What’s happening between Israel and Hamas, and will it affect Australian property prices?

Posted by Gavin Chau

It’s been hard to escape the news feed for this one, with tragedy unfolding in the Middle East once again. While we’re in the fog of war, it isn’t easy to know how this will play out. And being passive observers, our knowledge of what is going on behind the scenes is especially clouded. But once again, there’s nothing like moving up a level or two to get some perspective. Alright, let’s have a go.

The story started about 3,000 to 4,000 years ago when the Israelites lived in their homeland in Canaan, situated in the Southern Levant (modern-day Israel, West Bank, Gaza, Jordan, Southern Syria, and Lebanon). The Babylonians conquered the kingdom in 598 BCE, and the Jews were temporarily expelled. By 538 BCE, the Jews were allowed back in and rebuilt their temple at Jerusalem. They lived there under Persian rule until 332 BCE, when Alexander the Great conquered the region.

After the death of Alexander the Great in 323 BCE, Canaan was ruled by a succession of Greek and Roman empires. The Jews revolted against Rome in 66 CE but were defeated by 70 CE and expelled from Canaan again. For the next 2,000 years, the Jews didn’t have a homeland and spread throughout the Roman Empire and other parts of the world. Fast forward to the modern era.

During World War 1, the Jews were widely persecuted throughout Europe. The British government supported the establishment of a “national homeland for the Jewish people” in Palestine, which the Ottoman Empire controlled at the time. The Ottoman Empire was initially on the opposing side of the Allied Powers in 1914 but had disintegrated by October 1917. At the conclusion of World War 1, the League of Nations granted a mandate for the British to govern Palestine. Jewish immigration to Palestine increased, and conflicts arose with the existing Arab population, who had since built a home there.

By 1947, the UN partitioned Palestine into separate Jewish and Arab states, which was accepted by Jewish leaders but rejected by Arab leaders. By 1948, David Ben-Gurion (who became the first Israeli Prime Minister) declared the creation of the State of Israel just as the British Mandate expired. This sparked the first Arab-Israeli War (1948-49). Over time, the Israeli State has become far more powerful, militarily expanding to take ever-increasing parts of the Palestinian-controlled land. This has led to multiple conflicts breaking out with killing on both sides.

If we fast forward again to the current day, it’s clear that both Hamas and the ruling faction of Israel are two sides of the same coin. They both want a one-state solution where they control the entire land. Given the length of time this conflict has been going on, the unfortunate reality is that it is probably as much about vengeance now as it is about land and control. In addition, this latest attack on Israel has resulted in the most Israeli deaths since World War II. It’s now unlikely that this conflict will be resolved quickly and a good chance that it only resolves itself when one side is soundly defeated.

If we want to look at this through the lens of investments, we must first look at the supporting players. Hamas is viewed as a legitimate resistance movement against Israeli occupation in many parts of the Arab and Muslim world. However, in the West and Israel, it is officially considered a terrorist organization. Iran supports and funds it and controls perhaps the world’s most strategically significant maritime chokepoint – the Strait of Hormuz. This is where 20-30% of the global oil exports travel through, being a critical connection to the energy-rich countries of the Persian Gulf. If the Strait of Hormuz were blockaded for some reason, it would create a huge spike in energy prices. However, I’d like to make it clear that I don’t think this is likely to happen since 85% of Iran’s imports move through there.

On the other hand, Israel is supported and backed by the United States, which has now moved two carrier battle groups into position. The fighting has also spread to Hezbollah in Lebanon and Syria, so we can’t ignore the fact that there is the potential for this whole thing to escalate way beyond the borders where it is currently being fought.

So, what potential impacts does this have on the markets? We know that the United States is so heavily indebted that it can’t afford peace, let alone fund a proxy war in Europe, and a proxy war in the Middle East while preparing for a war with China. At the moment, its interest expense on its national debt at $782 billion per annum is approaching the $820 billion military budget. Combined with the fact that they are coming up to an election year, it’s likely that they are looking for a good excuse to drop interest rates and fire up the money printers. If history is any indication, this will flow into asset prices, pumping them up. It will also reduce the pressure on other central banks to continue with high rates, so it’s likely that a central bank pivot is imminent with flow-on effects to other countries.

But most importantly, if we look at all the wars that Australia has been involved in and plot them against property prices, we can see that there isn’t any evidence whatsoever that war has an effect. If anything, virtually every war we’ve been involved in has ended with higher property prices than at the beginning.

Does this mean that war is good for property prices? Probably not. If you look at our other analysis of market cycles, it is more likely that the property market simply shrugs off the effect of wars. It takes something enormous to kick the market out of its normal pattern, with the most notable recent example being the global commodities supercycle extending the Western Australian market past where it would normally peak.

Part of the resilience of this asset class might be due to the fact that we are so far removed from the rest of the world that there is little chance of a war occurring on domestic soil. And on the off chance that it would occur, it would be almost impossible for a foreign military to maintain the supply line, which would need to stretch across a vast expanse of ocean in order for troops to hold ground here. Australian property is safe, and we’re still on track for the property boom set to take off when interest rates drop around Q1 of next year.

Posted by Gavin Chau, on 17th Oct 2023