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 rouble 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.

We published a piece yesterday from Martin Spring on gold and why it seems likely to hit at least $1,000 an ounce. If you missed it, you can read it here: Is gold still heading for $1,000 an ounce?

Turning to the stock markets…

The FTSE 100 fell 72 points to 6,010. Mining stocks were among the main fallers after reversing early gains. Rio Tinto fell 3% to £30.70. For a full market report, see: London market close

Over in continental Europe, the Paris Cac 40 fell 47 points at 5,193, while the German Dax slid 82 to close at 5,989.

Across the Atlantic, US stocks slipped, amid disappointing sales figures from consumer goods giant Procter & Gamble. Interest rate fears also plagued investors as data on US factory orders and manufacturing sector sentiment was more upbeat than expected, adding to feelings that the Fed’s next rate hike is unlikely to be the last. The Dow Jones fell 16 to 11,400. Meanwhile the S&P 500 slipped 5 to 1,307, while the tech-heavy Nasdaq shed 5 to 2,303.

Japanese stock markets were closed for a public holiday, as they will be for the rest of this week. Elsewhere in the Pacific region, South Korea’s Kospi index rose 5 points to 1,441, despite a 3% slump in the share price of steelmaker Posco, fuelled by fears that rising US interest rates may curb global economic growth.

This morning, oil fell back in New York, trading at around $71.80 a barrel. Brent crude was also a down, trading at around $72.20.

Meanwhile, spot gold retreated from its recent 25-year high, slipping to $663.50 an ounce. Silver was trading at around $13.69 an ounce.

And here in the UK, the Halifax reports that house prices rose by 2% in April, taking the annual rate of house price inflation to 8%. But the group still believes that prices will cool later this year.

And our two recommended articles for today…

Why cash is anything but a safe haven
– Cash might be boring, but at least it’s safe, right? Wrong, says Puru Saxena in The Daily Reckoning. Governments around the world are swimming in debt – and the easiest way to destroy debt is by inflating the money supply. But inflation also destroys the value of your savings. So what is the best way to protect your family’s wealth – particularly when every other asset class is soaring relative to paper money? To find out which investment sector looks best for the long term, see: Why cash is anything but a safe haven

Could alternative energy be a better bet than gold?
– The gold and oil prices are soaring, and are likely to continue to be excellent investments, say Andrew Selsby and John Robson at RH Asset Management. But there’s one sector that they believe might perform even more spectacularly over the coming years. To find out the best way to invest in it, click here: Could alternative energy be a better bet than gold?


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