11/11/2010 - 00:00

Growth to overpower the housing surplus

11/11/2010 - 00:00

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Falling property prices in WA won’t last as the resources boom gets into full swing.

IF the Western Australian economy is growing at 7 per cent a year how can property prices be falling at 5 per cent a year? The correct answer is – they won’t be for long.

Property, particularly residential housing, is like any other commodity. It goes through periods of surplus and glut. Right now we are in a glut, a hangover from the building boom before the 2008 financial crisis, and the stimulus spending that followed.

It was the two years of uncertainty which followed the near-collapse of the Western world’s banking system that resulted in Perth piling up a surplus of housing, leading to today’s glut, which will take time to be eroded.

Listen carefully and you can hear the erosion taking place, as the after-effects of the crisis pass, global growth resumes and WA remains firmly hooked onto the coat-tails of rampant Asian growth.

Despite uncertainty about the new mining tax, and a fresh outbreak of Canberra versus Perth hostilities (our version of the 100-year war), demand for WA’s commodity exports has never been stronger. Project investment is expanding rapidly and unemployment falling.

The only blot on this landscape of growth is the residential property market, a situation that will fade from next year as today’s surplus is absorbed, at discount rates, and the state’s 7 per cent annual growth overpowers the housing surplus.

This scenario is not wishful thinking. It is in the night-follows-day category, and just as easy to predict as further falls in the value of the US dollar, thanks to the government in that country printing more dollars when there are already too many in circulation.

What the Americans are doing is undertaking the world’s greatest sovereign debt default. By printing vast amount of new dollars they create a massive surplus of the stuff, causing a fall in its value, and then repay their debts in devalued dollars.

China is the biggest victim of this dollar devaluation. The estimated $3 trillion of US debt it acquired throughout the 1990s and earlier this century is now worth about one-third less than the purchase price on conversion to any other mainstream currency – and about half the original $3 trillion on conversion to gold.

If all that sounds as if it has nothing to do with Perth residential property then you should take a closer look, because both the US dollar and the local property market have much in common – a surplus equals lower prices, a shortage equals higher prices.

For anyone invested in Perth property, or thinking about it, the question then becomes one of ‘what next’, with the answer being watch how quickly the surplus gets absorbed by the 7 per cent economic growth rate.

Even if you can’t see it happening now the effect of the resources boom is being felt in property, starting with the shrinking of the surplus built in the past two wilderness years.

If you had to pick a time when WA’s overall growth accounts for the residential property surplus, the two-year figure is a useful starting point. Two years of crisis requiring two years of normality.

The tricky bit is picking the start date for the return to normality and a reasonable guess for that is earlier this year, making early 2012 as a starting point for the next property boom.

However, if you accept that logical two-year progression from boom-to-bust-to-boom then it’s also reasonable to expect speculators re-enter the market in 2011, with mid-year a likely starting point for the early birds.

Until then, it will be a wonderful buyer’s market with sellers advised to hold off, if they can.

Tough times for CITIC

HOW do you turn an already red face a deeper shade of red? Well, in Beijing you ask questions about the CITIC Pacific iron ore processing project in WA – but only if you’re feeling courageous.

No-one, not even the chaps in charge of the world’s only example of free enterprise grafted onto communist roots, can explain what’s happened at the Sino Iron project, or dare get too close to the problem, which has the potential to become an international incident.

Undeterred by diplomatic niceties, Bystander’s explanation is that the people in charge of the $5 billion development (ho, ho, ho – $7 billion more likely) simply under-estimated the cost of building in the Pilbara.

If the CITIC project had been a development by a company from anywhere else there would already be a call for extra capital, or extra bank finance, or for the receivers to take charge.

China, however, does things differently and right now there is a huddle of mandarins in Beijing as the political masters sort out a mess created by their free enterprise cousins in a foreign country.

Meanwhile, the clock is ticking at the project site and in the WA Supreme Court, where angry local creditors are demanding payment for work done, or the winding up of Australian-based subsidiaries of Chinese government-controlled firms.

Calm heads will sort the problem, but if they don’t Cape Preston could become the graveyard of yet another attempt to process WA iron ore in WA – joining two pellet making plants, Rio Tinto’s HIsmelt and BHP Billiton’s hot-briquetted iron project.

Fishy thinking

AN early nomination for stunt of the year goes to a collective of jewellers, including Tiffany and Zale, who say they will refuse to buy gold from an Anglo American mine in Alaska, which might threaten a salmon fishery.

What utter nonsense. As if anyone is going to distinguish between bars of gold, and as if the customer cares, as wonderfully demonstrated a few years ago when the same boycott rubbish was threatened over blood diamonds from darkest Africa.

While the world media lapped up the public relations spin Bystander, who was in New York at the time, went to the trouble of asking at the Tiffany diamond department (fourth floor from memory) whether the gems on display were certified to not be blood diamonds.

The answer from the man actually selling the diamonds was memorable: ‘What are blood diamonds’.

A question for the next Tiffany visit: ‘Is the gold salmon friendly?’

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“Prosperity is only an instrument to be used, not a deity to be worshipped.”

Calvin Coolidge

 

STANDING BY BUSINESS. TRUSTED BY BUSINESS.

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