Australian Housing More Unaffordable in 2010

The Daily Reckoning

Whoa nelly!

Let’s clear something up before we get any further into today’s reckoning. Yesterday’s letter closed with this cryptic comment, “But what’s bad for shares might, just might, be good for housing.” We didn’t elaborate. And some readers wrote in asking if we’ve become property bulls all of a sudden. Nope.

Australia is a two-speed asset market. Aussies speculate on houses AND shares. From what we’ve seen in the last four years, the investing public is convinced that if you can’t make money in the share market, you just turn to the property market and everything will be fine. This isn’t true. But it IS the sort of thing that could support house prices in 2010. And they’re going to need it.

2009 was a great year for existing homeowners. Nationally, prices were up 11.3% through the first eleven months of the year. Sydney prices were up 11.6% and Melbourne prices soared nearly 17%. That’s going to be tough to replicate, especially when interest rates are set to rise and the first home buyer’s grant has expired at its elevated levels.

But all that skirts the issue. Housing affordability didn’t improve one jot or one tittle last year. Australian housing became more unaffordable than ever. Yes, yes, the Reserve Bank says just the opposite. But it says so based on the presumption that access to cheap credit is what makes buying a home affordable.

We use a more conventional measure: the average home price. It’s rising a lot faster than inflation-adjusted wages. Unless you’re willing to saddle yourself with massive debt (encouraged by the government) you don’t gain any exposure to rising prices (supported by the government). In our view, it’s a financial risk well worth avoiding.

Not that shares are inherently safer. Housing price adjustments happen over years. Share market adjustments happen a lot faster. Right now the Aussie indexes are trying to crack 5,000. We poked our head in the trading room yesterday to see what the trading guys had to say. They are market neutral and have trades on both sides of the ledger at the moment.

A couple of interesting things happened yesterday, though. First, February gold futures went up by over $22 and two percent to close at $1,118.10. Gold closed up $218 in 2009. It was a 24.8% gain for the year. In nominal terms, it was a smaller rise than the $286 gain in 1979 and in percentage terms it was smaller than the 31% rise in 2007.

But gold has closed higher nine straight years in a row. That made it a pretty good “trade of the decade.” Bill writes about it below. But his question, and the one we take up now, is whether buying gold and selling stocks is the best trade of the NEXT ten years.

Well first, we wouldn’t count gold out yet. In fact the whole precious metals complex had a stellar year. Silver finished 47% higher. Platinum was up 58.7%. And palladium was up a hearty 200%. Those are great numbers. And with stocks, you have even greater leverage to rising commodity prices. But obviously the question remains: are those numbers the sign of a top?

To be brief, no. Gold gained against all major global currencies over the last ten years, not just the U.S. dollar. The evidence is in the chart below from our friend Adrian Ash at www.bullionvault.com . Commodity currencies, high-saving countries, managed floats, large debt-to-GDP ratios…none of it mattered. Real money beat paper money over the last ten years, hands down.

Gold vs. Major Currencies over last 10 years

Source: www.buillionvault.com

Speaking of gold, the black kind-oil futures crossed $81 in New York futures trading. It’s hard to argue that energy prices are going higher if you think the global economy is contracting (or will contract). But because of its relative scarcity (and higher extraction and production costs) we like energy as one of the best investments of the next decade.

Oil’s one day gain was 2%. And with the northern winter settling in, you’ll have your usual mix of demand for fuel oil and heating oil and refineries struggling to get the mix right. At a 15-month high, it’s hard to blame this recent price surge on futures speculators. So what should investors do?

According to business analyts IBISWorld, have a look at fast growing industries. Oil and gas should be on your list. IBISWorld says world oil production will decline in 2010, according today’s Australian. “The firm’s general manager (Australia), Robert Bryant, said: ‘This[decline] will be more than offset by a rise in natural gas production, seeing the sector post 13.8 per cent growth in 2010 to $37.3bn, generating a 3.5 per cent increase in employment.’”

“‘In the coming year, Australia’s oil and gas industry will benefit from higher international prices, increased production volumes of natural gas from existing fields, and the development of new fields.’”

Ah yes. All apparently good news. Conventional and unconventional gas projects featured prominently in last year’s stock picks in the Aussie Small Cap Investigator and Digger and Drillers. They’ll probably feature again this year, but at the more speculative end of the market (not up at Woodside’s). But even energy stocks are exposed to a China bubble, about which more tomorrow. Until then!

Dan Denning
for The Daily Reckoning Australia

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