All booms end in busts, tears

EVERY time there’s a boom its continuation is always justified on the same basis: “This time it’s different.” But are the spruikers right, asks Terry McCrann.

Our property market has been caught up in the global China-driven boom.

EVERY time there’s a boom — whether in property or the share market — its continuation is always justified on the same basis: “This time it’s different.”

Well, the funny thing is that mostly the spruikers — whether brokers, real estate agents, or just bankers happy to lend money to speculators — are usually right. Or perhaps, that more accurately should be, half-right.

No, they are generally not right about the core claim, or hope: that the boom will just keep going; that prices which are already out of touch with reality, will just move higher to get way out of touch with reality.

All booms end in busts, all of them end in tears — but the tears can be different; the people shedding them can be different.

But that’s not what I really mean by agreeing that this time it is different. And I’m talking about both our local property boom and the global share market boom.

The core driver is always the same — too much money chasing too little stock, whether of houses or shares.

It is the specifics which are always different. And this time around the specifics are “more different” than they’ve ever been. Or at least, as that’s a pretty big claim, since we’ve seen them in the modern era.

The two things which we have never seen before is central banks actually and quite deliberately feeding fuel into the fire, and Chinese money flooding into key Western property markets.

The three major central banks in the world — the US Fed, the European Central Bank and the Bank of Japan — have printed more than $US8 trillion ($10.5 trillion — or 5-6 times the size if the entire Australian economy) and forced global interest rates down to zero and in the case of the ECB and the BoJ, below zero.

Our Reserve Bank only went down to 1.5 per cent, where it’s now stayed for nearly a year, and didn’t print any money.

Is it any surprise that if global money has been so cheap and so plentiful, it’s poured into property and shares?

And then add on the “China factor”: tens of millions from the very richest to middle-income earners buying property in Australia, Canada, the US and even New Zealand: something we’ve never seen before.

All of this is or should be pretty well known. But even so, there’s a pretty sweeping disconnect in thinking about what this is irresistibly “setting up” in both big picture and individual market terms.

We’ve never had a global boom like this before; we will also have a bust like we’ve never seen before; and most critically we don’t know how those drivers are going to play out. Literally, no one’s “been here before”.

We got that message in a big way midweek from the person who is probably the single most important “driver” in the world — Fed head Janet Yellen — when she gave her regular comments to the US Congress.

Janet Yellen speaking to the Senate banking committee in Washington.

Investors generally interpreted her comments as a promise to take things gently — to slowly push up US interest rates, to very slowly “unprint” all that extra money.

So Wall St went straight to yet another all-time high; (already very low) bond yields in the US calmed down.

What got completely lost in the investor optimism is just as “we’ve” never “been here before” — that’s to say, we’ve never had a boom like this before (to repeat, in shares and property, and also global bonds) — neither has regulator Yellen or indeed all her global peers been “here before”.

In short, nobody knows how what the big central banks do, or think they will do, is going to play out. In a funny sort of way we have more certainty in the “China factor”, because that’s driven by more rational behaviour: people making their own decisions about their own money.

We are in a rather unique position in all this. Our property market — or rather Melbourne and Sydney — has been caught up in the global China-driven boom in around somewhere between a dozen and two dozen cities.

We’ve had the added demand from our massive immigration program. Plus specific policy drivers like negative gearing and changes to superannuation.

But our share market — except for the bank stocks — has missed out on that global boom. Wall St is now 50 per cent higher than its pre-GFC peak; we are still about 15 per cent below our pre-GFC peak and there’s little prospect of getting anywhere near it.

What the Fed and the other central banks do will be the major driver of what happens to share markets.

They will also have a big impact on global property markets.

But it is China and domestic policies that will shape our property markets — in the big two cities and the rest of the country.

Understand that, yes, “this time it really is different”, but that does not mean the good times (if you’re an owner) will just keep going.

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Originally published as All booms end in busts, tears