How the humble Aussie house saved us from recession: Kohler

Reading central bank statements is a bit like cracking the enigma code – you need a guidebook at the ready so you can look up the phrases and see what they mean in plain English. A lot of people have taken yesterday’s statement by the Reserve Bank as an announcement that there will be no more rate cuts and that the next move will be up. That’s not quite correct, although it might be what happens.

Governor Glenn Stevens wrote: “the present … setting of monetary policy is appropriate…” Translation: “We can now do whatever the hell we like”.

For six months the governor has either been announcing a cut or saying that “the outlook for inflation allows more scope for easing of monetary policy if needed”. In central bank speak that’s an “easing bias”, now we have a “neutral bias”. In other words, they’re sitting tight.

So why are Australia’s interest rates now stuck higher than anyone else’s in the world, apart from China, India, Brazil and a few basket cases like Iceland?

It’s not because of China, or the stimulus, which everyone else got – it’s because the value of our houses didn’t fall, or at least recovered the small amount that was lost last year. The bursting of a world housing bubble was the main reason for the global financial crisis, and in most countries house prices are still falling.

In Australia, amazingly, they’re going up. Yesterday the ABS reported an astonishing 4.2% rise in the June quarter. We happily joined in the house price bubble between 2003 and 2007, and we’re still bubbling away.

Australians have been whacked by the same drop in share prices, depressed by the same grim headlines as everyone else in the world, and then cheered up by the same stimulus antidepressants and petrol price reductions. The big difference is house prices.

The result has been stronger consumer confidence and retail sales and lower unemployment.

So it’s a circular saw: our houses have kept their value, but the price of hanging on to that wealth is higher mortgages rates and kids who never leave home because they can’t afford to buy a house.

The importance of housing was underlined this morning by the fact that stocks on Wall Street were held up because a home construction index went up.

Last night I sat next to Professor Nouriel Roubini at a CFA Society dinner in Melbourne, at which he explained why he’s still pessimistic.

Roubini is often called Dr Doom (he prefers Dr Realistic, he says) because he became famous for predicting the crisis. In his speech he said that in 2006 he predicted a 50% drop in housing construction in the United States and a 20% fall in house prices, and everyone called him a lunatic.

He was wrong: housing starts fell by more than 80% and prices by 27% (and still falling).

Now he says the US recession will end in the fourth quarter of 2009, but there is a risk of a “double dip” and even if that doesn’t happen, growth will be weak – about 1%.

He was asked what he thought about the prospects for Australia. He said growth here would be 2%, not 1% like the US, but not the V-shaped recovery the Government is officially forecasting.

Roubini explained that he’s relatively optimistic about Australia because of the rise in commodity prices, the fact Government finances were in good shape, the better performance of the financial system, and above all the strength of house prices – which he attributed to the fact that Australians can’t just walk away from their mortgages as Americans can (in the US they are “non-recourse loans” and home-owners are just popping the keys in the mail to the bank and heading for the local trailer park).

Nouriel Roubini is now so famous his life is a misery: he spends eight months of the year travelling the world, living out of a suitcase and not sleeping much. He was in good form last night despite getting three hours sleep after a visit to a foreign land called Kalgoorlie the day before.

His basic message last night was that deleveraging the world’s debt has barely begun and that now we have “a runaway fiscal train wreck” as well. Governments everywhere are “dammed if they do, dammed if they don’t” (that is, exit their stimulus policies and fix their budgets).

If they do, there’ll be a new, deeper recession. If they don’t, there’ll be inflation. Meanwhile, the sharemarket is being lifted by a “wall of liquidity”.

But he’s actually quite optimistic about the medium-term. He’s Dr Realistic, remember.

This article first appeared on Business Spectator.