China’s housing keeps housing us

The hardcore gold bug brigade are so keen to push the idea that the global financial system is doomed and that gold is only thing in the world worth having that they twist and ignore facts with wild abandon.

It’s bemusing to see an idea take root and flourish in economic commentary when it doesn’t necessarily agree with the facts – the web has a lot to answer thanks to the ability to search, copy and paste.

Most often, it’s not economic “commentary” that’s to blame, but economic “barrow pushing” or simply mad and doctrinaire raving that latches onto an idea and then pursues it by ignoring evidence to the contrary and searching out and bending any factoids that support it.

The hardcore gold bug brigade are an easy example – they’re so keen to push the idea that the global financial system is doomed and that gold is only thing in the world worth having that they twist and ignore facts with wild abandon.

Doom and gloom

There are other less obvious cases though that seep into the collective memory unless challenged. For example, the idea that there is a lethal housing bubble in Australia and China that spells doom for our economy. These are important ideas to understand, so please bear with me as I deal with both of them by stealing the hard work of others.

There have been some credible and high-profile proponents of the Australian bubble argument – and some less credible. In my opinion, Dr Steve Keen falls into the latter category – he’s the fella who predicted Australian housing prices would collapse by 40 per cent and that we’d have 20 per cent unemployment.

That probably made him Australia’s most famous economist for a little while during the GFC when he was given uncritical free runs on the likes of 60 Minutes and the 7.30 Report. He was also demonstrably wrong.

Easy headlines

In the former category can be found the Economist magazine and, perhaps, British fund manager Jeremy Grantham who visited Australia last month and picked up some easy headlines by declaring a local housing bubble. The Economist made its case a few years ago, based on the idea of housing affordability, that Australian houses cost a higher multiple of disposable income than most other countries.

I suspect Grantham had picked up the Economist idea and run with it, but the situation isn’t nearly as simple as that – particularly if you get the facts wrong in the first case.

There are two essential parts to the question of whether Australia is suffering an unsustainable housing bubble. One is a simple matter of supply and demand – have we over-built housing thanks to a speculative investment boom the way housing was overbuilt in the US, Ireland, Spain et al?

Over-gearing

The answer to that is easy: no. We have a shortage of housing, we’ve underbuilt. Our investment in housing, as a percentage of GDP, has been pretty much flat for the past six years despite record population growth. That’s the main reason housing prices have risen.

The second part is the more complex issue of affordability, the bit the Economist and Grantham latched onto. The question there is whether Australian households are over-geared and thus riding for a fall.

And the good news there is that the over-gearing argument was comprehensively debunked by the Reserve Bank deputy Governor, Ric Battellino, in a speech last month. You can read the whole thing on the RBA web site here and then you won’t be easily fooled by headline-seeking alarmists.

Can we handle what we owe?

The RBA wouldn’t like us to gear up much more, but the Martin Place mandarins are pretty confident we can handle what we owe the banks now.

Grantham’s claim copped particular attention from Christopher Joye, managing director of Rismark International – a pro-housing investment research house – in a piece he had published in Business Spectator recently. Joye took some joy (sorry, I couldn’t resist it) is showing Grantham’s base figures were simply wrong, as well has quoting Battellino’s paper.

But Joye’s slap at Grantham was just a sidebar – his real target was the persistent allegation of a housing bubble busting in China. You’ve no doubt seen the stories or at least heard mention of dramatic collapses in Chinese residential real estate prices with the Doomsday Brigade using that as an excuse to forecast a crash in the Chinese economy that would flow through to Australia via commodity prices being smashed.

The Australian perspective

Turns out that isn’t quite the case. It’s symptomatic of the poor understanding of China that some people think China is Shanghai and Beijing. No, there’s a great deal more to it than that, as Joye makes plain.

More specifically from an Australian perspective, South Africa’s StandardBank commodities researchers have had a good look at China’s housing from the point of view of demand for commodities. StandardBank’s Walter de Wet finds some concern about the eventual sustainability of China’s rising house prices as prices are rising faster than the growth in median incomes (but not average incomes).

But that unsustainability fear is at the higher end of the housing market – not the base load that reflects China’s continuing urbanisation and industrialisation. De Wet puts it thus:

Onwards and upwards

“From a metal demand perspective, we look at Chinese housing market from a different angle than the US housing market. Prices fall for two reasons: either demand must decline, or supply must rise. Short-term demand may slow due to government measures to cool property speculation in China. But unlike many developed markets, urbanisation continues rapidly in China.

“Therefore, total demand for housing in China’s cities will remain healthy; especially lower income housing. If demand grows, then supply must rise (especially lower income houses). This is bullish for metal demand.

“We acknowledge for existing home owners (likely to be high income earners), there could be a negative wealth effect if house prices fall. In our view, this would affect final consumption expenditure more than primary metal demand.”

The bottom line

So don’t believe all the simplistic scary headlines you might read – the real story, as backed by the RBA and Treasury, is that China’s fundamental demand for bulk commodities remains in place for some years yet.

China’s housing keeps housing us by Michael Pascoe posted on Jul 09 08:27am

http://au.pfinance.yahoo.com/b/michael-pascoe/1112/chinas-housing-keeps-housing-us