This is a pandemic panic. Rate cuts aren’t going to cut it.

So the RBA cut rates last week.

No real surprises there.

As 2019 came to a close, I was saying my base case scenario was for one or two rate cuts in the first half of 2020.

… And then we had the bushfires.

… And now we have the Corona Virus.

And with the outlook for inflation and unemployment already too thin for comfort, and GDP this quarter set to print a doughnut, the RBA didn’t really have a choice.

But I actually think they’re behind the curve here.

And they’ve pretty much just got one rate cut left in the barrel now. After that, they can’t push rates any lower and they’ve got to come up with something else.

And so they’re out of ammo.

And for what?

What is 25bips going to do for us now?

Normally, rate cuts are meant to inject the economy with confidence. That’s what normally happens, but you want to talk about confidence? My local Woolies is still out of toilet paper!

People are getting in a flap about Corona Virus. They’re in a panic. And economically speaking at least, there’s very good reason for that.

The first round battered our tourism and education sectors. Now our major trading partners look like they’re on the verge of a shut-down.

And that’s all before flu-season in Australia hits.

There’s a lot of dark clouds and not much silver lining.

Oh no, there’s one silver lining. 25bps of rate cuts.

Thanks. We feel so much better.

I actually think the cut is wasted. I think the RBA should of held fire and kept its powder dry.

But it had to do something, so I think it should have jumped straight over to QE – Quantitative Easing – aka, money printing.

“Fire up the helicopter money, Phil.”

This is what a handful of countries have done already.

In Hong Kong, permanent residents aged 18 and above will each receive a cash handout of HK$10,000 (US$1,200.)

The government will also provide a guarantee on loans taken out by companies to pay wages and taxes.

In Macau, the government is giving residents shopping vouchers, while in Singapore, people will get between US$100 and $300 in a one off payment.

And over in New Zealand, they’re paving the way for their own QE measures.

This is what Australia should be doing.

This isn’t your ordinary, garden-variety confidence hit. This is a pandemic panic.

Time to nip it in the bud.

Fire up the helicopter, and start dropping money on people. Nothing says good times like free cash.

And drop off some toilet paper while you’re at it.

JG.

Economists just don’t know why this chart looks as scary as it does.

Is there a chart that keeps me up at night?

Now people sometimes call me a ‘Property Pollyanna’ – they say I’m always looking at the property market through rose-coloured glasses. Everything is always good!

But that’s not true. When I say it’s always a good time to buy, I mean it’s always a good time to buy a good deal, not just buy ‘anything’.

And while it’s true that right now the market is certainly going higher, and there are a bunch of factors lining up behind the property market, that’s not to say that it’s a one-way street, or that I’m blind to the risks that are out there.

Risks like this one. This is the one chart that keeps me up a night right now:

This monster is real household disposable income per capita.

Ok, there’s a lot going on, just in that title alone, so let’s unpack it.

Ok, so it’s household income. That is, it’s how much households, whether they’ve got one income or two (or three or four – I’m a modern guy), are earning.

It’s disposable income in the sense that non-discretionary items have been taken out of it. You don’t have a choice whether your going to pay your electricity bill or your rent, so this is the income that’s left after these things have been paid.

And it’s ‘real’ in the sense that it is adjusted for inflation. It’s what household disposable income would have looked like if the price of stuff never went up. It helps us understand how much purchasing power our income has.

Ok, so that’s what we’ve got: how much purchasing power do households have after they’ve paid for their essentials?

And what’s it telling us?

Well, this chart is telling us that household purchasing power hasn’t increased in 9 years! It increased solidly for 15 years (and for generations really, if we had the data), and then just hit a brick wall in 2011.

That is, households are no wealthier now than they were in 2011. And it doesn’t look like it’s improving anytime soon.

This scares me.

Why? Well, household income growth is essential for house price growth. This chart shows us how much wiggle room households have to spend more on their mortgage and bid up house prices.

