And there’s the external shock to finish off housing
Macro Business 12:21 am February 22, 2019
David Llewellyn-Smith
There it goes. The Australian property bubble is bursting and it is not going to be pretty.
MB has previously posited an ultimate fall in house prices of about one third in real terms from respective city peaks over two price fall periods. That could translate to a 40% fall in real terms over the long term.
The first leg was supposed to be 10-15% in short order and the second over the longer term similar as China structurally slowed one way or another. As of yesterday the second leg has been brought forward.
The Australia/China relationship is in meltdown. Indeed, as mentioned earlier this week, it has degenerated so much that we might call it an “economic war”. Australia has banned and blocked Chinese interests in everything from politics to telecoms and China is now in full retaliation mode with capital flight from realty, cyber attacks and, as of last night, outright bans on Aussie coal at five ports.
Given Australia can do bugger all about it – neither retreat on Huawei, the Pacific, nor the protection of its own sovereignty – this is very possibly only the thin end of the wedge. More coal could go, more Australian Chinese exports get bogged down and the tourism as well as student trade be badly impaired. That’s already underway in New Zealand.
If this advances at all from here it is the external shock needed to finish off the property bubble.
As it stands, the coal bans are not large enough to do much economic harm by themselves even if they are going to damage the net exports component of GDP through H1, 2019. The bigger issue is the confidence hit as GDP slows and house prices cop it all the more as a result.
Chinese capital is also finished in Aussie property. Repatriation in medium or large measure will accelerate as China mounts another big push to prevent capital flight.
As said, wider services trades are at imminent risk.
There is still some hope of a push back from the brink, via CNBC:
President Donald Trump sent a pair of bizarre tweets Thursday morning mentioning a “6G” wireless network and seemingly hinting that he could take a softer stance on Chinese telecom company Huawei.
The tweets rang as odd because 6G technology doesn’t exist. U.S. telecom companies are barely on the cusp of 5G wireless networks, and they’re facing stiff competition to build it before Chinese companies.
Trump doesn’t name China or Huawei, but that’s likely what he’s referencing. Chinese companies are at the forefront of 5G technology, and the Trump administration resumed trade talks with Chinese negotiators Thursday. Both nations face a March 1 deadline to reach a deal, although Trump has indicated he could back off of it.
Scummo and Liar Ardern are desperate, via The Australian:
Scott Morrison and Jacinda Ardern are set to discuss ways to secure telecommunications networks in the wake of both countries’ respective Huawei bans — which has seen New Zealand join Australia in China’s diplomatic freezer.
…A government source said the two prime ministers would discuss how best to secure government and business data in the wake of the decision to exclude the Chinese technology maker and also how to allow the use of emerging technologies such as AI, robotics, block chain and quantum computing while developing “appropriate strategic safeguards”.
Nonetheless, per capita recession is upon us. Outright recession looms as a 50/50 bet from now to year end. Lock in RBA cuts the moment unemployment rises a few points, a Labor win in the election and considerable fiscal stimulus through H2, including house price incentives such as FHB grants. This may rescue housing for a while but only if ever more crazy props are added. That is, it won’t work for very long.
If the Chinese trade conflict persist or expands, the housing problem can no longer be solved by kicking the can. Over the past fifteen years Australia has allowed a double economic distortion to develop in the hideous conjoined twin of a Chinese external mining dependence supporting an internal asset bubble dependence in housing. It is a high risk, high reward gamblers model of growth dependent upon good relations with all great powers. But the geo-political framework has begun to fracture. Regardless of the outcome this year, a large adjustment lies ahead.
Our economy will have to restructure all over again to accommodate the choice for freedom that we have made. We will need to diversify away from China. We will need a much lower real exchange rate. We will need to compete our obese arses off. Some of it will be managed and some of it just arrive, harsh and unbidden.
In the long run we’ll be much better off for it and our kids will be thankful.