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Selling out Australian home buyers to China

By Dan Denning - posted Thursday, 1 April 2010


Well you have to give RBA governor Glenn Stevens credit (no pun intended). He is no Alan Greenspan. He got on the idiot box on Monday and told anyone who would listen that speculating on house prices is crazy. Specifically he said that, "I think it is a mistake to assume that a riskless, easy guaranteed way to prosperity is just to be leveraged up into property. It isn't going to be that easy."

There are two reasons why it's not going to be easy, although we don't' speak for the governor. The first is that he pretty clearly telegraphed his intention to raise interest rates to what the RBA considers more "normal" levels. "We can't assume rates will remain low," he told Seven. "The relationship between the cash rate and what they pay for mortgages or small business loans is what we think is useful."

Useful for what? For predicting where mortgage rates are headed. And that would be higher if the relationship between the cash rate and mortgage rates persists. "If you look back when the economy was stable and we had low inflation, the cash rate, that is the rate we decide on, the rate has been in the average of 5 per cent."

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So if Stevens thinks the economy is pretty normal now with low inflation, then you'd expect the cash rate to rise from 4 per cent now to at least 5 per cent by the end of the year, beginning as soon as April 6th when the RBA meets again to rig the price of money. In February, Stevens said there was a good chance rates were headed up in the first half of this year.

When the man who sets interest rates tells you that you're rising, it would be wise to at least hear him out. Whether you take him at his word is up to you. But if you're making financial plans - say, like you're going to buy a house and are trying to figure out if you can stand a few extra points rise in the interest rate - the man has told you what is going to happen.

Of course there is the chance, mentioned last week, that bank interest rates have decoupled from the cash rate. This was the possibility raised by NAB execs when they said Australia's dependence on wholesale borrowing from overseas meant that the foreign cost of capital would determine the local cost of capital, not the RBA's price for money. We'll see about that.

In the meantime, Stevens has also said the RBA is watching whether or not "the role of foreign purchases [in the Australian housing market] is an important one". We'd submit that it is. This is the second reason it won't be "easy" for Australians to get risklessly rich in leveraged property investments. They'll be outbid!

It's obvious now that the Rudd Government has opened the Australian property market wide open to overseas investors in order to keep the housing market bubbling along. The stamp-rich gorging state governments have not objected. The end result is a huge spike in prices that locks out Australians hoping to enter the market at the bottom end of the property ladder.

Some people might call this the government selling-out the interests of its citizens in order to prevent the bubble from popping on their watch. In fact, we just muttered that aloud to ourselves. And we're not even Australian. But as an American, we've seen these desperate attempts to keep the good times rolling before. It always costs the little guy the most.

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To be fair, there isn't much data yet on how much of last year's national price surge was fuelled by foreign buying. And let's face it. By "foreign," most of the media accounts mean Chinese. And you know, from a Chinese perspective, buying real Australian houses with money not subject to Australian interest rates is probably a great investment.

But whether it's such a good thing for Australians depends on who you ask. If you're a Baby Boomer with 3.6 investment properties that you're counting on to fund your comfortable retirement, the influx of cashed-up foreign buyers is just what the doctor ordered. If you're a first home buyer ... well ... you're going to need a bigger grant ... or be willing to live in an outer suburb ... or rent for the rest of your life.

Can you see now that we have the confluence of two bubbles? The first is Australia's fevered national pastime of speculating on property. It's all good as long as it's making someone - property spruikers or investors - rich. But what if it makes the Chinese rich? And what if the Chinese investment in Australian property is itself a product of China's massive lending bubble?

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First published in The Daily Reckoning on March 30, 2010.



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About the Author

Dan Denning is the author of 2005's best-selling The Bull Hunter (John Wiley & Sons). Dan draws on his network of global contacts from his base in Melbourne. Hes the managing editor of resource newsletter Diggers and Drillers and the editor of The Daily Reckoning Australia.

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