For a few weeks in late January and early February, stock markets suspended belief. Pundits on every channel emerged, suggesting a small economic dip followed by a massive stimulus package meant it was time to bid expensive stocks even higher. Meanwhile, in the real world:

  • Earnings growth had already stalled.
  • Valuations had reached lofty heights not seen since the tech wreck of 2000
  • Coronavirus was unchecked outside of China. Cases were doubling every few days.
  • Lockdowns of the Chinese economy threatened supply chains around the globe.
  • Travel bans on students and Chinese travellers threatened revenue in oil, tourism, restaurants and education across the world.
  • Corporate debt, at record high levels, continued to be ignored.

The attitude was that the share market was bullet-proof, the Fed had its back and that all investors had to fear was fear itself.

In our portfolios, we had assumed the brace position. Then we spent four weeks peeking between our fingers wondering why we hadn't crashed yet. It was a Wile E Coyote moment for share markets:

Picture via Vox

The boom had run out of road. It was suspended in mid-air waiting to fall.

Now it is housings turn

Australian housing is contending with its own Wile E Coyote moment.

Auction clearance rates are in the 80s. Prices are rocketing upwards despite a surge in listings. Real estate agents are wondering if it is once again a sign of failure to be seen in a 5-series Beemer rather than a 7-series.

Pundits on every channel have emerged, suggesting a small economic dip followed by a massive stimulus package means that it is time to bid expensive houses even higher.

Meanwhile, in the real world:

  • Central banks around the world are cutting rates to try to get in front of a looming economic shock
  • Corporate debt markets are shut. Corporate debt levels are at record highs. Corporate interest rates are spiralling higher. Supply chains have been smashed for manufacturers. Demand has been smashed for services. The probability of a corporate debt crisis is high.
  • Coronavirus lockdowns are circling the globe. There is no short term fix.
  • Even the "economy is doing great" Australian government is preparing the biggest fiscal stimulus since the financial crisis to fight off looming increases in unemployment

The attitude is the housing market is bullet-proof, ScoMo has its back and that all investors have to fear is fear itself.

I get it. Banks had the debt hand-brake on in 2019 as a Royal Commission demanded they lend responsibly. But in 2020, egged on by the Treasurer and APRA, the banks were falling over themselves to get back to the irresponsible lending of the 2012-2017 era. The boom was back, baby!

Unemployment holds the key

But, as much irresponsible lending as possible won't increase house prices when unemployment starts rising. Perth showed us that during the same 2012-17 period:

We posted a housing return calculator here a few months back. The overall conclusion was that after entry and exit costs, it was going to be challenging to beat the cost of debt under the best circumstances. Circumstances are not going to be the best.

They are looking awfully like the worst.

The government response

A globally co-ordinated massive fiscal stimulus might change my mind. But in the current fractured political environment, I'm going to file that under "I'll believe it when I see it".

Our regulators, governments and central bank have wasted most of the good policy options in a desperate attempt to hold and already expensive house market at high levels. Now we have a genuine external shock, most of the remaining policy options are bad ones.

I have no doubt our housing-obsessed government will try many of those policy options. But they won't work.

Housing booms don't normally finish because governments want them to. Booms usually end in spite of governments (captured by vested building interests) doing all they can to extend the boom.

The most likely outcome is the same here. The real unknown is how much longer the housing market will levitate before realising there is no solid ground underneath.

Patrick Fresne

When you run the ruler over the covid-19 cases on a country and regional basis, there seems to be a curious relationship between the rate at which the number of cases increase over a set period of time and the average annual temperature of the impacted country/region. For example, the two regions that have so far faced the worst outbreaks have been China's Hubei province and (probably) Iran. Both Hubei an Iran have roughly the same average annual temperature, around the 17-18 degrees Celsius range. That temperature range is close to the average annual temperatures in most of Australia's major cities: Sydney, Melbourne, Adelaide and Perth. Assuming that covid-19 does indeed have some kind of temperature 'sweet spot' around the 17-18 degree mark, this might imply that there could be some difficult weeks ahead for Australia's major cities.

