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Bad News From Down Under For The Uk Housing Market

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Many commentators believe that if you want to know the future for the UK housing market, you should look south. About 10,000 miles south, in fact.

The UK and Australia’s housing markets share similar traits – high owner-occupation rates, a similar mortgage market, and a strong buy-to-let sector.

Rising interest rates in Australia meant it was one of the first countries to see its housing boom fizzle and give way to a flat market. The end of the UK’s housing boom wasn’t far behind, again triggered by rate hikes.

And for most of last year, Australian interest rates remained on hold. Many commentators speculated that the next move might in fact be down, as the housing market and retail sales slowed.

But there’s been some bad news from Down Under for those hoping that the next move in UK interest rates will be a cut...

Australia ’s central bank has hiked the country’s key interest rate to 5.75%. The move was the first change in 14 months, and left the rate at its highest since February 2001.

The move took analysts by surprise. Shane Oliver at Sydney-based AMP Capital Markets described the move as “a knock on the head” for retail sales and the housing market, which have been steadily recovering from a stagnant 2005.

So why the shock move? “The board judged that inflationary risks had increased sufficiently to warrant an increase,” said Reserve Bank of Australia Governor Ian Macfarlane. Consumer prices are currently rising in Australia at a rate of 3% a year, while underlying inflation has hit 2.75% - far ahead of the bank’s expectations.

Property firms and retailers bemoaned the move. They say they are already suffering the effects of high petrol prices on consumer demand. But if consumers are really feeling the pain that badly, it’s not showing up in borrowing figures. Loans to buy houses jumped by 13% in the year to March, and retail sales rose by 0.7% in February, far stronger than expected.

Of course, unlike the UK, Australia has the benefit of a strong export sector. The country supplies 43% of China’s iron ore and almost as much of its coal. Rising commodity prices suggest “a strengthening in the outlook for Australia’s export earnings, with consequent expansionary effects on incomes and spending,” said Mr Macfarlane.

But that doesn’t mean the UK won’t have to hike rates. The higher that global interest rates rise, the more difficult it is for other countries to maintain low rates. Generally, countries with lower interest rates will have weaker currencies – and a weak currency means imported inflation.

The dollar’s recent dive illustrates this point nicely. The greenback has fallen sharply against both the euro and the pound since recent comments by Fed chief Ben Bernanke were taken to mean that US interest rate hikes will end soon. Despite claims that the media had misunderstood what he said, the dollar’s decline has continued.

In fact, as one Money Morning reader points out, confidence in the US currency is so low that “even the Russians are putting the boot in.” An article in the Moscow Times points out that Finance Minister Alexei Kudrin has already declared the dollar as “unreliable as a reserve currency.”

What does this all add up to? When people are losing faith in the dollar, that means they are losing faith in paper money in general. We don’t imagine that the ruble will ever end up as the world’s reserve currency, for example.

This loss of faith is unsurprising, given the way that central banks around the world have destroyed the value of paper money by flooding the market with it. You can read more about this in Puru Saxena’s Daily Reckoning piece, further down this email.

And if people feel they can’t trust paper money, what do they turn to? That’s right – gold.

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  • 311 Brexit, House prices and Summer 2020

    1. 1. Including the effects Brexit, where do you think average UK house prices will be relative to now in June 2020?

      • down 5% +
      • down 2.5%
      • Even
      • up 2.5%
      • up 5%

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