Does history repeat itself?
When I was in high school we were set generic mock exam questions to help us with our forthcoming Uni entrance exams.
One of the mock questions was: “Does history repeat itself?”
After a crash-course tuition session, we were taught that the ‘model answer’ was essentially as follows: “on the one hand, yes, patterns tend to repeat themselves…but on the other hand, the specifics are usually a little different.”
Thus armed with this powerful, in-depth information I was finally ready to misspend the next three blithesome years larking around…
The underlying point is that economies move in cycles and while an economic clock is by no means anything even approaching a failsafe mechanism for predicting the future, it is sometimes reflective of wider trends.
We certainly saw a prolonged period of falling share prices through 2008 (2 o’clock on the investment clock) and the ensuing plummeting commodity prices as materials such as copper got smashed (3 o’clock). Some time later this was followed by moderately falling real estate values through 2011 and 2012 (6 o’clock) after the stimulating effect of initially cheaper credit wore off.
As for rising commodity prices (9 o’clock)?…well, we have seen this across the commodities index, although the trend was broken, before a recent upturn.
Recent economic data such as employment and retail has been promising, leading optimists to call that Australia is now well entrenched in the ‘general recovery stage’ of the economic cycle (10 o’clock) and that interest rates have no further to fall. Others of a more cautious bent see the mining construction peak as a potential Armageddon.
The return of the 95% mortgage has seen UK Chancellor Obsorne accused of inflating prices and “synthetically propping up” the housing market, while the Treasury argues that it will boost house building and help half a million people.
Two weeks ago South Korea announced that it plans to introduce tax breaks to homebuyers and to cut borrowing costs on order to revive home sales. First-time home-buyers with annual income less than 60 million won (around $50,000) will be exempt from taxes on property purchases this year worth no more than 10 times their salary and multiple homeowners are to see rules relaxed on capital gains taxes.
US fails to heed lessons?
Why the worldwide obsession with pumping up house prices? One reason is that developed world governments have come to realise that, just as within rising stock valuations, rising house prices can result in a ‘wealth effect’ which sees homeowners more inclined to spend which reinforces economic growth…while the trend lasts.
Sustainability of growth often tends to be of a diminished concern to governments (perhaps less so Central Bankers) who may only have 4-5 years in the hot seat.
Key measures agreed upon included an expansion of government bond purchases. With Japan’s interest rates close to zero, purchases of government bonds and other assets have been the main way the Japanese central bank has aimed to stimulate the economy and end the falling prices that have stunted economic growth. Those measures sent Japan stock valuations immediately higher to their strongest levels since 2008.
And for Australia?
If you bought Australian property before the financial crisis you will recall that in many cases deposits were not required to purchase real estate and 100% mortgages were often readily available. We are not back at such a level of easy money yet, although this recent article on the subject of the return of 100% mortgages seemed to imply that finance may be becoming easier again.
Few would disagree that a return to the days of super-easy credit would be a poor idea for the long-term stability of both our housing markets and the economy. For this reason, it seems likely that both APRA and the RBA will keep a more watchful eye on asset prices and trends in credit growth.
However, recent speeches by the Reserve have suggested that the Central Bank appears to view a revival in the housing markets as a valid means of kick-starting consumer confidence and spending.
Last week’s retail trade figures were a huge step in the right direction for Australia.
Now all eyes will turn to the Labour Force data next week. If employment remains strong then there could be happy days ahead for Australians and their economy, but most observers believe that February’s report was a little too good to be true.
Watch this space.
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