What Effects Will The U.S Market Downturn Have On Australia?
- Thread starter Young_Investing
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Yes, I know about it, they are a good indication of where the economy is heading to and it is one of the main reason on why the RBA is going to cut rates.
On the other hand as was pointed out on this forum the builder and trader are still flat out with jobs and car producer are not based in australia (and after all having less car driving around might be a good thing for trafic and that consumer might put their money in better use like paying debt and credit card).
Today came out the trade balance numbers that are better then expected of 1.3 bil of positive balance. That is because of falling AU$ that increased the export value of resources denominated in US$ and import got quite steady that would mean a reduced import in US$ which I believe would probably lead to reduced retail sales and consumer-business spending in the future.
By the way have you checked the car retail sales in country like Europe or US? car makers would jump of joy to get Australian numbers over there
About which governor you are getting, in US there was quite a bit of different approach to economy, while Greenspan lower the rate to 1% for something around 1 year in 2002 fueling the house bubble, governor like Paul_Volcker that is a mith for having ended the 70's stagflation with high interest rates. THen you have King that over one year ago was heavily critizised for playing down the credit crunch in UK and pretty much he got right what was happening once the Northern Rock failed. Then you get Bernanke that I think he is doing ok but 2 years ago say the US house prices respect the US foundamentals and failed to see the bubble. Then you get politicians like Costello that I was reading today on The Age his view of how better is Australia banking system compare to US and how much better regulation you have in Australia
Then you get Swan that is a bit like King and keep saying how Australian foundamental are very strong
. I believe he won't be able to handle well a downturn in the Economy but I think that unlike Costello he would know his limits and would get good advising on what to do.Anyhow Glenn Stevens has been around as governor for 2 years and haven't had a thought he is an idiot from any of his interview and reports.
I agree with that, and the pain for years to come is the most likely scenario.
The reason of a more likely long pain then a sharp short pain is the good Australian budget and the possibility to run a deficit for the future. Countrys like UK at the moment run a deficit of around 4% of GDP (even more in the near future), Australia if necessary can do the same and that would mean an extra 40 bil$ availabe every year. That would be enough to keep the economy in a good shape and avoid house prices to have any hard landing.
Fianally I agree that last year the M3 increased too much in Australia, but this year is going to increase as well even if not as much as 20% despite the high rates. Also in Europe the M3 is increasing to reasonable level. That justify the RBA and ECB in setting their rates in the last year.
Just found this piece which I think offers excellent insight into the vulnerability of Aussie major banks to a downturn in property prices.
http://www.the-diplomat.com/article.aspx?aeid=8724
excerpt below
Don't put your house on it
Jeremy Thompson 27-Aug-2008
"If property assets on banks’ balance sheets were to fall sharply – be it houses or commercial property – the leverage ratios would rise even higher. That would encourage banks to reduce lending, something they are already intent on doing (despite their leverage ratios being much more healthy than their American or British counterparts).
Goldman Sachs estimates that just reducing banks’ current leverage from 18 back to a more acceptable 16 times would require credit to slow by $180 billion. If the value of their assets were to fall sharply because of a sharp property price fall, or because their bad debts continue to spiral – both the Australian and New Zealand Banking Group (ANZ) and the National Australia Bank (NAB) recently reported billion dollar write downs – then the credit taps could be turned off even more aggressively.
Australia’s stock of wealth is skewed more towards property than in the United States. The so-called “wealth effect”, where rising house prices give owners the impression that they are rich, encouraging them to consume more aggressively, is more applicable to Australia than America. Accordingly, a sharp fall in house prices would probably have a more depressing effect on consumer sentiment and the overall economy.
The total value of shares on the Australian Securities Exchange is about $1.5 trillion. The total value of Australia’s 8.3 million dwellings is $3.7 trillion. In the United States the value of houses and shares is more in balance. The stock market is worth $US15 trillion, while the housing market is worth about $US20 trillion. In the United Kingdom, the stock market is only about a third of the value of housing, which is over $9 trillion, and so a “negative wealth effect” would be felt more keenly.
Look closer and more than a third of the capitalisation of the Australian stock market is accounted for by the financial sector (including property trusts). These companies derive a substantial portion of their business from property lending. The conclusion? Australia is not so much riding on the sheep’s back as on the roof of stellar house prices."
http://www.the-diplomat.com/article.aspx?aeid=8724
excerpt below
Don't put your house on it
Jeremy Thompson 27-Aug-2008
"If property assets on banks’ balance sheets were to fall sharply – be it houses or commercial property – the leverage ratios would rise even higher. That would encourage banks to reduce lending, something they are already intent on doing (despite their leverage ratios being much more healthy than their American or British counterparts).
