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Can we be relaxed about the trade war and house price falls?

Peter Switzer
Tuesday, December 04, 2018

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The question of the day whose answer might unfold as early as today is: “Can we trust this Trump trade war truce?”

With the November monthly home price fall in Sydney the largest since the peak of the market in July 2017 and now down 9.7% from the peak, yesterday’s question was: “Is this a sign of more big falls to come?”

Happily, this question (which I still think will be far less than the 40% collapse that got out there via a TV show) will take a year or two to answer.

Let’s deal with the house price slump first. The consensus of economists and property analysts still scoff at the 40% call. AMP Capital’s Shane Oliver has gone from a 15% fall in Sydney (peak to trough) to 20%.

The fate of housing is important as it could derail a very positive economic outlook for the Oz economy, where growth of 3.5% for this year and next, with unemployment falling, will work against big price falls. However, if big price falls kill confidence, then we could create a spiral of problems that could drive house prices down further.

That said, after 18 months since the peak, a 9.7% fall isn’t huge for Sydney. Take this in from CoreLogic analyst, Cameron Kusher, who in July told us national dwelling prices had increased by 44% over the 10 years to June, with combined capital city markets recording an increase of 52.6% for the same period. In contrast, housing values grew a hefty 112.9% in Sydney's south west region, and 98% for units. The range of rises for the different parts of the city was 93%-112%.

And while headlines got excited yesterday with the biggest fall since the GFC reported, that was a period when house prices in Sydney and Melbourne had gone troppo. The chart below shows Melbourne’s rise was 83% -102%!

For those still worried, this is what bond and interest rate expert outfit PIMCO had to say recently about our house price outlook. What I liked about the analysis was that the researchers compared us to the USA before the GFC. A lot of my twitter critics, who believe a big crash is coming, ask me the question: Why should we be any different to the Yanks, who copped a big house price crash after 2007? “An international comparison also suggests that Australia lacks the preconditions for a housing market crash,” PIMCO’s team concluded. “Key drivers of the U.S. housing crisis a decade ago – such as rapid accumulation of significant oversupply, compromised (sometimes fraudulent) underwriting practices and elevated leverage related to home equity and second lien loans – are absent. Australian mortgages are also full recourse with a strong social stigma attached to defaults. So far, the housing price correction appears purposely induced by proactive macroprudential policies, which suggests that regulators maintain decent control over the severity of the decline and have room to soften their stance if necessary. Finally, the domestic labour market remains healthy, which ultimately supports household debt repayment capabilities.”

To the Trump trade war truce, which really is a promise of no escalation for three months, which means the current tariffs will persist and interestingly some 30% of US companies told us at the last reporting season that they were affected — negatively and positively.

The Dow Jones response has been measured (up over 250 point as I write) but if the US President and his Chinese counterpart had called the trade war off, the rise could have been closer to a 1000 points!

The big negative of higher tariffs on all $US500 billion worth of Chinese goods imported to the USA and all the potential retaliation has been put on hold. Now Wall Street has to hope that three months of wide-ranging talk works out to be good for the US economy and what Donald Trump thinks is a fair thing.

In July, Mr Trump told us: “I’m ready to go to 500.” And markets have been nervous ever since. A worst case scenario, which looked highly possible, has been downgraded, so we can only hope that in 90 days good sense can prevail. My ex-student, “The Dude” (as he likes to be known as nowadays) gave me his take on the future and in the interests of objectivity, here it is: “Does not matter if the US and China stop the battle as it will not help either way. Stop the trade war. US economy will take off again and the FED will tighten, otherwise it will continue and the markets will continue on the downside. The world is over heated, needs more correction no matter what!

“Australia is going to continue the downward spiral, all the cracks that started years ago will continue to expose how weak the economy really is. As I said a while ago, coal and commodities will fall and that will put ongoing pressure on the economy, along with 100 other issues.  

“Finally banks and mortgage lenders have done the exact same there that occurred in the subprime, they are screwed and they will probably get downgraded in the first quarter next year and that will increase their cost of funds massively that will only increase the hurt on the economy and property market. Add to that the complete and total fraud by the banks and financial service industries here and it is not looking flash.”

And he finished off his email with: “Merry Xmas!”

My answer to him was inspired by Billy Joel: “You may be wrong but you may be right…” or you may be crazy.

I reckon the Dude will be right if Donald mishandles this trade stuff.  The world is vulnerable and an escalated trade war would hurt commodity prices, slow down our growth and put more pressure on house prices.

The presidents of the USA and China have some really important stuff to talk about over the next three months.

Published: Tuesday, December 04, 2018


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