Matt Daniell

Interesting. Unemployment the key? There still is a lot of hope around, whether that will keep the Wile-E at bay? There's no PPT (officially the President's Working Group on Financial Markets) for housing.

Mr T

agree employment is the key. its been a VERY long time since aussie businesses had to cut jobs in a meaningful way... so increasing unemployment will have a bigger lag than expected... so, if this thesis pans out, house prices have a bit of 'mid air' still to go i suspect! thought provoking article cheers

Damien Klassen

Hi Patrick. We have noted the same - check the charts here that analyse cases caught (ie not just diagnosed) in Summer/Equatorial vs Winter Suggests that Australia may skip the worst for another month or so...

Damien Klassen

Thanks for the comment Matt. In Japan, the central bank buys government bonds, corporate bonds and even equities. We have been joking around the office the Aussie government would love the Australian version of QE to see the central bank buying houses to "keep confidence up" the housing market. Let's hope they don't work out how to do that...

Patrick Fresne

Hi Damien Is there a possibility that there is a link between the spread of covid-19 and air conditioning systems?. Here I'm not suggesting that air conditioning systems are spreading the virus, rather that temperature controlled environments may be providing an ideal environment for the covid-19 virus. When I look over the number of cases on a country by country basis, what strikes me is that all the countries which have the highest number of cases are all those with 100% electrification rates. The countries with large numbers of people living without electricity scarcely rank on the list. India, sitting at the 31st place on the list, is highest ranked example of such a country, with 71 coronavirus cases at time of writing. Of course, 71 cases in a population exceeding one billion is insignificant. Conversely, there has been a curious spike in cases in recent days in cold countries such as Denmark, Norway and Iceland, which strengthens my suspicion that there may be a link between temperature regulated environments and covid-19. What I am getting at here is that this pandemic may be an indirect by product of the growth of the Middle Class around the world over the past two decades or so, which has resulted in many more people becoming wealthier, and thus higher electrification rates, and in turn, more temperature controlled environments. If you take a view that covid-19 has an ideal temperature range, then it would make sense that the virus would flourish with increasing numbers of air conditioned dwellings around the globe.

Damien Klassen

Hi Patrick - definitely a possibility that its temperature. I suspect humidity is more likely as humidity has been shown to break down some airborne viruses. In dry climates, certain viruses can "float" in the air for a considerable period of time (20 mins or more) and infect someone long after the original host has left the area. Humidity means the virus hits a water molecule which drops it to the ground and weakens the virus structure. So, we don't know if this is the case for coronavirus, but it seems possible. Air conditioning removes most of the humidity.

Mr T

continuing to think this through, i wonder if housing prices might also be more driven than expected by a 'negative wealth multiplier effect'. ie, particularly for retirees etc, they cant get returns from equity market or bank account, therefore become forced house sellers into market that doesnt have as much wealth to buy, driving down prices (independendtly of employment).

Damien Klassen

Maybe Mr T. I'm guessing retirees would draw on reverse mortgages if they really needed the cash before they sold. Maybe they would sell investment properties?

Ruth Kassulke

Stimulate? I don't mind ScoMo helping out small business, but cutting rates? Easy credit is the cause of the escalated asset prices, not the cure. Covid 19 isn't the cause of the current collapse, it's just the trigger bringing down the house of cards built upon mounting debt. Stimulate? More debt to be repaid in the future? What if no-one wants to buy your bonds because they don't think they'll be repaid (looking at you USA). End result is surely money printing and inflation? In which case holding some property is a good idea, if you can hold on long enough to service debt, put up with increasing costs landlords must pay, and low rent as many tenants won't be able to pay. Process looks inevitable to me, but no idea how long it will take. Could be decades.

Xav O

Hi Damien, Could you link the housing return calculator article you mentioned in the article please? Thanks