Analysis: up and away for the dollar and Perth property

Unless we have entered a parallel universe where economic forces work in reverse there really is only one way for the Australian dollar, and Perth property prices to go, and that is up.

The dollar, because it is becoming increasingly clear as to which way money is flowing internationally. Perth property, because it is clear which way money is flowing inside Australia.

Yesterday’s optimistic property price tips from the forecasting firm of BIS Shrapnel was in line with something I predicted about three years ago. Wrong then. Right now – with apologies to readers for being a premature property tipster.

What Shrapnel sees is precisely what I saw, a flow of money and people from east to west, driving up rents, with the underlying asset value following.

The three-year time delay can be explained by a fresh outbreak of global (Euro-phase) uncertainty, deep disquiet about decisions taken by the Australian Government which seem to be a direct attack on WA, and the reluctance of workers in the east to take up jobs in the west.

The logjam which held up the inevitable avalanche appears to have broken, though Shrapnel has surprised with its tip of a 22% rise in Perth’s median house price over the next three years, triple the Adelaide growth rate and an almost unbelievable seven-times the Melbourne growth rate, and a totally unbelievable 22-times faster than Canberra’s 1% growth rate.

However, if the boffins at Shrapnel have got it right then the Australian property market will soon reflect the state of the respective State-economies (which it should), with fast growth in the west and north, and stagnation in the south and east – which will be a major challenge for whichever political party wins the next federal election.

On the international scene, the flow of money and its effect on currency values is also predictable, but made more interesting because of recent events.

Last week, as the Australian dollar hovered around parity with its U.S. cousin (the cross-rate most closely watched) the rate against the increasingly sick European currency, the Euro, was entering headline-making territory with parity perhaps not far away.

At a rate of 80 Euro cents to the dollar, the Australian currency has risen by a spectacular 33 per cent over the past 30 months, easily outstripping the 12 per cent rise against the U.S. dollar where most of the increase was achieved several years ago.

Against the U.K. pound, the rate widened again last week to 64-pence to the dollar, taking the gain over the past five years to precisely 50%.

Little wonder that Australians are indulging in that long-delayed European vacation – or that exporters outside the mining and petroleum sectors are suffering.

Can the Australian exchange rate continue to rise? That is a question being asked everywhere, and right now (subject to change without notice) I believe the trend will continue with Euro parity a possibility over the next two years, and pound parity over the next five years.

The reason for that bullish forecast is for exactly the same reasons Shrapnel can see Perth property prices dramatically outperforming those of Melbourne and Canberra – the flow of money.

The recent events which boosted optimism about the exchange rate can be condensed into two numbers; minus-$100 billion, and plus-$5 billion.

The $100 billion is the size of the bail-out fund requested by Spain because its banking system is broken, though who creates the desperately needed money (coming on top of desperately-needed rescue funds for Greece, Ireland, Italy – and perhaps France) is a very serious question because the Germans have just about had enough of other European nations which refuse to slash their bloated welfare systems.

The $5 billion is the amount almost casually rolled out by BHP Billiton ($800 million) and Rio Tinto $4.2 billion) on coal and iron ore project expansions in Australia.

What could be more stark! Another European country calling in the German bailiffs v another round of resource project expansion in Australia to help meet Asian demand for raw materials.

The trend will continue, though perhaps at a slower pace as commodity prices slide (but don’t crash) and Australian construction and operating costs continue to rise.

In a nutshell, last week’s events told the exchange rate story. Europe going broke after decades of living in a fool’s paradise v Australia sucking in capital, with some of that capital coming from rich European investors keen to get their money into a growth environment.

Naturally, these trends can reverse with Australia risking a lot with its current social welfare and tax settings.

Right now, however, enjoy the trend of rising property and a rising exchange rate – or, to twist an old saying, make hay while the dollar shines.