Property market commentary has become infused with a tsunami of theories as to why the world is ending.
Some represent credible threats, of course.
Others represent no such hazard, yet have been espoused so frequently they are increasingly being treated as common knowledge.
When “everyone knows” something it’s often a good time to consider whether “everyone” might just be wrong.
I’m going to look at a number of common myths in the next few weeks, and today it’s…
“Deficits spell doom!”
There is ever more information freely available today, but for property market analysis this often just leads to more noise and less common sense.
Take the example of Australia’s budget deficit (a deficit is where the government receives less money than it spends).
The implicit message in the media is that we should be resigned to doom and gloom because Australia has been running a deficit since the financial crisis.
Big scary numbers too!
In reality, the numbers can and do get bigger over time as the economy gets bigger.
That’s just the way money works.
As a percentage of the size of the economy, Australia racked up a sizeable deficit through 2009-10 in order to stimulate the economy through the financial crisis.
Although I doubt many people believe that the projections will be accurate, government estimates see us returning to a surplus within a fairly short space of time.
More likely, in my opinion at least, we’ll see a prolonged period of moderate deficits.
Surplus good, deficit bad?
It’s “common knowledge” that budget surpluses are good, and deficits are bad, because they lead to big, scary, and unsustainable debt.
Yet in truth, Australia does not have a high level of government debt – another related market myth that I looked at here – and even if we did have high debt, the cost of servicing the debt is incredibly cheap, the lowest level in history.
Moreover, where is the supposed link between house prices and budget surpluses?
I can’t find it.
The answer is: there isn’t one.
Refer back to the first chart.
If anything the housing market seems to be healthier during the budget deficit periods.
For example, Australia ran budget deficits from FY1991 to FY1997, yet the hard data shows that median house prices grew strongly in every capital city as interest rates declined.
Australia has also run budget deficits from FY2008 to today, and house prices have increased then too as interest rates declined.
Budget deficits and housing market malaise?
There’s no link.
Velocity of money
Now, there’s no question that the government doesn’t always spend its money wisely.
Helicopter trips, for example!
The stimulus packages issued through the financial crisis are a worthwhile case in point – there was plenty of back and forth about the wisdom of nation building projects, and cash injections, and so on.
Yet it worked – Australia’s economy did not slump into a recession.
Source: Australian Government (Budget Papers)
If you think about it, some government expenditure ends up leaking overseas – including to other governments – but most of it either ends up in the hands of corporations and institutions, or in the hands of the people.
And they in turn spend the money again…and again, and again, and again.
Heck, even government spending on helicopter trips end up benefiting helicopter trip companies, and then in turn their employees, suppliers, and shareholders – who in turn spend that money on housing, food, clothing, footwear, and luxury goods. And so on.
The Reserve Bank of Australia charts a series of measures, including “M3”, which help to track the velocity of money travelling through the economy.
I analyse them here on my blog each month of you’re interested.
When the government is running a deficit and taking on debt sensibly, it then injects much of this money into the economy.
This is by no means a bad thing, and markets often enjoy the proceeds.
Debt is bad?
We are generally hardwired to believe that debt is bad.
But a world without debt or where nobody is lending and nobody is borrowing is not a good place.
Quite the opposite!
Being British I’ve seen what happens when banks and lenders pull up the debt ladder and it’s not pretty.
In fact, everyone whinged about it relentlessly, as I recall!
Much of the time it was the same people who whinged about there being too much debt, come to think about it.
Used sensibly, debt is very much a good thing for people, for governments, for companies, and for the economy – it helps us to buy houses, to start businesses and to grow them, which in turn creates employment, income and expenditure.
Australia doesn’t have a high level of government debt, and whether we are running a deficit or a surplus doesn’t have much bearing on the housing market.
Indeed, arguably a deficit is actually a better dynamic for housing markets, exactly the opposite of what many would try to have you believe.
Check the first chart above again and compare the deficit years to historic house price movements – deficits don’t spell doom for housing markets.
Never have done.