A very odd recession

I have been off-line because of a house move, making it difficult to both write and post.

I find this a very odd recession, both globally and in Australia. Australia may well avoid a “technical” recession, but for all practical purposes at least parts of the country feel as though they are in recession.

Why then do I say odd? Well, the economy is all over the place, with a now somewhat incredible gap between domestic and international economic performance.

At a time of global real-estate declines, the Australian Government’s first home buyer grant in combination with reduced interest rates have triggered something of a mini-real estate boom in at least at the lower end of marketplace. In real estate mad Sydney, real estate investment is again a topic of interminable conversation.

One side effect of this is that rents appear to have risen at the lower end of the market place.

The best data on both rents and sales in NSW is provided by Housing NSW’s Rent and Sales Reports. The latest sale reports are for the June quarter 2008, the latest rent reports the September Quarter.

The sales reports show year on year real estate price declines in most localities. This in combination with lower volume of sales led to a marked drop in State Government revenues from stamp duty. By contrast, rents generally increased.

Since then, house lending has started to move up, with a seasonally adjusted increased for housing finance for owner occupation of 7.1% in December over November. This was associated with a major jump in December for the seasonally adjusted value of dwelling commitments.

The next NSW rent and sales reports may not show this increase because of lag effects – the sales data will be for the September quarter – but should still be interesting.

I had major reservations about the extension of the first home buyers grant on existing properties, a view I still hold. However, one practical economic effect has been the creation of another buffer for financial institutions and for ordinary wage and salary earners owning their own homes.

Australian bank bad debts have increased. However, this has been focused on the commercial side, not housing. This makes it much easier for Australia’s banks to absorb losses without adverse balance sheet effects.
Still on the odd side, only a little while ago Australia’s major banks were seen as global minnows, too small to compete effectively. I find it hard to come to grips with the fact that they now have market capitalisations greater than many major international banks including Citigroup.

Clearly bank shareholders are concerned about the statements from the various major banks that their profits are under pressure and that they may need to reduce dividends. However, there is a major difference between worrying about dividend reduction as compared with worries about sheer survival.

Like US consumers, Australians have clearly been trying to save more and have reduced spend on particular items. Reflecting this, the January figures for motor vehicle sales showed a further small decline in both trend (-0.8%) and seasonally adjusted (-1.1%) terms, continuing a downward trend that began at the start of 2008. December on December sales show a decline of 16.9% in seasonally adjusted terms.

In addition to ordinary shifts in consumer demand, motor vehicle sales have also been pulled down by lower fleet sales. Still, both the December reduction and the year on year numbers are still relatively mild by global standards.

All very interesting.