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  • Writer's picturePete Jonson

Sunday Sanity Break, 14 January 2018 - economic outlook

House prices in Australia have stabilised, on some measures falling, certainly soggy on Australia's East and South-east coasts. Mrs T is watching in Melbourne prices closely and can quote examples of houses that fail to sell at auction, then get listed at still high prices and then are sold one or two hundred $s lower than the listed price. This is a great change from selling at auction $500 K above the listed prices. (Interest here is in the $1 M =/- $200 K range.0

Mrs T says it will be time to buy in six months or so, but recalls when we purchased during the recession the problem was supply, which many sellers going to ground. Now of course a much higher number of people with mortgages are already at a point of 'extreme pain' and will be forced to sell.

The Aussie dollar is again going through a period of strength, mostly due one assumes because commodity prices have been higher than expected. Another reason that we consider a tax on capital inflow. US cash rates of interest are now (due to recent rises) about Aussie levels. With US cash rates currently due to rise further this year, with just one possible rise from Martin Place, the Aussie should be falling and some experts expect a big fall in the mighty Aussie.

Globally, the asset inflation story is still about shares. Despite slowly rising interest rates in the USA, share prices keep on rising. This would very likely to have continued if Janet Yellen had still been US Fed chief, but her replacement, Jerome Powell may have different thoughts. But if he keeps to the Yellen playbook that he supported before being nominated there should be three more 25 basis point increases in US cash rates in 2018 and this should finally be able to at least begin to take some air out of the share market tyres.

Monetary policy cannot serve two (or three) masters. US prudential policy is meant to quall increases in US share prices, but rising cash interest rates will provide supporting policy. In Australia, cash interest rates are focussed on consumer inflation on the grounds that will keep the overall economy in reasonable shape. APRA's prudential policy is supposedly focussed on house prices, and recent APRA efforts have reined in bank lending for housing.

A third issue, an uncomfortably high exchange rate, needs a third policy. In 2013 this was recommended in one of Henry's articles in the OZ, linked here. So far the Aussie dollar has remained uncomfortably high, limiting Australia's international competitiveness, with no policy response except some feeble attempts to limit overseas (Chinese) house buying.

So it is beginning to look like a difficult year. Strong labor markets in both the USA and Australia are confusing officials, politicians and most journos. Strong growth of jobs is a result of unusual wage restraint, with wage restraint due to workers (and households) fears about their lack of market power. This means fear of job losses, with labor markets far more fragile than official estimates of numbers unemployed.


Fiona Prior mingles with mermaids at Sydney Festival’s Aquasonic. More here.

The sporting life

The test cricket ended with a 4 zip win over the pestiferous poms. Now there is a slight lull with only the ludicrous 'Big Bash' cricket to disturb us. But the bigtime tennis is about to start and loss of several bigtime players give Roger Federer a chance to add to his room full of trophies. Some hopes for young Aussies who have done well in satellite tournaments.

Soon the AFL will be starting its practice matches and naturally Henry will be rooting for Caaaaarlton! and providing clear-headed, if hopeful, comment.

Henry wishes all readers a happy and profitable new year.

Image of the week - Dream home for a young person

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