Australia’s amazing housing market: Kohler

Housing in the United States, China and Australia is a repeat of the story of Goldilocks, when she tasted the three bears’ porridge: China – too hot; America – too cold; Australia – just right.

Tomorrow, Rismark and RP Data will release their latest monthly house price indexes for May, and the early indications from RP Data’s Tim Lawless and Rismark’s Chris Joye are that they will show another rise.

The first four months of 2009 have already seen 2.8% growth, according to their numbers. The growth, it seems, has continued into a fifth month.

The strength of the housing market is why Australia’s recession is relatively mild. The global downturn is basically a housing crash that morphed into a credit crunch, but that simply did not happen here.

Meanwhile in the US, house prices are still falling because rising unemployment is now feeding through to higher foreclosures, and in China there are growing concerns about a housing bubble fuelled by excessive lending.

According to the China View website, a leading Chinese economist, Cheng Siwei, told a forum in Zheijang Province over the weekend that bank credit extensions in the first quarter represent 90% of the annual target.

He said some of this money has been channeled into stock and property speculation. Another economist at the forum, Gao Qinghui, said investment demand was creating a property bubble in China.

Fitch Ratings has issued a report in which it warns about what’s going on. I haven’t been able to track down the report itself, but over the weekend Ambrose Evans-Pritchard writing in the London Telegraph reported that Fitch said bank exposure to property is rising at a rate of 30%.

He says China’s regime is so “hell bent” on achieving its growth target of 8% that it has given an implicit guarantee for what Fitch calls “a massive lending spree”.

“Fitch traces the 2009 bubble to the central bank’s decision to cut interest on reserves to 0.72%. Bankers responded to this “margin squeeze” by ramping up the volume of lending instead. Over half the new debt is short-term. Roll-over risk is rocketing. China’s monetary stimulus since November is arguably more extreme than the post-Lehman printing of the US Federal Reserve, though less obvious to the untrained eye.”

The US on the other hand is stuck in a negative feedback loop resulting from the collapse of its own housing bubble. Banks stopped lending to each other in 2007 after the bubble ended because of concerns about mortgage defaults; that caused a recession which has taken unemployment to more than 9%; house prices are falling because of that recession.

Harvard’s Joint Center for Housing Studies said last week: “Although there are some signs of improvement or at least steadiness in new construction and sales, housing starts stand near 60-plus year lows, and any life in home sales is coming from distressed foreclosure sales, temporary first-time buyer tax credits and low interest rates that moved higher in recent weeks. The best that can be said of the market is that house price corrections and steep cuts in housing production are creating the conditions that will lead to an eventual recovery.”

In Australia the porridge is just right.

If you look at all the various indices, house prices in this country have fallen 4-5% in the year to March and have since started rising again. It’s even possible that the Rismark RP Data numbers tomorrow will show that most, if not all, of the fall has been recovered.

And even a relative economic pessimist like me can see that there is little reason in the short to medium term for house prices to start falling again: thanks to last year’s big interest rate cuts, housing affordability is near a record high (that is, most affordable); population growth is the highest in 40 years; developers are having trouble getting finance, as well as land, so there is a shortage of supply.

Against that, prices at the top end have fallen more than the medians and remain soft. And unemployment is likely to keep rising over the next 12 months at least, which is likely to restrict both finance and housing demand.

So far, so good. But remember: Goldilocks’ mistake was falling asleep in the just-right-bed, having eaten the just-right-porridge.

This article first appeared on Business Spectator.