Whilst scanning the local news website in Sydney for the Melbourne Cup winner (it was Shocking for those antipodeans that are interested), I stumbled across an interesting article that features an ex-colleague of mine. Rory Robertson, an interest rate strategist at Macquarie Group, bet University of Western Sydney associate professor of economics and finance Steven Keen that Australian house prices would not fall 40 per cent within a year. The loser of the bet had the fun task of walking over 200km from Canberra to Mount Kosciuszko (Australia’s tallest mountain) wearing a t-shirt that says “I was hopelessly wrong on house prices! Ask me how.”
Dr Keen (or the “Merchant of Doom”) will be starting his trek in April. His reasons for forecasting the massive fall in house prices were a large build up in debt by the average Australian homeowner, an increase that he believed was similar to the Japanese experience between 1991-2006. Dr Keen expected that many homeowners would have to default on their home loans in an environment of weakening demand and rising unemployment. This scenario has not eventuated and house prices in Australia have in fact risen over the last year.
I have written before on the strength of the Australian economy. China’s insatiable demand for commodities has boosted mineral exports and provided a fillip for the Australian economy when most other developed economies have struggled to return to growth. Australia has now raised interest rates twice and the market is pricing in a good chance of a third hike in December, which has contributed to the Australian dollar being the best performing currency this year. The positive outlook for the Australian economy has led us to increase exposure to Australian assets and we have bought both Australian corporate and government debt.
The scenario that Dr Keen forecast has in fact played out on the other side of the world, in Ireland. Builders in Ireland are now selling homes for less than they cost to build. With no currency to devalue, no control over monetary policy and relatively high wages, Ireland has found it difficult to regain its international competitiveness. It is hard to see what will drive growth in Ireland over the short to medium term and result in a return to positive growth. Earlier this week, Fitch cut Ireland’s sovereign rating from AA+ to AA-, citing the severity of the decline in nominal GDP and the exceptional rise in government liabilities. In terms of the housing market, eventually house prices should get so cheap that prices will stabilise and demand returns. But until Ireland works off the extra supply of homes that were built during the boom years, prices will continue to fall. And that will take time.