If you want to hear some common sense on what the Japanese government should do to repair its economy, click here.
You won’t find praise of the latest multi-trillion yen stimulus package. And you won’t hear any fawning over the supposedly heroic central bankers.
No. What you’ll hear is a straightforward and common sense argument for why the Japanese central bank should increase interest rates right now.
If it doesn’t, it will result in more wasteful and misdirected government spending and even greater pain for the Japanese.
Now onto other business…
This week the Reserve Bank of Australia (RBA) released the minutes from the March 1 board meeting.
The RBA bankers noted:
“The household and business sectors in Australia did not appear to be under financial stress, though both continued to show more caution in their borrowing behaviour, as evidenced in slower rates of credit growth over the past couple of years. Members saw this as a welcome development, particularly as household debt remained at a historically high level and debt-servicing requirements had recently increased with the rise in interest rates.”
It most certainly is at an historically high level. Australians have borrowed over $1 trillion to buy houses… and the number is growing.
As we mentioned earlier this week, housing debt has increased 33% since late 2008 – a period when mainstream economists told you Australian households had deleveraged.
Deleveraging? “Deleveraging” my foot!
What the RBA may not have noticed is the following information anonymously sent to this editor:
“One unnoticed factor has been the huge increase in mortgagees taking possession.
“We are processing, on average, 20 new bank applications PER DAY!
“Hundreds are losing their houses per week, just through this one firm, and yet it has gone unnoticed, it seems.”
Annualise that and twenty repossessions per day works out at 5,000 per year… at just one firm.
That fits in with the report from ratings agency Fitch. It says mortgage arrears unexpectedly increased during the last quarter of 2010.
We’re not surprised. First-home buyers were fooled by unscrupulous spruikers, politicians and bankers into buying overpriced houses at the peak of the market.
Nothing can go up forever – look at the stock market – and first-home buyers now realise they’ve been duped. And even worse is the fact they can’t afford to keep paying for a depreciating asset… leading to repossessions.
Let’s face it, things must be pretty bad for it to go that far. Even if you’re getting behind with repayments, in most cases people are able to struggle through it.
And even if they can’t, there’s still the option of selling the house before the situation gets out of control. But if the house is worth less than the mortgage against it, well, that’s a different story.
An increase in mortgagee sales won’t be good news for the spruikers. With a glut of housing already on the market… such as in Queensland:
“Gold Coast property is facing oversupply conditions, with banks and major lenders exposed to falling values, according to an insolvency firm speaking at an Australian Financial Review property conference.
“KordaMentha partner Mark Korda told the conference more than 2,000 apartments worth around $2 billion were up for sale, with few buyers meaning just 300 apartments were selling on average each year.”
The report continues:
“Mr Korda said there was anywhere between a five and seven-year supply of apartments on the market, with developers and property investors no longer able to rely on cheap money to snap them up.”
Housing shortage? “Shortage” my foot!
And now Future Fund chairman, David Murray has decided to shove his oar in on the housing debate. The more the merrier we say.
We’re no fans of the Future Fund, but more mainstream voices out there sounding the alarm bells on the housing sector is a good thing.
He told a panel discussion on Sky News that:
“The relationship between house prices and incomes is uncomfortably high.”
Darn right, it’s uncomfortably high. Higher than the 4.5x income the spruikers would have you believe. Try six, seven, eight or nine times income and you’ll be closer to the mark.
Of course, that probably didn’t bother Mr. Murray too much while he was chief executive of Commonwealth Bank of Australia [ASX: CBA]. A bank with over half of its assets invested in residential mortgages.
But don’t get me wrong. It’s not just the housing market that’s in trouble.
The rest of Australia’s lopsided economy is on the ropes too. And that includes the stock market.
As the RBA also noted in its minutes:
“Members noted that overall price/earnings ratios were generally at no more than average levels. This was also the case for the Australian market, where the recent reporting season had highlighted diverse outcomes; the mining companies and the banks had recorded strong results, while retailing companies had generally fallen short of expectations and/or downgraded earnings predictions.”
As the RBA admits, the only sectors of the economy doing well is the mining sector – thanks to China – and the banking sector – thanks to the mining sector and the Australian taxpayer.
Everywhere else, earnings have been bad… or certainly not as good as mainstream analysts had forecast.
This tells you the day of reckoning is fast approaching.
As I mentioned, there hasn’t been any deleveraging, because household debt levels are 33% higher than two years ago.
But what we are seeing is the effects of slower credit growth… which is still high mind you. And for an economy built on credit, built on dollars flowing from profitable mining companies into housing loans and credit via the banks, any slowdown in credit growth is bad news.
I know it’s an overused term, but what Australia and most of the Western world has gone through in recent years is Ponzi finance. Every day more loans need to be created than the previous day in order to keep debt levels growing.
Any slowing of credit growth means fewer new loans can be created. This means less inflated money hitting the economy. And less inflated money means asset prices and consumer prices won’t grow as much.
Now, that’s good. Inflation only gives a false impression of growth.
But while it’s good in a normal economy, Australia – like most everywhere else – isn’t a normal economy. It’s an economy built on bogus growth. And for an economy built on bogus growth it means big trouble.
The extent of the trouble can be seen in the performance of the stock market. Markets are priced based on forecasts of future profits.
Even before terror struck Japan late on Friday, the Australian market had dropped nearly 5% over the week.
That tells you investors weren’t prepared to buy stocks at those high prices. That based on forecast earnings for next year, investors didn’t believe earnings would be high enough to warrant paying high prices.
In other words, investors didn’t believe earnings would increase further than expected and so there wouldn’t be the opportunity to sell shares for a higher price next year.
Look, prices of all assets tend to overshoot on the upside. When that happens you just need to stand back and let prices fall. Falling prices encourage buyers to re-enter the market.
When prices fell in 2008 and 2009, buyers flocked into the market to pick up bargains.
The trouble is the housing market hasn’t been allowed to fall. When it has tried, governments have thrown money at it, and banks have thrown credit at it to keep it propped up.
That’s not sustainable. The money is running out, and house prices will do what they’ve been trying to do for the past twenty-odd years – fall to a level that is sustainable. A level at which buyers can afford to buy without forking out 70% of their income on a mortgage.
That’ll be good news for buyers, but not-so-good news for those already leveraged up to the eyeballs.
But long term, it will be good news for the Australian economy.
It’s about time the Australian housing market and economy was allowed to go cold turkey and come down off this ridiculous high.
It’ll be painful when it happens. But it has to happen.
Kris Sayce
For Money Morning Australia