There are a handful of websites I make sure I read every day. Many of them are U.S.-centric because that’s where I happen to live at the moment and it’s also where most of the action is in terms of the financial meltdown. It’s also darn interesting to read about. But for a long time I was searching for a common-sense Australian spin on what’s really happening in the world of finance. Enter The Daily Reckoning – Australian Edition. Here’s a little sample of something from today’s edition.
December existing home sales fell by over a million units and 16.7%, according to the NAR. The positive news, if you’re looking for some, is that sales per year were up 21% compared to 2008. And if you can believe it, the median sales price for an existing U.S. home is a rather humble (by Australian standards) US$178,300.
What a bargain!
Actually, what’s happening is pretty simple. Sales are up because the ass-clowns in the U.S. Congress introduced an $8,000 tax credit for first time home buyers. Sound familiar? It’s not a grant. It’s a tax deduction. But the effect is the same: to bring forward demand and support current prices.
In November, first home buyers taking advantage of the tax credit made up 50% of demand for existing homes. In December, it fell to 43%. Those two months were supposed to be the final months of the credit. The December decline shows that most people who intended to take advantage of the credit had already locked it in.
But what now? The credit supported prices and sent sales soaring. The Congress extended the credit through April 30th of this year. But we doubt it will lead to a huge recovery in home prices. Why?
There is 7.2 months supply of homes at the current sales rate. That’s a huge surplus inventory. It puts massive downward pressure on prices – and that’s before another likely wave of foreclosures hits the U.S. market. Hmmn.
Yes, we know what you’re thinking. In Australia there is not a surplus of homes. There’s a shortage! Yes, median prices are higher in nominal terms and as a percentage of median incomes. But it’s different here. There are immigrants. And there are other things which guarantee house prices in Australia cannot fall. Surely.
We shall see. The principle here is roughly the same. You can bring forward demand through lower interest rates or grants and tax credits. But this does not make housing more affordable. It DOES get the marginal buyer into the market, though, and that supports prices for a while.
Eventually, house prices have to be realistic relative to incomes. In the U.S., that means prices are finding a clearing level that reflects tighter credit, the surplus inventory, and a lower median-price-to-median-wage level. In Australia?
Well, you’d think immigration was a slender reed to lean on. Besides, according to a recent poll, 66% of Australians want the Federal government to cap immigration. Not that the government usually listens to “the people”. But the point is: immigration can be capped.
In fact, the best reason to cap it is generally that a high-tide of immigration lowers average wages by expanding the work force. That might not be the case in Australia, of course. A growing economy creates jobs at all wage levels. And to the extent that Australia is imported skilled workers (to work the mines in WA and Queensland) the wages there are much higher than the wages in the rest of the economy (this pushes WA house prices into the stratosphere).
Our point, though, is that all of these are peripheral factors. Houses can’t be so expensive that people are unable to afford them on the average wage. You can try to bridge the gap with tax credits, grants, and lending schemes. But eventually, prices are going to fall.