One of the strongest influences on house prices is mortgage rates. The sonic boom in house prices post CV-19 reflected another leg down in interest rates (with the RBA’s official rate at a record low of 0.1%) amid other factors.
However, there are signs that rates may be moving higher, even without any Central Bank action. Massive stimulus, combined with supply chain frictions has sent prices rising. The US recorded annual inflation of over 4% – the highest read since September 2008. The price of lumber, steel, coffee etc have all moved sharply higher over the last year. Inflation is here, we all know it!
Michael Burry (of Big Short fame) caused a stir when he mentioned Weimar Germany and moved his fund to strongly short US Treasuries, betting on a rise in yields (and thus fall in price).
In Australia, our largest lender, Commonwealth Bank has started to raise rates on some of its longer term fixed rate mortgages (https://www.msn.com/en-au/money/markets/commonwealth-bank-asxcba-hikes-interest-rates-is-the-rba-wrong/ar-AAKdRmx). I’ve personally just rolled out of a 3-year fix from 3.87% into a new term at just 1.87% (less than half the interest rate!). No wonder property prices have been booming! However, if inflation continues to rise, these mortgage rates will be a happy memory. In the meantime, it’s a great time to consolidate your financial position by paying off principal amid these low interest rates. If rates to rise and your property falls in value, at least you will have insulated yourself to some degree.
Iron ore has continued to confound the doubters and haters as it hits all-time highs over $200/ton.
Many thought that iron ore’s price had enjoyed a temporary boost only amid CV-19 related infrastructure stimulus (particularly in China). And China’s steel sector has been almost unbelievably strong, with output increasing from already mind-boggling levels.
It seems that the share prices of Australia’s iron ore majors have been based on the ‘temporary boom’ narrative, with comparatively small increases in comparison to an iron ore price that has doubled even its pre-CV-19 levels of around US$90-100/ton. Further, unlike the 2011 boom in prices, the majors have scuttled their costs down, although there will be likely some increase in costs given the red hot nature of the industry currently. The bottom-line is that major iron ore producers are making giant profits, which has even raised discussion of Kevin Rudd’s super profits tax from the dead. My thoughts on that are a separate post altogether.
In a ZIRP environment, the dividends of the iron ore majors are among the best on the market and highly attractive to income hunters. For example, RIO recently paid an interim dividend of $5.17 per share (current share price $127 – a fully franked dividend of around 8%). Make no mistake, if these iron ore prices hold, the majors (BHP, RIO, FMG) are likely still materially undervalued. Like the iron price, it’s been a hated rally, with share prices grudgingly moving higher. While the IO price has blown past previous records, only BHP is in touch with its highs from a few months ago (see below)
It feeds into a broader challenging environment for shares. In the US, many blowout earnings have been received with little fandom. Are investors will expecting an unwind?
Australian property prices continued to surge higher in April increasing by 1.8% according to CoreLogic. This was weaker than March, but still a breakneck rate of growth.
Darwin (2.7%) led Sydney (2.3%) with over 2% growth while Perth was the only city increasing by less than 1% (0.8%) – still a robust rate of increase. The property price surge is on nationally. No longer is there the resource laggards or the big city over exuberance laggards of recent years – it’s on for young and old – moreso old in this case.
Yes, there are a range of social implications to what is happening and parents are increasingly helping children onto the property ladder. And in a lot of ways, it is unsurprising. Not only is it getting harder for the youth as prices move tens of thousands higher every month, at the same time, the oldies have enjoyed massive windfall gains on their property (in many cases multiple), meaning they can afford to transfer some equity. The transfer comes at a much more useful time (family formation stage) for the younger generation, which is better than post-mortem (by which time the children will be elderly themselves). No surprises.
Regulators and policymakers have shown little appetite to withdraw the punchbowl and so it looks like further gains instore through 2021.