Housing Question From Down Under

Ben from Australia has a wife who is wondering about the wisdom of staying in cash on the sidelines waiting for Australia home prices to decline.

With and Email header of Advice for an Aussie, Ben writes ...

Hey Mish,

Just wanted to say a quick hello. I love it every day when then email with your latest posts arrives in my inbox about 5:20pm each afternoon (Sydney time).

You are completely right about the property boom in Sydney and Australia. One of my best mates is about to buy a pretty average 3 bedroom unit in Sydney for about A$750,000. It is absolutely crazy. He plans to rent it out (the rent will cover less than half the interest etc) but he is sure it will go up 10-15% a year. �Why?� I always ask. �Because it always does!� he replies. I�ve stopped explaining my position to him. All my mates think I am uncle scrooge.

But my question � I have a young family and a growing business. I�m stashing everything in cash in the bank and waiting to buy a house when the RE market (inevitably) falls � although my wife is getting impatient. The Reserve Bank of Australia is a pretty conservative beast (that�s a good thing in my book) with official interest rates at 4.50% and headed higher. But I look at China and your comments about Australia (and Canada) getting belted in the fallout. Would you suggest anything other than putting everything in the bank?

Anyway, hope you�re having a good weekend. Just wanted you to know that your efforts are appreciated around the world.

Cheers,

Ben

Response to "Down Under"

Hello Ben, that home prices in Australia keep going up is all the more reason to wait. The bigger the bubble the bigger the crash when it happens. Home prices always revert to the mean. Australian home prices are standard deviations above the norm in terms of price-to-rent and price-to-wages.

The bubble will pop and the crash will be spectacular, no doubt as soon as every conceivable person on the sidelines is sucked in.

"No Bubble?" Don't Believe It

The central bank says there is no bubble. Don't believe it.

Moreover, I laugh when I read articles like No house price bubble: RBA

RBA deputy governor Ric Battellino said today house prices in Australia, relative to income, were reasonable.

"People feel that house prices in Australia are quite high and that�s quite often because the ratio of house prices to income that are published for Australia tend to focus mainly on prices in the cities, and they are quite elevated,�� Mr Battellino said in response to a question at a business function in Sydney. ��But, if you look across the whole country, the ratio of house prices to income is not that different from most other countries."

What Battellino seems to be suggesting is to look across the Outback and average prices and there is no bubble. This is like suggesting there is no bubble in San Diego because there is no bubble in Danville, Illinois.

Well, there may not be a bubble in the central Illinois farm belt, but not many people live in widely dispersed small farm towns of a few thousand people each.

It makes no sense to measure prices this way. The bubbles in Australia are where the vast majority of the people live.

Ben Asked "But I look at China and your comments about Australia (and Canada) getting belted in the fallout. Would you suggest anything other than putting everything in the bank? "

His question is in reference to Misguided Love Affair with China; China's Massive Monetary Expansion and Crackup Boom.

One thing Australians have going for them is treasury rates of 4.5%. The second thing is they do not have to worry about currency fluctuations, something that carry trade investors do have to worry about.

Australia Dollar Weekly Chart



The Australian dollar has been on a tear. Yet, where to from here is of primary concern to carry trade players seeking 4.5% in interest but assuming the risk in the slide of the Australian dollar.

Australians have no such concerns, and that does open up another play. Instead of sitting in cash, Australians can consider buying longer term Australian Central Bank notes on the expectation that when the housing bubble bursts, the RBA will respond by lowering rates.

For someone living in Australia with expenses and wages in Australian dollars, long-term Australian Central Bank bonds looks like a very good opportunity.

Those are my thoughts as to what looks attractive from this side of the ocean where 5-year treasury notes yield a mere 1.17% and 10-year notes a paltry 2.6%.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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