Thursday, 17 March 2022 — Albert Park

By Catherine Cashmore Editor, The Daily Reckoning Australia

[6 min read]

Dear Reader,

The recent floods in Queensland and northern New South Wales have had a devastating effect on the property market.

It’s estimated that more than 17,300 Queensland homes were affected by flooding in the most recent crisis. And 9,200 homes in the Northern Rivers region of NSW.

Historically, floods have the greatest impact on the Australian economy of any natural disaster. And the magnitude of this event could turn out to be the costliest natural disaster Australia has ever experienced.

Some analysts have suggested it could wipe 0.5–0.7% of annual GDP growth.

That would have to be balanced against reconstruction efforts as well as rising food prices from destroyed crops.

But whether we slip into recession or not, the effects on the back pocket of the average Joe in the regions affected, are going to be lasting.

Compensation payments for a lost crop or loss of income doesn’t insure against loss of output in the following years.  

We know some of what to expect from a 2021 study undertaken by Curtin University et al.

They analysed the effects on state GDP for 47 major floods and 36 major bushfires in Australia from 1978–2014.

Floods had the most devastating effect:

‘On average, a typical major flood in our study reduced a state’s output in the following sectors in both the year of the disaster and the subsequent year. The effects over the two years (compared to other states that did not have a disaster) were:

• ‘In mining, down 12.8% in the first year, 12% in the second;
• ‘In agricultural, down 5.6% in the first year, 6.2% in the second;
• ‘In construction, down 3.2% in the first year, 1.5% in the second;
• ‘In property and financial services, down 3.62% in the first year only;
• ‘In wholesale/retail trade, down 2.34% in the second year only; and
• ‘In recreation, down 2.93% in the second year only.’

As for the direct effect on property, a study from Queensland University of Technology et al. ‘Assessing the immediate and short term impact of flooding on residential property participant behaviour’ used data locally and internationally to conclude the following:

• ‘Sales listings fall immediately after the flood in the affected areas (but unaffected suburbs had no fall or increase in listings).
• ‘There was a significant decrease in the number of rental listings areas close to the flood affected suburbs.’

And significantly:

• ‘House prices could decrease by up to 17%, and in severe cases, values can take up to 10 years to recover to levels in non-flooded areas.’

Queensland property specialist Michael Matusik has also written an enlightening paper looking back at the effect of the 2011 Brisbane floods on the market.

It’s well worth a read — the charts are priceless.

He shows:

• ‘It took 33 months (or just under three years) for Brisbane house prices to recover to the same level they were in late December 2010.
• ‘Suburbs not affected by rising flood waters took 21 months, on average, to regain pre-flood price points.  Whilst it took, 54 months (4.5 years on average) in the flooded suburbs to recover.
• ‘Dwelling approvals fell for several years after the 2011 flood and there was an increase in the properties for sale, as some decided to sell rather than stay put and rebuild.  (In comparison listings are in decline today.)’

Putting this in context, the floods will of course have an immediate and lasting impact on the suburbs severely affected.

However, a few points to bear in mind here.

We’re at a very different stage of the property cycle compared to the last major flooding event in (2011/2012), which occurred in the first half of the real estate cycle (find out more here).

The second half of this cycle is extremely bullish for the smaller states by population.

South East Queensland has been capturing the lion’s share of population growth.

The state’s net interstate migration in 2021 hit its highest rate since 2005, with 31,000 new residents.

Vacancy rates in the flood affected areas are at decade lows.

In regional locations across Northern NSW and South East Queensland, the vacancy rate is close to zero.

Inflation and shortages of building materials, along with an increasing number of insolvencies in the development sector, will additionally put a hand break on construction and hit recovery efforts.

As such, established housing in non-affected areas will continue to fall under increasing high demand.

Add to this the opening of international borders, and it continues to be an overall bullish story for the South East Queensland and the regional property markets outside of those regions directly affected.

(Note: Regardless of what state or territory you buy in, it’s prudent to always check the zoning certificate to assess if a site falls in a flooding zone. The detail will be listed in the overlays that affect land and typically result in higher construction and insurance costs.)

Best wishes,

Catherine Cashmore,
Editor, The Daily Reckoning Australia

By Bill Bonner Editor, The Daily Reckoning Australia

Dear Reader,

Jerome Powell and his fellow Fed heads are hunkered down for their big meeting today and tomorrow. Caught between a rock and a hard place, the Fed has to decide. Consumer prices are rising at a politically uncomfortable rate — almost 8% per year. But the stock market is wobbly…and threatens to crash.

What to do?  

