rapid bounce back after such a sharp fall.
What you want to see is a successful retest of the lows at 5,800 (or higher). That would improve the odds that the market can go on to new highs in the months ahead.
The fate of the Aussie market is tied to the US though, so let’s have a look at the S&P 500. It’s a similar story. A deep sell-off and rapid bounce back means the market now looks a bit tired. It does to me, anyway.
I expect to see selling come back in and dominate in the next few days, as those hoping for a bounce or buying during the panic selling look to take profits and move to the sideline.
The February sell-off rattled a few nerves. I’d be very surprised to see stocks bounce immediately back to new highs. So look for renewed selling in the short term. If the region around 2,600 points doesn’t hold, I’d expect to see some more decent falls.
Let’s check in again next week and see how it’s playing out.
Finally, what about Bitcoin? After the price plunged to a low of US$6,000 just a few weeks back, the cryptocurrency is now back above US$10,000.
It looks like a ‘dead-cat bounce’ to me. As such, I’d expect to see the price turn back down again soon. The bubble has popped and the trend is now down. The odds of making money just aren’t on your side.
Is the Aussie housing market in a bubble?
Well, yes and no. I say yes and no because property has some unique characteristics that make it hard to compare to stock or cryptocurrency bubbles.
Let’s have a look at a few of them now.
Australia doesn’t have the broad housing oversupply that characterised the bubble markets of the US, Ireland and Spain (to name a few) in 2006/07.
Strong population growth over the years (a deliberate political ploy to juice economic growth, by the way) has absorbed and continued to keep the demand/supply equation broadly in line.
True, there is an apartment glut in some cities, but this isn’t enough to bring the whole market down.
The point is we don’t have excess supply, which is a major factor in most housing bubbles.
The biggest risk to housing comes from our creditors. As I’ve pointed out previously, foreign creditors largely underwrite Australian house prices. You may go to a bank to get a loan, but the bank in turn goes to offshore wholesale debt markets to borrow around 30% of your loan.
Australia doesn’t have enough savings to fund our appetite for debt. The banks rely on deposits to fund around 60% of its loans, shareholder equity accounts for around 10%, while short and long term loans from foreigners funds the rest.
What does all this mean?
Well, for house prices to ‘crash’, or fall substantially, you need to see a big fall in either the demand for, or supply of, credit.
As long as interest rates remain low, demand for credit should hold up. And while interest rates will probably head higher at some point this year, given the huge debt load carried by the household sector, the RBA will tread very carefully.
Immigration should remain reasonably strong, at least strong enough to absorb the supply of housing, which means housing won’t move into oversupply. This should support demand for credit too.
That leaves the supply of credit as the swing factor. And when the next global crisis hits, this supply will dry up. Foreign credit is important here because in a big crisis the government and the RBA will support the banks and prevent a run, meaning deposit funding will be OK.
But there are no such guarantees on foreign capital. In a crisis scenario, the Aussie dollar will take the biggest hit (it will fall to reflect the drying up of foreign capital inflows) but offshore borrowing rates will rise too. This will (finally) impact the demand for credit, and you’ll see prices fall quickly.
The key question is ‘when will the next global crisis hit’? If we’re talking a 2008 style crisis, then I simply don’t see any of the preconditions right now. The housing market can decline, for sure. But a crash is a long shot and more a function of hope (if you’re hoping for a cheaper price) than anything else.
Editor, Crisis & Opportunity