Ever heard the adage “buy on the sound of cannons, sell on the sound of trumpets”? It’s one to keep in mind as we head towards an uncertain 2014 with either Prime Minister Abbott or Prime Minister Rudd (ritually cleansed by the election) attempting to breath confidence into the economy, and thereby into asset prices.
For my money, there are more trumpets blaring on house prices and equity markets right now than are justified.
Yesterday’s 25bps cut in the cash rate, to the 50-year low of 2.5 per cent, will prompt various interpretations from analysts – though those without a political axe to grind general concur that we’re in a weak phase, and both confidence and investment must be lifted if we’re to avoid an economic slump next year.
But that’s just the smarty-pants analysts. Going into a federal election there are competing forces at work, spinning the rate cut news this way and that, and they may have a profound effect on the final vote count on September 7.
What is at stake is a very, very deep-seated belief in the Australian voting public that we can, in most years, make more money than wages/salaries alone provide, by borrowing to gamble on asset inflation in the housing market.
The belief is that this is an open-ended phenomenon that is good for the nation. It’s the greatest free lunch in our history, and no politician would every dream of bursting that bubble, so to speak.
Yesterday’s rate cut was interpreted by Treasurer Chris Bowen as proof that interest rates won’t “always be lower under a Coalition government” as first John Howard, and now Tony Abbott and Joe Hockey have said. For Bowen it’s a sign of virtuoso economic management by the man he help turf out of the Treasurer’s office – Wayne Swan.
Abbott was spinning furiously in the other direction – that these low, low rates were a sign of damaged confidence that will require a dramatic change to get things going again. That view, though typical election-time fear-mongering, is much closer to the views of most economists at this time.
But against the backdrop of all that spinning, home-owning voters cling to the secret desire to see their assets surging ahead of the growth rate of their incomes once more.
Apart from very young home-owners, most remember the halcyon days of the Howard years, when a phone call to your bank would allow enough equity to be withdrawn to buy the car you’d always wanted, pay for a trip to Paris, or perhaps just cover this year’s school fees.
But can those days really return? Property price headlines in recent weeks have been contradictory. Here are three examples:
‘Perth house prices slide’ (Perth Now, July 31) ... ‘Perth leads house price revival’ (The West Australian, August 6).
‘Real estate price surge for Sydney property market’ (Daily Telegraph, August 3) ... ‘National vendor hibernation continues into July, especially in Sydney’ (Property Observer, August 5).
‘GFC gloom forgotten as city house prices surge ahead’ (The Australian, August 1) ... ‘RBA “risks” house price bubble’ (Financial Review, August 7).
In today’s Financial Review, UBS’s Jonathan Mott calls the latest rate cut “undesirable and dangerous”, because house prices are so high already by global standards and have just seen 2.4 per cent growth nationally in the June quarter alone.
And therein lies the contradiction at the heart of the great Australian housing story – prices are dangerously high, impose severe economic hardship on many young families hoping to ‘get on the ladder’, and still pose a long-term threat to the economy if a global or domestic ‘black swan’ leads to a price collapse. And yet on the other hand, we’re all secretly cheering on house prices, wanting another serve of the Howard-era free lunch.
That feeds into the way householders will read the comments of Abbott and Rudd over the next four weeks. Yes, boats are important. And that carbon-thingy-stuff. And pensions and parental leave and that... But which side will send my house value soaring?
On the Coalition side, the great hope is for what I have previously called the ‘Abbott bounce’ – an unlocking of business investment, particularly in the SME space, by businesspeople who have been holding their breath through the stink of the 43rd parliament.
On the Labor side, the hope is that by not ‘cutting to the bone’, and by tipping more money into things like automotive manufacturing and renewable energy projects, economic weakness will be defeated.
So voters must ask themselves a simple question – “Who do I trust to stimulate further unsustainable growth in house prices, so I can withdraw equity and buy that new sports car?”
My feeling is that many will choose Abbott for this darkest of reasons. We yearn for the Howard-years property feast, and Abbott looks just enough like Howard to lead us back there.
Of course it’s all illusion. Neither side will take us back there. Prices are knocking up against the very real ceiling of slow growth in incomes. Until either an Abbott bounce or Rudd’s Keynesian jobs plan works, there won’t be any more free lunches.