House prices hold up but business investment stops: Kohler

The incredible chasm between Australian housing and business investment is widening even further.

Later this morning, the RP Data-Rismark house price index for April will come out, along with a revised number for the March quarter. It is expected to show that prices, amazingly, increased more strongly than previously thought in the quarter, and actually accelerated in the month of April. Recession? What recession?

These figures are based on the largest database of home sales (60,000 in the first quarter) and the index is hedonic, which means it is more sophisticated than the median price data used by the ABS because it adjusts for the differences in houses.

In other words, when RP Data-Rismark report, as they will, that home values have increased in every capital city except Perth in the first four months of 2009, we can be fairly sure it’s true.

In the United States house prices fell 7.1% in the March quarter and 8.3 % in the December quarter. Basically, US values have been falling at an annual rate of 20% since August 2006, and that pace has not yet materially slowed.

There seem to be three key reasons for this astonishing difference (bear in mind that Australia’s share prices have fallen more than America’s): the Australian Government’s first home buyers grant, the underlying shortage of houses in Australia, and the healthier state of our banks.

Meanwhile, there was confirmation yesterday that the downturn in Australian business investment had arrived. This is the recession.

ABS data showed that new capital expenditure fell 8.9% in the March quarter, driven by a 10.8% collapse in equipment – the largest fall since this survey began in 1987. Spending on non-residential buildings fell 4.7%.

More importantly, business investment expectations have been cut 10%, including 13% for mining.

While the strength of house prices is the main thing that is cushioning the Australian economy from the global recession, the decline in business investment is the biggest concern.

The outlook for private investment is very poor and will lead to higher than expected unemployment. It will be offset to some extent by government infrastructure spending, but not enough.

In a speech yesterday, Ric Battelino, the deputy governor of the Reserve Bank, told us one of the reasons for the difference between the health of housing and the malaise in business – a big difference in borrowing costs.

The current standard variable mortgage rate is 5.16%, according to Battelino, which is 1.7% below the 10-year average.

The current borrowing rate for non-financial companies is 7.29%, which is 0.62% higher than the 10-year average.

There is a similar difference between housing and corporate borrowing rates in the US, and housing and business there are sinking together; likewise the UK and Europe.

So the cost and availability of credit can’t be the only reason for the widening chasm between housing and business in Australia, but it’s an important one.

Will it be resolved by an improvement in business investment because of the global green shoots or by a housing downturn caused by rising unemployment, the end of first home buyers grant and tighter home lending?

That, of course, is the big question. I suspect it will be the latter, but then two years ago, like many, I found the property bears’ predictions of a house-price slump convincing. These arguments, for Australia at least, now look to be completely wrong.

This article first appeared on Business Spectator.


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