‘We have some misgivings on the longer-term consequences of these new stimulatory policies. If housing is regarded as an asset class that is not allowed to fall, Australia could have some rather serious social issues surrounding home ownership rates over the long term. In the meantime, risks have risen that this new recovery will be one of the more speculative rises seen in some time. Let’s keep in mind unemployment remains elevated and net migration is expected to be negative next year. We have a surplus of inner-city units in our two largest cities. And if there was another negative macro event in 2021, there is not much room left to cut lending rates further.
‘Many in the community are starting to think they cannot ever lose on housing. That the Government will always be there to step into the housing market, if need be. And that is a scary idea…’
Those were the warning words of Louis Christopher, Managing Director at SQM this week.
Both stimulus and cheap debt have kept property rising, even as we go through a-once-in-a-century pandemic and lockdowns. SQM expects property could keep rising through 2021 from ‘aggressive government stimulus’, low interest rates and changes to responsible lending laws.
In their ‘Boom and Bust Report 2021’, they looked at four scenarios:
Their base case (scenario 1) sees property prices rising in all capital cities by an average of 5–9%. Perth is the star performer here with price rises between 8–12%…even if we have more lockdowns. But on the condition that stimulus continues and JobKeeper is extended.
Bear in mind then that any property growth won’t be coming from salary growth or immigration, which was one of the main drivers in recent years. Instead, the push will come from stimulus and cheap debt.
Unemployment will be key here and it’s likely to stay high. The RBA expects that will be the case for the next two years along with a salary growth of less than 2%.
The RBA doesn’t expect too much growth in housing. In fact, Philip Lowe spared some words about this in his opening statement to the House of Representatives Standing Committee on Economics:
‘[I]n the current environment, the bigger stability risk is a protracted period of high unemployment, rather than excess borrowing. When people don’t have jobs, their spending is curtailed and they have difficulty servicing their debts. It is also worth noting that over the past 6 months, many households have improved their finances and paid down debt. It is possible that this attitude to debt will change again, but it is also possible that people will continue to take a more cautious approach to borrowing than they did before the pandemic.’
I’m not so convinced…
I mean, property is looking quite appealing when you consider that interest rates are at record lows and cash in the bank is losing you money.
At the same time though, things are looking quite risky. We keep on raking in debt.
Pretty much every asset has gone up during the crisis
Global debt hit a record high this year and is set to reach US$277 trillion by the end of this year, or 365% of the world’s GDP according to Institute of International Finance.
The Wall Street Journal writes:
‘Companies and governments have issued a record $9.7 trillion of bonds and other debt this year, as extraordinary support from the Federal Reserve and other central banks has fueled a borrowing bonanza.
‘The total covers the year to Nov. 26 and includes nearly $5.1 trillion of corporate bonds, as well as some kinds of loans, including riskier leveraged loans, according to Refinitiv. Both figures already exceed those for any prior full year.’
Central banks are debasing their currencies and people are moving away and into assets.
I mean, you’ve seen the stock market, gold, property, bitcoin…pretty much every asset has gone up during the crisis. It’s a fight between cash and real assets. Especially with the perspective that interest rates will stay low for a while.
But of course, this comes at more risk.
I lived in a property speculation bubble before, in Spain during the financial crisis in 2008. Let me tell you, it didn’t end well.
It left many people bankrupt, including young families that had overindebted themselves just to get their first home. There’s real danger here.
But that’s what happens when there’s no prospect of growth ahead. People will take more risks.
For The Rum Rebellion