Thursday, 7 April 2022 — Albert Park

By Catherine Cashmore Editor, The Daily Reckoning Australia

[6 min read]

Dear Reader,

0.2%!

I’m not talking about the interest rate on your savings account.

I’m talking about the vacancy rate (VR) in Adelaide as recorded by Domain.

According to the data agency, it’s the lowest recorded VR for any capital city since they started collecting records!  

It’s not much better elsewhere.

Nationwide, vacancy rates are at record lows of 1%.

To put this in context, it is often said that a 3% or greater VR is a rental market in ‘balance’.

In other words, there’s enough supply to meet demand without upward pressure on rents.

To be honest, I’m not sure how much data analysis sits behind that statistic. The understanding seems to rest on the assumption that a 3% VR indicates market equilibrium as prices tend to track the rate of inflation.

Regardless, in the face of the chronic rental shortages we’re experiencing right now, rent hikes are inevitable.

We’ve seen it already.

Regional NSW has borne the brunt of triple-digit rent increases.

Blairgowrie on Melbourne’s Mornington Peninsula has seen rents shoot up by 35.4% through the pandemic, while Rye and St Andrews Beach increased by 34.9%.

According to PRD Real Estate Managing Director Angus Murray in Perth:

‘We are receiving up to 1,000 enquiries for individual rental properties, whilst rents in the Perth CBD have risen 15 per cent in the last fortnight.’

A rise in rent in any location experiencing population growth triggers several inevitable consequences, accelerating gains in land prices.

For example:

• Rises in rents increases the amount the banks are willing to lend.
• It also pushes those that can to purchase rather than paying a premium to a landlord.

Balance this against a drop in the number of listings available on the market, and you can clearly identify the regions where property owners are going to benefit most.

SQM Research released its ‘Stock on Market’ data for March.

It registered a 1.8% rise in total for sale listings.

But significantly, both Brisbane and Adelaide have experienced a significant drop in listings annually.

Take a look:

Supply isn’t going to increase markedly anytime soon, especially with developers and builders putting plans for construction on hold due to acute shortages and rises in the cost of building materials.

Add to that increased pressure as the border opens and net overseas migration increases to 200K per annum.

As SQM Research Managing Director Louis Christopher points out, both cities continue to record ‘massive’ price rises. Although he warns that the election and impending rates rises may slow those gains:

‘The rise in listings over March will be welcome to home buyers who largely struggled for choice, last year.

‘However, we still have a shortage of stock in the market, particularly for Brisbane and Adelaide. Those two cities continue to record massive housing price rises as a result.

‘Going forward I expect we will shortly enter into a lack lustre period of activity in the lead up to the Federal Election. After that point there will be a looming interest rate rise for the market to consider.’

The market was nervous ahead of the election in 2019.

It came on the back of the royal commission into the banking sector and uncertainty regarding potential changes to capital gains tax and negative gearing.

Once the election result was clear, however, the market roared! It was a dramatic and sharp reversal to a significant market slump likened to the early 1990s. 

This election year things are different.

Neither party has any significant policies on the table to slow the market.

Buyers are still seeking yield.

Rental rises in areas such as Perth, where the median price is still less than $600K, will continue to attract money despite talk of increased lending rates.

Then we have news that property buyers have stashed record amounts of cash in offset accounts.

Put simply; an offset account is an account linked to your home loan, which works just like a transaction or savings account, often with a redraw facility. 

It enables mortgagees to offset the balance against the balance of their home loan, and only be charged interest on the difference.  

The savings can be significant, and the buffer protects in an environment of rising rates.

According to the AFR:

‘Residential borrowers have squirrelled away a record $232 billion in offset accounts — an increase of nearly 15 per cent, or $30 billion — in the past 12 months to reduce their interest payments and shorten loan term.

‘Financial advisers say borrowers with large amounts in their offset accounts should question whether they’d be better off using some cash to invest in equities, or buy an investment property…’

Indeed, I’m assisting some buyers right now that have done just this.

To sum up: Conditions continue to be bullish for the property market.

We have a few years to go before we hit an overall peak, in my opinion. To find out why click here!

Best wishes,

Catherine Cashmore,
Editor, The Daily Reckoning Australia

By Bill Bonner Editor, The Daily Reckoning Australia

Dear Reader,

Oh, to be as carefree…as optimistic…and as brain-dead as an American stock market investor!