Nothing! Or as close to nothing as it can get away with. This week, the Fed will almost certainly announce a tiny 0.25% increase in its key lending rate…bringing it (adjusted for inflation) to MINUS 7.4%.  

To get our bearings, we note that if you’re going to stop price increases, you have to lend money at a higher rate than the inflation rate, not below it. An inflation-killing move equivalent to what Paul Volker did in 1980 would put the Fed rate at PLUS 10% — or 1,740 basis points higher than it is today. And if the Fed continues its baby steps to nowhere approach, raising the key rate by a quarter-point per trimester, it will take 17 years to get there…or until 2039. By that time, the dollar and the world’s US-dominated money system will be long forgotten.

‘Inflate or Die’? On a scale of 10, we rate the Fed’s chances to mount a serious fight against inflation at one.

Fed Chief Jerome Powell says he is just being cautious. What with a war going on and all…he didn’t want to introduce more ‘uncertainty’.

What to make of it? Sarcasm offers the only relief.

Gladiators, fight!

Elon Musk has proposed what must be the best solution to the Russo-Ukraine war. He challenged Putin to a ‘single combat’ to settle the issue:

It is absurd, of course. But it would be a great way to end the war. Imagine the box office! Billions could be raised from selling tickets to the event or online viewing. The money then could be used to repair the damage.

And if Putin wins, he gets what he wants without more bloodshed. If Musk wins, whatever he wants…well, who knows? But it’s not likely to be worse than what is happening now.

So far, no word from the Kremlin about whether the challenge has been accepted. So, the bombing, shelling, killing, sanctioning, and spending goes on…in Ukraine, in Yemen, in Afghanistan…and all over the world.

But why? Why is money taken from Americans to be used to kill Russians, Yemenis, or Afghanis? Why is money taken from Russian civilians without due process? (What kind of kangaroo court would condone taking money away from people who had done nothing wrong?)

Here at the Letter, money is our beat. Money is made by producing goods or delivering services — such as providing gas to Europeans — and thereby satisfying customers. But politics intrudes…and the money vanishes.

‘You’re either with us or against us’, George W Bush said of the War on Terror. There was no middle ground…no room for compromise…no other side to the story.

You’re either vaccinated…or you’re causing the ‘pandemic of the unvaccinated’, said Joseph Biden, even though vaccinated people — such as your editor — got the COVID too.

And now…even suggesting another side to the story marks you as a ‘Russian asset’.

Yesterday, the Financial Times cited the case of India. The fact that it has not come out four-square in favour of the ‘Western allies’, could ‘imperil relations with the US’.

Holy fantasies

This train is bound for glory; everyone is meant to get onboard. But getting on-board with the sanctions war against Russia means getting off-board with other fads and fashions of the elite. Until a few weeks ago, for example, fossil fuels were the devil’s work and investors were proudly displaying their contempt for weapons manufacturers.

‘A nasty business…with nasty clients…and nasty results’, we put words in their mouths. In the ESG (Environmental, Social, Governance) world, investing in energy or weapons was a no-no. Making the world a better place was the goal, even if it meant lower profits.

But now they’ve all signed on to the ‘Ukraine-as-Holy Land’ fantasy and suited up for battle. Suddenly, the war on CO₂ has disappeared from the headlines, and ‘defence’ is no longer a bad word:

‘“Ukraine is one of the most important ESG issues we’ve ever had,” said Philippe Zaouati, chief executive of Mirova, the $30 billion sustainable-investing unit affiliated with Natixis Investment Managers. “It’s a vital issue for energy and human rights, and questions whether we still want to live in a democracy or not.”’

Really? Is that what it’s all about? Is that what we’re fightin’ for?

Is democracy at stake? Is that the reason to switch from saving the planet to saving the Ukraine?

But Mr Putin has shown no sign of wanting to end the Ukrainian democracy; instead, he seems to want to increase it by allowing the Eastern provinces to elect their own leaders. As for the rest of it, he insists only that it remains neutral. Thinking strategically, he doesn’t want any NATO missiles hard against his southern flank. How this poses a risk to democracy, we don’t know. Was Mexico to announce that it was allowing China or Russia to put their missiles on the south side of the Rio Grande…how long would it take the US to launch an invasion? Mexico’s democracy be damned!

But that’s the nice thing about politics. Nothing is ever marked to market. You can believe anything you want. And since you can fool most of the people most of the time, you’re almost always able to get the yahoos behind you.

Alas, fooling people causes foolish people to do foolish things.

Tune in tomorrow for more on the foolishness surrounding us all.

Regards,

Bill Bonner,
For The Daily Reckoning Australia