Goldman Sachs estimates that just reducing banks’ current leverage from 18 back to a more acceptable 16 times would require credit to slow by $180 billion. If the value of their assets were to fall sharply because of a sharp property price fall, or because their bad debts continue to spiral – both the Australian and New Zealand Banking Group (ANZ) and the National Australia Bank (NAB) recently reported billion dollar write downs – then the credit taps could be turned off even more aggressively.
Australia’s stock of wealth is skewed more towards property than in the United States. The so-called “wealth effect”, where rising house prices give owners the impression that they are rich, encouraging them to consume more aggressively, is more applicable to Australia than America. Accordingly, a sharp fall in house prices would probably have a more depressing effect on consumer sentiment and the overall economy.
The total value of shares on the Australian Securities Exchange is about $1.5 trillion. The total value of Australia’s 8.3 million dwellings is $3.7 trillion. In the United States the value of houses and shares is more in balance. The stock market is worth $US15 trillion, while the housing market is worth about $US20 trillion. In the United Kingdom, the stock market is only about a third of the value of housing, which is over $9 trillion, and so a “negative wealth effect” would be felt more keenly.
Look closer and more than a third of the capitalisation of the Australian stock market is accounted for by the financial sector (including property trusts). These companies derive a substantial portion of their business from property lending. The conclusion? Australia is not so much riding on the sheep’s back as on the roof of stellar house prices."
That is a good find WW,
I have being saying about that risk for the economy if AU home prices fall somewhat 20-30% in a calendar year.
I am not that keen on the valuation compare to the share market as company's can be listed or not listed, also company that are not based in US are listed in US or UK.
I like to point out other comparison like Australian population: it is somewhat 15 times the one of US that would relate the 3.7 tril$ of Australian houses value to 55.5 tril$ which is more like 44 tril US$, that is more then double the amount of the current US homes value. Also I believe Australian home owner debt is somewhat around 2 tril$ which would be equivalent of 24 tril US$ for US. Costello is saying Australia has no public debt so won't have tre trouble US is having, but US public debt is 10 tril US$, way less then the 24 tril US$ of a related private home owner debt
In any case a sharp downturn in the AU home prices is unluckily and for sure Stevens, Swan, Rudd and their advisor would try to avoid at any cost (which would be high inflation, budget deficit and lower AU$).
But I wouldn't still bet your house on it
Boz, have a look at the steepness of the drop in car sales.....12% decline in 6 mths...
Just BUMP into the latest car sales number in US: down 27% in september....
Yeah Boz, I was looking at the US car sales this morning. and it prompted me to check Aussie's. Agree with your points about comparing US and Aus property/share market split. My view is we are better putting more capital into companies that employ on a sustainable basis (not property), and keeping the cost of living as low as possible. That to me is the path to true wealth cos it means higher purchasing power and ability to do R&D etc. Expensive housing has a high opportunity cost and our current 31% foreign borrowing for mortgages sends a lot of capital overseas.
Good talking with you. You seem reasonably familiar with the macro stats and interpret them sensibly.
I am still trying to become better informed, and tie it all together...so the discussion helps me balance my views.
Would be nice to find some 'reasonably' user friendly economic models/games of economies that one could do whatif scenarios with. Instead of playing Sim city or whatever, people could be messing with their country's and the global economy's outcomes based on the most recent real world stats released. Gee you could even plug in which govt is in and its monetary and fiscal policy bias. Definitely get Joe Public more informed and put pressure on getting better politicians voted in.
Good talking with you. You seem reasonably familiar with the macro stats and interpret them sensibly.
I am still trying to become better informed, and tie it all together...so the discussion helps me balance my views.
Would be nice to find some 'reasonably' user friendly economic models/games of economies that one could do whatif scenarios with. Instead of playing Sim city or whatever, people could be messing with their country's and the global economy's outcomes based on the most recent real world stats released. Gee you could even plug in which govt is in and its monetary and fiscal policy bias. Definitely get Joe Public more informed and put pressure on getting better politicians voted in.
This is the concept I had in mind.
http://en.wikipedia.org/wiki/Economic_simulation_games
and this is what I was thinking of.....but tailored for Australia.....and how about a dumbed down intro version....with less variables....
http://fairmodel.econ.yale.edu/main.htm
http://en.wikipedia.org/wiki/Economic_simulation_games
and this is what I was thinking of.....but tailored for Australia.....and how about a dumbed down intro version....with less variables....
http://fairmodel.econ.yale.edu/main.htm
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Thanks,
I've been fiddling with the forex this year after I sold most of shares last year and got most of the money in boring 1-2 year bond in euroland. I would never thought I could be one of the 5% of forex trader that are not loosing money, but I am far from making a living out of it unless I increase the bets by 10 times that would bring a too scary positions of the order of mil$ and loosing or making 10k$ in matter of minutes
But the good thing is that you'll discover that even if you think to be good in handle emotions and things like greed and fear you'll discover you've got lot of improving margins. I' ve got much better in handling those, specially greed and admitting to be wrong with yourself and move on with it and do that fast (that was the hardest thing for me).
