Every Investor Should Watch This

The foreign money is still coming into Australian real estate. In fact, overseas investors account for one in six residential purchases, according to a survey the Australian Financial Evaluation reported on this morning. If you’ng been following the DR you know the reason: a lower Australian dollar, and the security associated with Australia’s property rights.

This overseas money is flowing primarily into Quarterly report and Melbourne. The AFR says:

‘The figures confirmed anecdotal proof that foreign investors are relatively modest investors and are not accountable for price surges, with 41 per cent spending in between $500,000 to $1 million on houses and almost a third spending less compared to $500,000. Only 5 per cent bought property costing more than $5 million.’

Maybe. What the article doesn’t make clear is how many properties each buyer owns. And just because you buy in a modest price point doesn’t mean you are a modest investor.

Perhaps I’m quibbling. Maybe they are the notorious ‘mum and dad’ investors everyone loves to spruik about here. I don’t know. The potential is certainly there.

The OECD is forecasting that the global middle class will more than double to 4.9 billion by 2030. That’utes a lot of demand that could still filter into our metropolitan areas.

Of course, there’s plenty of need right now. Real estate buyer’s advocate Catherine Cashmore, who was on The Daily Reckoning Podcast recently, was at an auction in Victoria on Saturday. The property sold with regard to half a million dollars above the book.

The suburbs where Asian migrant communities are flourishing are sizzling. That’s one reason NAB chief economist Alan Oster calls the demand from Asia a ‘Sydney and Melbourne tale.’ But it’s not so accurate for the rest of the country. For all the speak of a housing boom, most of the nation is fairly flat. Anyone in Perth right now can attest to which.

That’s a dilemma for the RBA with regards to monetary policy. One side of the debate wants to cut rates additional to foster demand. The other doesn’t want to spark the speculative frenzy in the housing market.

The transmission of great interest rate cuts to the rest of the economy is not as clear cut because the mainstream media and economic experts would have you believe. It’s not an accelerator. You can’t simply push down rates watching the economy rev up.

If price cuts did act like this, popular economists would have a much easier time explaining Japan. The Bank of Japan cut interest rates a dozen times in the 1990s and the economy still stagnated. This gave rise to Japan’s ‘lost decade’ (now actually 30 years) and is still a traditional mystery to mainstream economists. They keep pushing their own foot down on the gas, and expect Japan to go quicker.

The most important factor to watch in an economy is not the interest rate, but the level of credit creation. That’s because the private banking program creates 97% of the money supply. If credit is rising, the economy will expand.

But there’s an important distinction to be made right here that very few people comprehend. When the commercial banks produce credit, that credit may either be used for productive expense or speculation. It’s fundamental to know which is happening.

If a person follow the indicators mainstream economic experts use, you’ll never know. This really is one reason they miss the build up of risks in the economy that bring on busts such as 2008.

One example is GDP. Gross domestic product is a totally flawed way to measure the value of transactions in the economy. Here’utes the problem: it totally disregards asset transactions, not to mention funds gains. That includes the majority of real estate buying and selling.

If you take out a company loan and buy tools, it’ll show up in nominal Gross domestic product growth. If you take out a mortgage to invest in property, it won’capital t.

The world’s premier banking expert, Richard Werner, put out a document in 2012 explaining why, as an buyer, you need to be aware of this. He wrote at the time:

‘The proven fact that asset prices are in aggregate determined by bank credit creation yields another important insight: the extension of credit for non-GDP transactions, if large and continual enough, will produce a Ponzi scheme, whereby early entrants (those buying the assets that are driven up by bank credit score creation) have a chance to exit with profits, while the past due entrants (usually the broader public, buying at close to the peak of an asset bubble, because the media comes to focus on the extraordinary profits made by earlier newcomers) will lose.
‘The reason why credit for non-GDP transactions must be a Ponzi scheme is that only GDP transactions — as national income an accounting firm know – generate the worth added that can yield income streams to service and pay back loans.’

This is why over at Cycles, Trends and Forecasts we created our own indicator to track this. As far as we all know, no one else in the world does this. You know when to be in the market and out of it. It should be upon every investor’s dashboard. Put it on yours here.

Regards,

Callum Newman,
Contributing Editor, Money Morning

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