Now, as I said, the outlook for property is still bullish. Falling interest rates increase purchasing power, regardless of what’s going on in wages, and the housing shortage means that people will pay more to secure a home, and then just cut back on other spending items.

So prices will keep going up.

But the wages and income data are still concerning.

The other thing that’s strange in all this is that economists don’t really know why wages aren’t increasing. The economy’s been doing ok. Wages should have been going up. Ross Gittins at the Age sums up the general confusion here. Maybe it’s decreasing Union power. Maybe it’s the unwinding of the mining boom. There’s no clear answer.

This is both concerning and comforting. It’s concerning that we have such a blindness around such an important part of the picture, but it’s comforting in the sense that mysteries in economics don’t tend to last long – they correct one way or the other.

So my base-case scenario is that wages and household income start to pick up in the near future, and that will add support to house prices.

But I can’t say with any certainty when that will happen.

And until then, this chart remains just downright scary.

JG.

Some incredible charts on what’s happening in China right now.

So the Coronavirus seems to be dragging on in China.

The Chinese government is saying that they’re close to being on top of it, but you know, I wouldn’t trust the CCP as far as I could throw the people’s plenary. Chinese data is notoriously dirty at the best of times, and I doubt virus numbers are going to be an exception.

But we do have this mind-blowing chart:

Look at those sales numbers! The entire property industry has been laid out on the mat.

People just aren’t buying.

Why?

Because people just aren’t moving.

Real estate offices, like most of the country, remain in shut-down.

And The New York Times reckons that half the population is facing strict travel restrictions:

At least 150 million people in China — over 10 percent of the country’s population — are living under government restrictions on how often they can leave their homes, The New York Times found in examining dozens of local government announcements and reports from state-run news outlets.

More than 760 million Chinese people live in communities that have imposed strictures of some sort on residents’ comings and goings, as officials try to contain the new coronavirus epidemic. That larger figure represents more than half of the country’s population, and roughly one in 10 people on the planet.

China’s restrictions vary widely in their strictness. Neighborhoods in some places require residents only to show ID, sign in and have their temperature checked when they enter. Others prohibit residents from bringing guests.

But in places with more stringent policies, only one person from each household is allowed to leave home at a time, and not necessarily every day. Many neighborhoods have issued paper passes to ensure that residents comply.

In one district in the city of Xi’an, the authorities have stipulated that residents may leave their homes only once every three days to shop for food and other essentials. They also specify that the shopping may not take longer than two hours.”

One in ten people on the planet effectively under house arrest! Wow.

And the CCP is saying that China has gone back to work, but that’s not what the data shows.

Road congestion data suggests that the roads are empty:

While daily trip numbers haven’t bounced back after the New Year holidays:

Suggesting this year is wildly different from past years:

As a result, Nomura estimate that only 20% of the workforce has actually gone back to work:

So no wonder property sales have tanked. Who’d be buying property when all this is going on?

But without volumes, prices are going to have to fall. Developers with stock on their books can’t wait forever for conditions to normalise. They’ve got debts to pay.

And so we’re already seeing sales incentives being rolled out:

China’s leading property developer Evergrande Group announced Sunday it is set to launch great incentives to lure domestic consumers via online subscriptions starting Tuesday, and an analyst said such a “self-rescue” promotion would attract more industry followers and help shore up the sluggish domestic housing market in February amid the novel coronavirus outbreak.

Evergrande plans to offer 25 percent off for consumers who purchase housing units, including apartments and office buildings, from Tuesday to February 29.

The discounts will continue and be adjusted to 22 percent off from March 1 to 31.

It will be the largest incentives the firm has offered in its business history, Liu Xuefei, vice president in charge of sales with Evergrande, told an online meeting on Sunday.

A “self-rescue” package. That’s cute.

Anyway, I think this is an interesting case study in how a disease epidemic can affect the property market.

It could happen in Australia too.

The key transmission mechanism is volumes. The real estate industry needs a minimum amount of trade to support the new-build sector.

If that trade dries up, it’s only a matter of time before prices start to fall.

Here’s hoping that it never happens here.

JG.