If you want to try you can get the main info in forum like this and get the real time charts from provider like this
I've messed around with fx trials before and I felt I'd have to have a better handle on economics, global finance, and trade relations. I found tech analysis a lot more unreliable due to volatility I couldn't come to grips with.
I came to the conclusion it would be safer doing momentum trades on the US stock market at no more than 4:1 leverage (more dumb money in the US markets
. That along with the influence of US share market on Aussie shares and finance led me to a US centric reading bias.I had also started trying to understand the source of Aussie credit because property prices depend on it more than anything else imho...debt serviceability is the bottom line.....I realized we weren;t the source (cos our savings are so low) and that led me to the dodgey increased leverage behind sub prime 2 years ago. I had also thought the Bank of Japan was the other source of cheap credit to Australia.
The markets certainly heighten the emotions. At the end of the day, best to have quantitative trading decisions that can be autmated. Turn on your entries and exits, and go to bed. You can mess around using discretion for both and end up making not much more (or less) and destroy your health with poor sleep and extra worry watching the screen...
great find - i'm not allowed to give you any more kudos though so i'll just say it instead.
re: this bit - Australians are also more closely tied to their homes than any other asset. Any australian can reel off the median price for their suburb. We aspire to own, not rent.
it is therefore more likely that a depression in housing prices will cause a depression in sentiment and a depression in the upward trend of a consumer based section of the economy, which is GENERALLY used to gauge general sentiment anyway.
yapyapyapyap
thx BC and Craig. I am doing my best to self educate. As I've said before, I reckon if we all do a bit of reading and research, we all end up better informed. Sure we'll all say stuff often that is dribble, but hopefully like a guided missile, others will get us back on target. So don't take my word for anything. Good healthy debate with others who are reading will benefit us all.
Meanwhile, Rudd obviously thinks the future could be so precarious that he confirmed a Keynesian stimulus (infrastructure spending) at COAG today.
As regards the question, as some of us have been saying for a year now, money will *continue* to be harder to get and remain expensive to buy.
Any enterprise or asset price significantly dependent on cheap, easily available credit is/will be negatively impacted.
Any economy dependent on consumer consumption fueled by increasing asset prices rather than production is screwed (see: US)
The highly geared punter dependent on pulling equity to maintain payments is in trouble.
Fear of recession will encourage the RBA to put downward pressure on rates (important point - downward interest rates moves are symptomatic of a faltering economy not of forthcoming good times)
Attempts by the RBA to move consumer rates down will struggle against the real cost of raising funds.
Overall, resi property prices will drop in real (inflation adjusted) terms over the net 2 years - some areas will still do well but many will see material drops ala Western Sydney post-2004.
As a general propostion, the pre-2007 credit low cost/ high availability experience will not be repeated. Those days are over.
Any enterprise or asset price significantly dependent on cheap, easily available credit is/will be negatively impacted.
Any economy dependent on consumer consumption fueled by increasing asset prices rather than production is screwed (see: US)
The highly geared punter dependent on pulling equity to maintain payments is in trouble.
Fear of recession will encourage the RBA to put downward pressure on rates (important point - downward interest rates moves are symptomatic of a faltering economy not of forthcoming good times)
Attempts by the RBA to move consumer rates down will struggle against the real cost of raising funds.
Overall, resi property prices will drop in real (inflation adjusted) terms over the net 2 years - some areas will still do well but many will see material drops ala Western Sydney post-2004.
As a general propostion, the pre-2007 credit low cost/ high availability experience will not be repeated. Those days are over.
It is also more likely that people will hang on to their house rather than sell at a loss, particularly with recourse financing. So the actual reduction in house prices in the first place is less likely. It really requires high unemployment to force house sales along...
Not saying it can't happen it's just a matter of likelihood.
HE, the act of prioritizing the mortgage over all other household expenditure, is what will threaten the economy and jobs moreso. People are already tightening on discretionary exp. With much more expensive houses in Oz and higher rates than US, Oz is more sensitive to:
a slowing economy
lower AUD (decreased imports -> decreased employment esp in retail),
tighter credit (no matter the actions of the RBA)
And I posit the Aussie major banks could get into trouble just by Aussies being afraid to buy homes -> values down -> bank debt equity ratio up.
Lets keep in mind that IR cuts are applied on a national basis but state economies differ. It is not improbable that Qld could boom while NSW wallows.
QandA are discussing the bail out right now. Am amazed at the lack of understanding by all, and point scoring by the left.................actually, no, I am not amazed
The most popular article read on our PropertyUpdate.com.au website last week was This stuff in America - is it going to affect me? by Jenna Ford
It's worth a read - click here to get an interesting perspective
It's worth a read - click here to get an interesting perspective
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