Why Banks and Government Want High House Prices

Lately, Money Weekend has focused on the property market.

It’s not necessarily the most interesting aspect of investing, but it does play a huge role in the lives of most Australians.

There are those who have many investment properties, there are those that have a few. Some only own the house they live in. And then there’s generation Y and Z, who are struggling to break into the market at all.

Unless all your money is invested in the property market, then most Australians wouldn’t mind seeing the price of housing fall.

After all, if you own your home and plan to continue living in it, its price doesn’t actually affect you all that much. If you’re locked out of the property market, then your reasons for hoping it will pull back are obvious.

But are there some out there who don’t want to see easing in the market? Unfortunately for those like myself — Gen Y — according to the ABC’s Business Editor, Ian Verrender, governments, banks and the economy have no desire to see falling prices.

Currently, the housing market is in a downward trend. It’s still early, and not too significant yet, but prices are lower all the same.

While the banks have tightened credit in an attempt to cool down the market, they haven’t had much affect just yet.

As Australia’s real estate cycle has been so strong for so many years, many Australians have always seen real estate as the safest investment.

But the previously booming real estate market has caused some heavy debt. According to Verrender:

Having splurged so much on homes, our household debt, at just shy of 200 per cent of annual income, ranks among the world’s highest. Hocked to the eyeballs, it’s no wonder our household consumption is sluggish, retail sales are struggling and inflation is anaemic.’

Australian banks don’t want to see a decline in house prices. As Verrender wrote for ABC News:

When the value of your major asset is going backwards, you’re less inclined to spend and less likely to be given credit. That, in turn, weakens the domestic economy which eventually leads to higher unemployment, mortgage defaults and, potentially, a banking crisis.’

Without a rising and stable real estate market, the economy will suffer. Both federal and state governments benefit from higher property prices. They can generate more fees and taxes from higher land prices, allowing more money to flow through to governments. This is evident in the graph below:

MoneyMorning 02-06-18

Source: CoreLogic, ABS
[Click to open new window]

You can see a pattern of steady growth in government coffers. But for the past 18 months, property prices have been declining in Sydney and Melbourne. As I wrote in last week’s update, both the CBA and Morgan Stanley believe Australia — especially Sydney and Melbourne — is in a downward real estate cycle. 

Even during decades of growing revenues from the property market, Australia’s government deficit has blown out to epic proportions. How sustainable could government spending possibly be, with the market in reverse?

The previous 18 months of falls are problem enough. But Aussie real estate could be set to get much worse before it gets better. As Verrender explains, global interest rates are signalling a warning:

Global interest rates are on the rise which eventually will feed through to Australia and could put a significant number of households under stress, leading to higher defaults and lower property prices. Then there’s the clampdown on foreign ownership, particularly Chinese investors, who were skirting the law.’

Add to our growth in population and as Verrender states in his article, construction and infrastructure are struggling to keep up with demand. The higher the demand, the higher the cost of owning your own home. As he explains:

While we are about to run up 27 years of uninterrupted economic growth on a national basis, as individuals, many of us are worse off. Wages growth is stagnant because, for all the claims of job creation, we’re barely standing still if you take the new arrivals into account.

When it comes to property prices, population growth has been every federal government’s secret weapon.

For years, we’ve been told our skyrocketing housing costs has been a supply problem. Instead, there has been a deliberate effort to keep piling on the demand, just to maintain the illusion of economic growth and to keep the real estate sales clicking over.’

While Australian governments are hoping for a reversal in the markets and a return to increases, there’s one man who believes that the Australian property market could drop by 50% or more. Globetrotting economist and author Harry S Dent has been calling for an Australian housing market crash. And his prediction may be on the verge of coming true. He explains more each day in his free new eletter, Harry Dent Daily. To find out about the demographic and economic trends behind Harry’s predictions, you can sign up to his free eletter by clicking here.

This week in Money Morning

In Monday’s Money Morning, Harje explains the power of a brand name. In many scenarios, such as diamonds, you can get the same product from many different stores. So why then, are some stores, such as Tiffany & Co, that much more popular? It’s all about the brand. Tiffany’s has such a huge name in the jewellery market, that people associate the name with quality. And while different cultures like different things, many nations including Australia and China, buy Tiffany rings. And as you’ll see here, there are many brands that are loved by the Chinese market that you could invest in.

In Tuesday’s Money Morning, Harje discussed how in recent years, the Chinese have lost a lot of trust concerning food. Most notable is the fake baby formula scandal, which saw many babies lose their lives, and other babies to incur development problems and hospitalisations. And now it looks as though their love for salmon has also been fake. They’ve been receiving rainbow trout instead of salmon. So how could this be fixed? Through blockchain. To find out more about the technology helping the Chinese identify fakes, go here.

On Wednesday, Harje discussed the idea, what’s better: a great management team? Or, a great company? Understandably, it’s good to be both. On the one hand, a good management team can evoke trust from its employees and built a rapport with clients and investors alike. A brand with a great company behind it can still garner sales and investor confidence, without letting off any clues about what happens behind closed doors. It all comes down to culture and values. To find out more, go here.

In Thursday’s Money Morning, Harje looks to the ongoing trade ‘war’ between the US and China. While there are already trade tariffs in place from both countries, the US is looking to issue more. And while the trade talks had many worried earlier this year, we even saw some market volatility because of it, there are some positives to come from it. And that’s Chinese tech. To find out how you could profit from the trade tiff, go here.

In Friday’s Money Morning, Harje concentrates on the world of EVs. Electric Vehicles are the way of the future. Tesla and Elon Musk have, so far, been paving the way. But after having their fourth crash in 2018, people are starting to have their doubts. But that doesn’t mean the EV dream is over. Musk is looking to produce his vehicles in China. China’s pollution problem continues, and Musk is looking to capitalise on that. Meaning, there may be potential for opportunities in the car and battery manufacturing industries. To find out more, go here.

Kind regards,

Alana Sumic,
Editor, Money Weekend

Alana Sumic is part of the editorial team here at Money Morning. She contributes to bringing you Money Morning each day, along with all of Fat Tail Investment Research’s many other publications.

As the Editor of the weekend edition of Money Morning Alana brings you a summary of the news for the week, and her own take on the week’s most important story in markets. She is also a writer and editor for Fat Tail Investment Research’s political publication, The Australian Tribune.

Money Morning Australia