ELEPHANT IN THE ROOM

“Credit conditions are the elephant in the room for economies with liberalised financial markets …. When credit conditions are easy the positive collateral benefit of higher house prices …. outweighs the negative effects”. J Muellbauer & D Williams

While some will argue that the real elephant in the room, is the “mining boom”, I recently heard Fidelity’s Paul Taylor [on a webinar] talk about the outlook for the Australian economy. These economic experts keep coming back to credit conditions, being “critical”.

The Japanese are flooding their system with money, and their stockmarket is the best performing global market [over the last year]. The Chinese and Indians have been forced to “turn-off the taps” to contain inflation, and so China and India have slowed down.

Here in Australia (as explained by Paul Taylor) there is plenty of anxst regarding whether the Australian economy can transition from it’s reliance on the “mining boom”. There is widespread fear that Australia could experience the first recession in 20 odd years.

However Paul Taylor had charts showing that Australia has previously experienced these mining booms, and invariably the Australian economy does successfully transition, without disaster. While Australia certainly doesn’t have the most diversified economy in the world, the non-mining sector is large and significantly bigger than mining.

Taylor explained that when the mining boom, was in full swing, the RBA had to contain inflation. So interest rates were kept high and this had the effect of strengthening the Aussie dollar, and stifling the non-mining sector. So with credit conditions in Australia, now good, care of the Reserve Bank cutting official rates by 2% to 2.75%, the stage has been set to normalise the economy.

Paul Taylor also explained that resources is “not falling off a cliff”, instead the resources boom is chugging along, but at a much more moderate level.
So the news is largely good, and improved credit conditions will increasingly see monies directed to housing investment. Indeed one of the reason’s why the Sydney market, has been the first to take off, has been the “ sizeable deficit in housing stock”.

So expect dwelling construction and public investment, to fill the gap of reducing mining investment.
Interestingly Canberra has been the one weak capital city market, and one commentator recently noted the following “John Howard, who became prime minister in 1996 when the coalition won government, cut 10,000 jobs in each of the following three years… Home prices in Canberra fell 8.3 percent from March 1996, to a low in August 1997, while prices jumped 18 percent in Sydney and 13 percent in Melbourne over the same period”

Anyway I will steer well clear of politics, but I will say the Sydney market is certainly looking positive, and irrespective of what happens with the Federal election, I expect to see housing market leading our economy.
Until next time…..Danny Doff Principal Laing + Simmons Double Bay