Oh dear. The stage is set for the RBA to inflate a giant housing bubble on one front while they fight COVID on the other.
Is it just me or is history repeating? Go all the way back to 2001. The US economy fell into a mild recession at the time.
The US Fed slashed rates to 1% and held them down for over a year. Meanwhile, US housing started the surge of its bull run into the inevitable peak around 2008.
Now, what do we see today?
The response to the Delta variant has put nearly 50% of the Aussie economy into lockdown. The uncertainty around it is getting worse instead of clearer.
The state governments need to pay out more support to prop up their constituents being crushed.
That means more bonds (debt) into the market. The RBA will likely need to remain a buyer. More QE is likely coming.
And yet pinning down rates merely inflames the housing market even further.
We know from data that it’s the insecure and low-paid workers hit through the lockdowns the worst.
They were never going to be speculating in housing in the first place.
Any cashed-up white-collar worker or retired boomer can still chase the market. And there are lenders everywhere prepared to give them the money.
Meanwhile, the spectre of inflation looms still.
The rational response to the current economy is to protect your cash in a hard asset like real estate, defray the interest cost as best you can, and ride the asset inflation before the consumer inflation hits.
Look at the steel market right now.
The Australian Financial Review reports that China’s crackdown on steel and port bottlenecks are driving up the cost of imported steel.
This flows back into higher input costs for housing and infrastructure projects.
This dynamic is unlikely to end anytime soon.
Note that China’s manoeuvre to reduce steel is not based on weak demand. On the contrary, demand is roaring.
It’s an effort to reduce the appalling pollutions levels in China.
They seem to be tired of being the world’s waste dump on one hand and being lectured on everything else on the other.
However, a tonne of steel not produced in China has every chance of being produced somewhere else.
We can observe this through BlueScope Steel currently.
It’s already expanding its steel mill in Ohio because it’s so profitable. Now the decision is whether to do it again.
Tariffs currently protect American steel. So the big margins aren’t completely market based.
But the rise in steel prices globally is so prodigious there can be no doubt that the demand is there.
Most of the commentators in Australia worry about falling Chinese steel production flowing back to weak demand for Aussie iron ore.
But there’s a glimpse, for those prepared to look a little further out, of a horizon when iron ore supply is too little.
After all, who expected a global steel boom now, say, three years ago? No one. But now we’re in one.
All those new wind farms and electric vehicles will need millions of tonnes.
And yet Aussie miners were positioning for a world of moderation as Chinese production peaked out.
That suggests iron ore could stay weaker than otherwise for a quarter or two before heating up again.
But what does this have to do with where we began, the housing market?
A stronger-for-longer iron ore market has the potential to shower profits, dividends, and high wages across the country.
This will allow those on the receiving end to further channel the wealth into the property market…and leverage the boom even more.
This won’t be a just outcome. Those on ordinary wages are going to be left far behind.
But the outlook for the resource sector — gold, iron, lithium, nickel — is just so wildly bullish.
And with interest rates at rock bottom, this cashed-up class of people will have little trouble servicing the loans.
There was once a period when Melbourne was considered the richest city in the world. It was the boom before the turn of the 20th century. What fuelled it?
The gold rush, of course!
Well, there’s not just one rush coming to Western Australia, but at least three, and maybe more. The coming wealth creation is potentially gigantic.
And what will we do with it? The same as always. Spend it into land!
Strap yourselves in…this boom is going to run hotter than you expect.
Best wishes,
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Callum Newman,
Editor, The Daily Reckoning Australia
PS: Australian real estate expert, Catherine Cashmore, reveals why she thinks we could see the biggest property boom of our lifetimes — over the next five years. Click here to learn more.
