The Looming War that Could See Aussie House Prices Tumble

This year we’ve discussed a lot about both the US-China trade tensions and the downturn in the Aussie housing market.

They’ve remained mutually exclusive, until now.

It’s not an unreasonable assumption to make that the trade tensions would have an effect on the Australian economy; we’ve mentioned in the past that Australia could be affected.

However, it’s not a far reach now to assume that the housing market could slip even further if the trade tensions increased into a trade war.

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The US and China’s impact on the housing market

With the US being Australia’s greatest ally and China our biggest trade partner, it makes sense.

Earlier this week, the IMF released a report detailing why Australia’s housing market could dip even further depending on the outcome of a trade war.

Last week we spoke about the slight increase to wage increases, and while we don’t see any significant change in the near future until there is a tighter labour market.

And while we’ve seen some improvement to business and consumption, which has propped up our GDP, the International Monetary Fund (IMF) has sent a warning that Australia’s ‘recent strong growth and declining unemployment’ could be under threat due to the US-China trade tensions.

This trade war could lead to a slowdown in the Chinese economy, therefore directly affecting Australia. According to the ABC, the IMF believes it could ‘amplify the [housing] correction’ as well as decrease domestic demand for housing in Australia.

In the IMF’s words:

The balance of risks to economic growth is tilted to the downside with a less favourable global risk picture.

A weaker than expected near-term outlook in China coupled with further rising global protectionism and trade tensions could delay full closure of the output gap, although there are also upside risks to the terms of trade in the near term.’

How does this affect Australia?

Keeping in line with the housing theme, household debt levels and the ‘concrete exposure’ regarding mortgage lending by the major banks are also major risks threatened by the looming possibility of a trade war between the US and China.

Australia’s house prices soared up 70% in the past decade, and about 90–100% in Melbourne and Sydney.

Moreover, if a trade war were to break out between the US and China, global markets could also be affected, which could lead to a tightening in Australia’s financial markets. And could eventually mean that Australians who owe debt may have even less of a disposable income.

As the IMF report stated:

A weaker-than-expected near-term outlook in China, coupled with further rising global protectionism and trade tensions could delay full closure of the output gap

A sharp tightening of global financial conditions could spill over into domestic financial markets, raising funding costs and lowering disposable income of debtors, with the impact also depending on the response of the Australian dollar.’

So what does all this mean for the housing market? Well…further cool downs.

As the IMF explains:

The cooling of the housing market is welcome and can be weathered in a strong economy.’

But for that to happen housing supply reforms need to be put in place. This will lead to, hopefully, restoring housing affordability.

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This week in Money Morning

In Monday’s Money Morning, Harje informs readers that inflation is coming. That’s according to former head of the US Federal Reserve, Alan Greenspan. It’s easy to mistake inflation as a sign of good things to come. When inflation is higher, it means there is growth. When inflation kicks up, central bankers also increase interest rates, which is a signal for a stronger economy. But the growth inflation symbolises is not economic. It’s the growth of money outpacing the growth of new goods and services. To find out more, go here.

In Tuesday’s Money Morning, Harje opens with the story of Tokushichi Nomura who worked for his family business (a money changing shop) but decided to change the business’s direction to a brokerage business. Then, Japan declared war on Russia. And Nomura had his brokerage business up and running. This time, he was ready to make a fortune. He would profit on almost every investment he made. Despite his early success, Nomura didn’t believe he was infallible and kept his nose in detailed research. He only bought stocks he believed were mispriced and valuable. In time, as stocks kept rising, it became harder and harder for Nomura to find decent investments. He compared his findings on Japanese stocks to others around the world. (Japanese stocks had become grossly overvalued.) To find out more about this story and how it could be relevant to your investing future, go here.

On Wednesday, Harje looked at the decline in tech stocks. Stocks like Altium Ltd [ASX:ALU] and Afterpay Touch Group Ltd [ASX:APT] dropped more than 5–10% on Tuesday. Even the tech-affiliated bitcoin is nose-diving. The crypto was sitting at US$4,763 — its lowest point this year. And what’s causing all these declines? Valuations. Interest rates. Growth assumptions. Take a look at the FAANGs. In the last four quarters of 2018 (some Q4 figures are estimates), earnings and free cash flow haven’t fallen off a cliff. To me, it seems pretty obvious what’s going on. Fundies think they can time the market. And they’re using excuses like high PEs, rising interest rates, potential regulation and lagging growth to justify their actions. To find out more, click here.

In Thursday’s Money Morning, Harje notes that 2018 isn’t a 2008 replay. Lenders aren’t shutting their doors. The economy is not recoiling. Central bankers won’t rapidly cut interest rates. Consumers are not leveraged to the hilt. And we’re not about to enter a recession. Asset prices are just falling. That’s it. Harje claims that now is not the time for pessimism. It’s time to take stock. Look at what you’ve got right. Try to learn from mistakes. And keep moving forward. To find out more, go here.

In Friday’s Money Morning, Harje explains that years of cheap cash is what’s pushed property prices, stocks, bonds, and most investable assets sky high. And this is not to mention, all the debt taken on in these periods of cheap money. So when central bankers put their foot on the brake, or even hint about putting on the brakes, those prices fall, sometimes very rapidly. So what will the overpaid central bankers think of next? Most likely they’ll play follow the leader, with Jerome Powell (Chair of the Fed) leading the pack. Eventually, interest rates here in Australia have to go up. Phillip Lowe (governor of the RBA) cannot continue keeping them on hold forever. If he does, inflation might destroy us all. And when those interest rates do start climbing, Aussie stocks will actually have a reason to fall, instead of mimicking US pessimism. To find out more, go here.

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.

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