By our reckoning, US stocks are about US$25–30 trillion overvalued. Typically, around 80% of GDP, the Wilshire 5000, which captures all US publicly traded equities, is now almost at 200%.

What would it take to drive investors away from the stock market? A tsunami washing over Manhattan? A nuclear war? The dead rising from their graves?

Already, there’s a war on…and one of the combatants has nukes in his arsenal. Inflation is already at 8%; it looks like it will hit double digits soon. The bond market has just delivered its most reliable recession signal — the dreaded ‘inverted yield curve’.

And the Biden team has just proposed the highest income tax rates in the developed world. Fox News:

‘The budget blueprint that President Biden unveiled last week includes several tax hikes on the ultra-wealthy and corporations that would push the top U.S. rates on both individual and corporate income to the highest level in the developed world, according to a new analysis published by the nonpartisan Tax Foundation.’

Hey…it probably won’t pass!

And now, the Fed is determined to stamp out inflation by raising rates.

Cometh the clouds

Higher interest rates will put the refinancing machine into reverse. Instead of refinancing debt at lower rates, debts will be refinanced at higher rates, causing the overall debt pile (and the economy) to shrink.

Many households and businesses will find that when the weather was fair and the going was good, they went a little too far. Cometh the clouds and they will be unable to refinance debt. Instead, they will default.

Far and wide…public, private, questioning…asset prices will go down.

Uh oh. You’d think that would make stock gamblers a little nervous. But no…here’s the head-scratcher headline from MarketWatch: ‘US Stock Futures Edge Higher as Investors Prepare for Steep Rise in Interest Rates’.

And here’s Larry Lindsey. MarketWatch again:

‘“I do think we’re going to have a recession, probably in the next quarter,” Lindsey said, in an interview on CNBC.

‘“Inflation is eating into consumer spending power, they’re going to have to cut back,” he said.

‘The former Fed governor also said the U.S. central bank was “nowhere close” on being able to control inflation.’

Among serious commentators (of whom, there are no more than a half dozen), the prevailing view is that the Fed will have no choice. After having recklessly goosed up stock prices for the last 14 years, the Fed must now reckon with its mistakes and goose them down.

• It pushed down interest rates far too low (below zero!) for far too long (almost 14 years).
• The phony and unnatural interest rates created a whole phony and unnatural economy that now depends on ultra-cheap credit.
• The ultra-cheap credit created a culture of rampant speculating and borrowing, which led to an Everest of debt, public and private — now about US$87 trillion, or roughly US$50 trillion more than in 2007.
• With so much debt, investors, business, households, and the government are desperate to keep interest rates low. To that end, the Fed has had to make more and more cash and credit available. It and other central banks added some US$25 trillion in new money since the Wall Street bailout of 2008–09.

All this easy credit and money printing has produced the inevitable inflation…made much worse by COVID shutdowns, trade barriers, and sanctions — especially against one of the world’s largest energy exporters, Russia.

All the world’s central bankers

And now…faced with double-digit inflation, what’s a poor central banker to do? He has no choice. Not in Europe. Not in Britain. And not in the US.

He has to take the knife between his teeth and climb the rigging. David Stockman:

‘…the fools in the Eccles Building will have no choice but to throw on the monetary brakes far harder than now planned or expected during the next 8 months. That’s because the inflation menace will be in their face via the “incoming data” at 8-10% on a Y/Y basis or higher, while the negative GDP of recession will not show up until Q4 2022 or early next year.’

All the world’s major central bankers — save for those in Russia, where the key lending rate is already 20% — are in the same boat. All followed the same course. All now find themselves on rough seas…

…and all must now batten down the hatches, take down the sails, and ride out the storm.

That would be the reasonable thing to do. That is what investors should expect.

But investors are still sans soucis. They are still comfortably ensconced in their deck chairs…enjoying the fading light and waiting for another drink. Whatever happens — earthquake…the third world war…plague — they still believe that Captain Powell will make sure that nothing bad happens to them.

And you know what? They may be right. This brave Ahab…on the high seas of high finance…may be just mad enough, weak enough, or just plain dumb enough, to turn a very bad situation into an even worse one.

More to come…

Regards,

Bill Bonner,
For The Daily Reckoning Australia