Get divorced, buy house

  • The persistent rise of house prices
  • Rate cut? Not yet…
  • Not capitalism, but something else

Colleague, Callum Newman, dropped us a line with a link to yesterday’s Financial Times. The article of interest noted the following:

A divorce registration office is not a typical place to seek clues about demand for real estate. Then again, China’s is not a typical real estate market.

The divorce office in Shanghai’s Xuhui district was overwhelmed with happily married couples on Monday. For the previous week, rumours had circulated that starting from September, the government was about to impose a 70 per cent downpayment requirement for mortgages, from which unmarried homebuyers would be exempt.

Local media described a flow of new divorcees holding hands as they exited the office.

Whether the story, or the rumoured change in government policy, are true or apocryphal is anyone’s guess.

But regardless, it’s amusing. It’s an example of how, whatever a government does to try to manipulate the market, consumers and entrepreneurs are always one step ahead.

We like that.

Markets

The US markets were closed overnight, in observance of the Labor Day holiday.

In Europe, the Euro Stoxx 50 index closed down 2.08 points, or 0.07%. The FTSE 100 index fell 0.22%, while Germany’s DAX index lost 0.11%.

In Asian markets, Japan’s Nikkei 225 index is up 47.88 points, or 0.28%. China’s CSI 300 index is down 0.46%.

In Australia, the S&P/ASX 200 index is down 20.08 points, or 0.37%.

On the commodities markets, West Texas Intermediate crude oil is trading for US$45.28 per barrel. Brent crude is trading for US$47.67 per barrel.

Gold is US$1,327 (AU$1,739) per troy ounce. Silver is US$19.50 (AU$25.56) per troy ounce.

The Aussie dollar is worth 76.29 US cents.

The persistent rise of house prices

House prices.

As we’ve noted before, we’ve long given up on the (feeble) attempt to predict a house price collapse.

From 2008 to 2010, we thought the Aussie market was primed for a huge fall. How wrong we were. We couldn’t have been more wrong, in fact.

Since 2008, house prices in many Melbourne suburbs have increased by big double-digit percentages. Some have increased by triple-digit percentages.

In Sydney, according to CoreLogic, the median house price is $780,000. Naturally, the closer you are to the centre, and the bigger your harbour view, the higher the price.

But for all the talk of high Aussie house prices and an impending bubble, Sydney has nothing on house prices across the Tasman. In particular, Auckland.

As Bloomberg reports:

The average house price in Auckland, New Zealand’s largest city, has surged above NZ$1 million for the first time.

The price for the Auckland area, home to a third of New Zealand’s 4.7 million people, jumped 16 percent in August from a year earlier and 6.1 percent in the last three months to NZ$1.01 million, according to data published Tuesday by government property research agency Quotable Value. The city’s average price has risen 86 percent since 2007.

But let’s compare apples with apples. The ‘average’ price and ‘median’ price aren’t the same. So we turn to New Zealand real estate firm, Barfoot & Thompson for clarity.

Barfoot & Thompson managing director, Peter Thompson says:

While prices continue to rise, for the past 5 months buyers have not been prepared to pay more than they believe is the market price.

The same trend can be seen with the median price, which at $850,000 for August is up 1.2 percent on July’s, and up 2.5 percent for the average for the previous 3 months.

In Aussie dollar terms, the Auckland median house price is $816,000. That’s $36,000 above the Sydney median house price.

Is Auckland that much more desirable than Sydney? We won’t pass judgement. Sydney is fine, but we’ve never been to Auckland.

But, in truth, it doesn’t matter whether Auckland is nice or not. ‘Niceness’ isn’t a factor. There is only one factor, and that’s interest rates.

(No doubt Callum Newman and the Cycles, Trends, & Forecasts team will disagree. And if we had to tell you who to pay most attention to when it comes to property, we would have no qualms about telling you to ignore your editor’s advice, and instead listen to the advice of the Cycles, Trends, & Forecasts team. You can find out more about that service here.)

To make our point on the importance of interest rates, consider this chart. It’s of the Reserve Bank of New Zealand Official Cash Rate:



chart image

Source: Bloomberg
Click to enlarge


As in Australia, New Zealand’s interest rates are at a record low. It’s no wonder, then, that Auckland house prices are at a record high.

