Monday, November 9, 2009

Bubble Trouble

As I've long said I may just be a negative vibe merchant but everywhere I look I see bubbles - in China and in Australia, and the US stock market. While a few months ago it appeared that many had learned the lessons of boom times - that they don't last forever and that they nearly always end badly - we are back in boom time territory and the phrase 'this time it's different' (TTID) has truly made a comeback. The TTID mentality extends right across the spectrum from the property spruikers to the governor of the Reserve Bank and the Head of Treasury.

Latest figures from the ABS on Housing Finance show a seasonally adjusted rise of 4.8% for the month (that's an annualised rate 57.6%). Now it's obvious that govt grants to house buyers (really a grant to venders) have bolstered these figures and many people who believed (like me) that house prices would have fallen by now are thinking "I better get in the market now" or "I'll be paying even more soon". One truly wonders how high house prices can go.

Now there is one intervention that govts could do to restrict house price growth and that's increase supply. One of the original aims of public housing was to keep a lid on the private market, particularly for rentals.
But govts and much of the population associate rapidly rising house prices with prosperity when really they are drag on prosperity both present and future. Firstly they make one of the most significant costs in our lives more expensive and they divert investment away from potentially productive endeavours.

The next bubble or set of bubbles that indirectly could concern Australia are in China. As Rowan Callick (one of the best writers from The Australian) observes today there are worrying signs in Hong Kong and the rest of China:
Last week a flat on Conduit Road in Hong Kong's mid-levels was bought for a world record of $51m - $135,626 per square metre.
The dominant element of Beijing's anti-GFC stimulus package has comprised the rampant return of the "policy loans" to state-owned enterprises, plus the opening of credit to individuals with privileged access, thanks to party or other connections, to the state banks.
Interest rates are not only paltry but notional. This is more than low-cost capital, or even no-cost capital. Hardly anyone's thinking about repaying the billions of bucks involved. Most of it has swiftly found its way into property and shares. Within China, house sales have surged 70 per cent this year.
This raises interesting questions about the fulsome praise that has been lavished on the Chinese stimulus package, in Australia as elsewhere. Some of the spending has doubtless found its way to useful projects where investment will be returned, in a socially and economically beneficial way, for some time to come.
But it's more difficult to see what's gained from printing heaps more money and telling the government's banks to shovel it out to mates.
I highlighted the worry that no thought is being given to repayment. Debt is serious and right now we've forgotten that much of the GFC was built on a cavalier attitude to debt.

Property and share markets can easily develop bubbles - as prices go up, investors pour more money in and prices go up further, attracting more investment and so on. But eventually everyone realises that the bubble is really just air and sentiment changes.

Just remember one phrase:
The unsustainable cannot be sustained ...
Actually another one is worthwhile as well:
This time it's not different ...

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