March 21, 2013 by Dymphna 9 Comments

Get Ready for the Next Boom in Oz

Last time we looked at the minimal impact that both Europe’s and America’s GFC problems have had on Australia. We also talked about why, from a monetary perspective, we are in a pretty good position to weather their financial storms. And even though America is still struggling through their worst recessions in 70 years, our level of trade with America hasn’t changed at all. All of this is good news for us as real estate investors here in Australia.

But what’s better than a little good news to keep an economy on the move? Why, more good news! And here’s the drum: Australia is perfectly positioned to benefit from not only what happens in Asia, but also from America’s current monetary policies. Let’s look at what’s happening in Asia first.

Independent giants

Australia plays a major role in the two fastest growing economies in the world. Of course, I’m talking about China and India. Both of these countries will continue to have a huge impact on our economy because we will provide them with the building blocks they will need and rely upon to keep their own economies on track. Both of these Asian giants—which together account for one-third of the people in the world–are experiencing rapid growth, and will continue to do so, for the foreseeable future.

Here’s another key point to understand: neither the Chinese nor Indian economies are dependent upon each other. That means that neither needs the other for growth and that both move in their own cycles; neither nation is influenced by the other to any large extent. The rate of internal growth in both countries is massive, marked by the large-scale urbanization that is taking place right now, and again, is happening separately and independently from each other.

What Chinese slow down?

I know that some people in the media are talking about a possible economic slow down in China. It might be happening to some extent, but even so, it’s not likely to last or be of any significance for very long. In fact, the stockpiles of iron ore and other materials that were occurring on some of the Chinese docks in ports several months back, are now gone. That means that the glut is gone and that commodity prices will be stabilizing or even rising in the near future.

And even if China’s economy does slow some, it won’t change much of anything. The reason I say this is simple: China population is so large and their needs so great in terms of food and resources that they simply can’t slow down; there’s just too much demand. Let me give you a few examples…

Do you have any idea what percentage of China’s people own cars? Today, it’s a little over two per cent. But the expectation is that over the next five years, the Chinese want to raise that percentage up to five per cent, and up to 10 per cent in the next eight years. That’s a 500 per cent increase in their car market in less than a decade and they are already the world largest consumer of cars!

The demand for electricity to build those cars will be enormous. On top of that, China has recently launched about $152 billion package on 55 different infrastructure projects. They range from subways to highways to government buildings and so forth. That’s a lot of steel, iron ore, coal, and other commodities, including coking coal for steel and brown coal for generating electricity. Well guess what? We’ve got plenty of both!

Good news from ANZ

But there’s even better news from the economic reports coming from ANZ. They expect that by summer of 2013, the price of coking coal may well be back up to $175 a ton or even above $200 per ton. These statistics were backed up by American coal industry studies. Those industry leaders make some very big decisions based upon reports like these, so it’s likely that they’re fairly reliable. This is great news for our Australian economy.

China will need to import its energy to continue to grow. It will also need to import the raw materials to manufacture those cars. And where do you think China is looking for its coal for electricity generation and other primary resources like iron and copper? That’s right; Australia.

When it comes to resources, Australia is an Asian giant in its own right. We have what both China and India need and we have quite a lot of it. And the simple fact is that we are an Asian country. We are located in Asia, we deal with Asia, and we are the closest quarry pit and the closest trading partner with Asia. We are the resource bowl and also the food bowl to Asia, pure and simple.

Stimulus causes rise in commodity prices

China and India’s massive urbanization trends aren’t the only causes of rising commodity prices, although they certainly are big factors. But another factor is also in play, and it comes from America. Right now, with their wholesale price of money at an already low 0.5 per cent, there is no room for the U.S. to further stimulate their economy by lowering interest rates. And they can’t do it by increasing immigration either; they’re already at their capacity for absorbing immigrants and they have massive levels of unemployment as well. The only thing left to do is to stimulate the economy by printing money.

Whenever any instability is seen in the U.S., prices tend to rise. What we’re seeing today with America’s ongoing stimulus programs– they’re printing about $40 billion every month—is a big source of instability coming from America. Their stimulus will result in a devaluation of the U.S. dollar and prices for goods to go up. The prices of commodities on the world market will have to rise as well. This may be bad news for America, but it is very good news for Australia.

The flow-on affect

With a decrease in the U.S. dollar’s value, there is a flight to save havens, and Australia is seen to be a safe haven as well as the quarry pit of the world. But also, as commodity prices continue to rise, money will obviously flow to those areas as mining operations are expanded. We’re really starting to see the flow-own affect in real estate markets throughout many parts of Australia.

But we’re not just talking about mining towns, although the real estate is certainly positively impacted there. We’re also talking the regional towns that surround the mining areas that are a flow-on for food, services and other support systems for those mining towns. So real estate markets will be improving not just in the mining town itself, but radiating out from them as well.

Of course, the ports are also positively impacted by the flow-on affect. As port capacities expand, more construction is needed, and more workers as well. Real estate around the port areas becomes more valuable as housing needs increase and rents go up. Even those people who work the fly-in, fly-out mining areas will also greatly benefit from the flow-on affect. As they make more money in those mining areas, they take that money back to where they’re from and enhance the local economy there as well.

If the media want to sell doom and gloom here, they’re going to have a bit of a hard time of it!