There is a tendency in the financial profession to overcomplicate things. If a financial professional can make something seem complicated, they feel it will increase the demand for their services.

In reality, financial markets aren’t as complex as most pros will have you believe.

In finance, there are just a few simple relationships. The most simple of all is interest rates. Interest rates influence everything.

If all roads lead to Rome, then all financial booms and busts lead back to interest rates. We can’t be any clearer about it than that.

In 2008, across most of the world, asset prices collapsed. There were a few exceptions. House prices in Australia and Canada didn’t collapse. Most everywhere else, they did.

But Australia didn’t escape completely. ‘Trophy homes’ in places like the Gold Coast took a beating. As did homes in Perth, which had previously shot up in value as a result of the mining boom.

The Aussie stock market fell by half. That was due to the collapse of mining stocks and the worldwide banking crisis.

As a result, central banks slashed interest rates. You can see how that played out in New Zealand in the chart above.

Prior to the crash, the RBNZ Cash Rate was 8.25%. A year later it was 2.5%. Today, it’s 2%. And according to the futures market, there’s a 58.8% chance of the RBNZ cutting rates to 1.75% at its November meeting.

Just when will the era of low interest rates end?

On the current evidence, here in Australia, in New Zealand, and in the US, it doesn’t seem as though it will end any time soon.

So, get used to it.

Rate cut? Not yet…

Breaking news (from nearly three hours ago), the Reserve Bank of Australia kept its Cash Rate at 1.5%.

Based on futures prices, the market appears to be convinced Aussie interest rates will stay where they are for now…for now.

As for this time next year, that’s a different story. The futures market only has a 36.9% chance of the RBA Cash Rate still being at 1.5%.

The money appears to be on the Cash Rate being at 1.25% or lower.

More cuts are coming. That’s what the market is telling us anyway.

Not capitalism, but something else

Every once in a while we read something that makes us go ‘Huh?’ We had such a thought on reading the following from the Financial Times this afternoon:

Leaders of the world’s 20 largest economies have been warned that they must “civilise capitalism” as they seek to revive economic growth and address growing public scepticism about the benefits of free trade and globalisation.

We’re not sure of the correct grammatical term, but capitalism is civilisation. That would make ‘civilise’ redundant in this context.

But who was it who uttered the phrase? Perhaps one of the G20’s former communist nations? Not quite. The FT reveals all:

According to the officials, Australian prime minister Malcolm Turnbull, a former Goldman Sachs banker, warned his peers of the need to “civilise capitalism”.

Yes, that was the sound of your editor slapping his hand to his forehead.

As always, capitalism isn’t to blame for the problems in the world’s economies. Capitalism is the solution to the problems. If only governments and central bank would allow capitalism to run its course.

By blaming capitalism, governments are merely using it as a scapegoat for what people believe is capitalism, but which is really statism or fascism. That is, the partnership of government and businesses to manipulate the economy.

In a truly free market and capitalist world, there would be no government/business partnership in anything. Businesses wouldn’t receive subsidies. Banks wouldn’t get bailouts.

Executives of notionally private enterprises would be fired for running their companies into the ground, rather than receiving the government gift of monopoly, ensuring those same companies become economic zombies.

At the After America conference in 2012, we warned attendees that China wasn’t becoming more like the West. We warned that the West was becoming more like China.

More evidence to support this view abounds. Again, from the FT:

Chinese president Xi Jinping helped set the tone of this year’s G20 meeting in a weekend address to business executives. “Development is for the people, it should be pursued by the people and its outcomes should be shared by the people,” Mr Xi said.

Ah, all very egalitarian. Or rather, all very Marxist. From Karl Marx’s Das Kapital:

Centralisation of the means of production and socialisation of labour at last reach a point where they become incompatible with the capitalist integument. This integument is burst asunder.

Governments are wont to declare war on things: on nation states, on terrorist groups, on drugs,epana

on tax avoidance…and now, on capitalism.

When folks talk about the need to ‘civilise capitalism’, what they really mean is the need to destroy it, and replace it with centralised government control.

Cheers,
Kris