4 April 2020
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Switzer spotlights Spitzer's shocking property scenario. Will we be saved?

Peter Switzer
29 July 2019

Those hoping for a house price Armageddon wouldn’t like the AFR’s weekend headline that “buoyant buyers boost property sales” and that the auction clearance rate is up 40% compared to this time last year.

But those who ‘know’ that no economy escapes a bubble in the housing market, especially when the household-to-debt ratio is the second highest in the world, would be arguing that it’s only a matter of time.

That said, how long must the non-arrival of a huge house price collapse of say 40% go on before these ‘Armageddoneers’ say: “Hey, maybe Australia is different and/or this time is different?”

If you want to understand why an army of haters have it in for the Reserve Bank, Treasury and the rival army of mainstream economists (who think the doomsday tribe are bush economists or DIY economic theorists), put aside some time and read the excellent research work by John Spitzer.

You can check it out here. And if you’re easily scared, read it with a tough friend or family member.

For Australia and the banking system to escape a serious fallout from the mountain of debt, we have to see economic growth rebound, the negative wealth effect from the fall in house prices reverse, unemployment fall and a recession dodged.

By the way, that’s why the RBA cut interest rates and ScoMo went for tax cuts. And the higher minimum wage will help. Easier bank lending should add to demand so we have to hope that growth picks up. But don’t expect this to happen with the next reading that comes out in September.

This will be the June quarter number, which has the negative economic effects of Bill Shorten’s policies threats and the negativity that elections bring.

We won’t actually get the official view on the economy now until early 2020! So we’ll have to try to make a call on the data as it’s revealed over the next three months. If the economic snapshot looks as bad as John Spitzer and his ilk suggest, the RBA Governor, Dr. Phil Lowe, will cut again.

If that happens, then the chances of the ‘Armageddoneers’ being right shorten. Being right might have some cred in the Twitter debating fraternity but how we invest, buy or sell assets if they’re inevitably right, is a more important issue.

You see, Steve Keen argued a lot of John Spitzer’s stuff but no house price collapse here happened, as the central bank and the Government threw the switch to “bailout time.”

Keen says the house price collapse causes the recession rather than the recession turns a house price correction into a full-blown crash. Meanwhile, Spitzer builds a huge case for showing that if we can trust history, then we’ll be cooked because “it’s never different.”

However, to keep the debate going, as I like to do (as I’ve always liked the British poet William Blake’s take on life that “without controversy, there is no progress”), let’s see if there are a few issues that haven’t been covered by Spitzer. There are some differences between the housing /banking collapses of Ireland, Spain, Iceland and the USA.

First, apart from their own excessive commitment to home building and lending, there was a “big short” problem, where the debt rating agencies misled both financial institutions and investors about collateral debt obligations. This led to a total distrust of banks for other banks, which made the GFC predicament harder for all banks but more so those who were too-exposed to debt and the housing sector.

This kind of global banking credit crunch is currently not in sight but I guess those infernal ‘black swans’ can come out of nowhere.

Second, interest rates were nowhere near the low levels they are now. On that score, Mr Spitzer has to accept on this criteria that “things are different this time.”

Alex Joiner, economist with IFM Investors, has shown a chart that reveals how these really low interest rates not only help debt servicing but actually make properties relatively cheaper.


Note how the red dotted line is above the red line, showing that lower rates actually make houses more affordable, which shouldn’t surprise anyone. But it implies a house repayment issue and its impact on wealth and consumption is eased with lower interest rates.

Third, even Steve Keen doesn’t think the US economy is heading into recession, which was a big shock to the global economy in the GFC. This could be another plus that will help us dodge a house price collapse recession.

The objective commentator has to concede we are in a bit of a property pickle. However to fatalistically say we have to have an economic collapse defies our own history. The fact is that with most potential economic crises we do muddle through and extreme alarmists are often shown to be exaggerators.

Does anyone remember what the likes of the very bright historian, Niall Ferguson, was telling us about the GFC? This is what he told CNN in April 2009 to the question: Is a depression still possible?

“It is. The Great Depression was initially a U.S. financial crisis. But what made it a depression was its global contagion, and then the breakdown of trade and the retreat into protectionism. All of that can happen. All of that is in fact happening with terrifying speed. Countries have started to use protectionist language, whether it's “Buy American” or “British jobs for British workers.” 

I remember his scary predictions because I was on commercial and ABC radio and TV saying that the economic policies created to rescue Australia and the USA were likely to be successful. Europe was slow to the rescue party but eventually got on board.

I know a stock market crash will happen one day and trigger a recession, which we won’t dodge this time but I bet it’s still some time off. And I’m betting because I’m long both property and stocks.

PS: One subject that I totally agree with John Spitzer is his love of the Sydney Roosters and Big Artie Beetson!

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