It’s been a while since we’ve given the property spruikers a few jabs in the ribs.
But yesterday the Money Morning mailbag bulged at the seams with emails concerning the speech given by Reserve Bank of Australia, head of Economic Analysis, Tony Richards.
Not surprisingly the mainstream press was straight onto it, with “House prices about to soar” headlines.
Although we do note this morning, the tone of the headlines has changed. The story is the same mind you, just the headlines are different.
This morning we have, “Reserve Bank warns on house prices” and “Soaring house prices not helping us.”
We can’t account for the change in tone from the media. Apart from the chance they’ve realized how ridiculous they’ve become with their “house prices always go up” mantra.
But rather than reading the pap in the mainstream press, you’re better off going straight to Tony Richards’ presentation.
Although in all honesty you don’t need to go any further than the first paragraph to be treated to the fabulous world of public servant contradictions and doublespeak.
Here’s the first paragraph in full:
“It is looking increasingly clear that Australia has avoided the large falls in housing prices seen in some other countries over the past two years or so. This is a good thing, because of the macroeconomic difficulties that have accompanied those price falls in some countries. But, looking forward, the risk is that we might move towards undesirably strong growth in Australian housing prices. This raises a number of concerns, which seem to be widely shared in the community, as is witnessed by conferences such as this one.”
So let’s get this right. The previous housing price rise is good, but a future house price rise is bad!
It’s good that house prices have risen to unaffordable levels, but it’s even better that they haven’t fallen back to more affordable levels. Yet it’s bad that house prices could rise further because that will make them even more unaffordable.
But then he goes on. And it’s the usual stuff. Lots of theories and excuses and reasons about why prices are high.
Of course at no point does he pin the blame on the Reserve Bank of Australia (RBA) or their cronies at the banks.
And he wouldn’t dare point the finger at his paymasters in government who have aided and abetted the massive and criminal distortion in house prices.
No, it’s none of those things, it’s population growth, underlying demand, and an undersupply of housing.
Same old, same old.
Although we’ll note that he does finish up with one bit of common sense. It’s probably a statement that will only serve to earn him a rake across the coals from his bosses.
He suggests that, well, you read for yourself:
“It is important to remember that housing is a consumption item. We all need to consume some level of housing services, either rented or purchased. So a higher level of housing prices and rents allows less spending over our lifetimes on other items… Lower-income households are less likely to own housing, either their own home or an investment property, than higher-income ones. So when the price of housing rises, higher-income households tend to benefit at the expense of lower-income households. As I have noted before, as a nation, we are not really any richer when the price of housing rises, but the more vulnerable tend to be hurt.”
Most of that paragraph is obvious, and we’d probably agree with most of it too. But it’ll probably put a few property spruiking noses out of joint. We dare say property doyen Christopher Joye is already feverishly preparing the same charts and graphs that he uses in every other rebuttal he makes to the property bears:
Charts from the Banks, charts from the RBA, charts from his own company, blah, blah, blah…
Actually, he may as well just use the same article each time because very little changes. But all property bulls will be the same. They’ll wheel out the same tired old excuses, each one more fantastical than the one before.
But it’s the opening statement from Mr. Richards that still leaves us befuddled. We’ve read it several times yesterday and this morning and we still find it hard to believe someone could utter so many contradictions without realising they’re talking nonsense.
If Mr. Richards believes it’s good that house prices have not fallen, then can we assume that all housing everywhere is now priced at the optimum price point? That they should never move either up or down from here?
Because in effect that’s what he’s saying. It’s the typical planned economy approach favoured by public servants. The blind belief that markets can be micro-managed at their whim without dire consequences.
But if you read between the lines what he’s really trying to argue is the same argument put forward by the property bulls. It’s their ‘worst case’ argument.
As you know by now, the property spruikers absolutely refuse to acknowledge that property prices can fall. They claim the ‘worst’ that could happen is a flattening of prices for a period followed by another roaring gain.
Surely even they know that’s nonsense. But based on what we’ve read so far it doesn’t appear they do.
We all know it’s rubbish and illogical so we won’t press on it again. What we will have a crack at is the idea that a rising population increases house prices.
Who says it does? Again, where’s the ironclad guaranteed evidence that a rising population increases the value of housing? They can’t make a claim like that without backing it up.
Like the challenge we issued on the now discredited “chronic housing shortage theory” we’d like to see what flimsy evidence the spruikers can come up with on this one.
Because to our mind, a rising population is could be seen as irrelevant in terms of house prices.
We’ve stated before that house prices are determined by supply, demand and price. And that the property spruikers conveniently leave price out of the equation when they make their claims.
Well, the other assumption that is widely made is that a rising population automatically means rising demand for housing, and therefore rising house prices.
Although it may be true that a rising population means a rising desire for housing, it does not necessarily mean that demand to buy a house rises and therefore it does not necessarily mean that prices must rise. Just as a rising population does not necessarily mean prices of any other product, commodity or price will rise.
They will only rise if the price is at a level at which people can afford it. If prices rise too high for anything then the demand will fall as less people are able to afford it.
Therefore you could increase the population as much as you like. If prices are too high it won’t make one jot of difference. In fact, once you have more people than the number of houses in a society you could argue there is always more demand than supply.
Therefore does it make any difference if you have 11 million more people than houses (such as is currency the case), or whether you have 15 million more people than houses, or 20 million?
If prices are too high then housing will be unaffordable, and the size of the population is irrelevant.
The way the property bulls go on you’d think Australia is only ‘importing’ multi-millionaire immigrants who can afford to pay any price that’s offered.
It’s obviously not the case.
In fact, it’s possible, just possible, that an increasing population will actually create the conditions for a housing price collapse.
How so? Well, even the property bulls can’t argue against the fact that the housing market is built on paper foundations – credit created by the banks.
The higher house prices are, the more buyers have to borrow. That’s been proved by the recent statistics showing first home buyers especially taking out massive mortgages. Mortgages that are bigger than those taken out by non-first home buyers.
It means that the banks have to lend more money to more people in order to keep house prices rising. The more they lend the greater their exposure is to something going wrong – for instance, borrowers over-extending themselves by borrowing too much.
It’s just like the stretched elastic band, you can only pull it so far before it either snaps back, or it just breaks.
As soon as credit is contracted – which it hasn’t yet remember – then that means borrowers are able to borrow less money from the banks.
Less money borrowed means a lower borrowing capacity. A lower borrowing capacity means prices of assets bought on credit must fall. That’s right, must fall. Not flatten out.
Because everyone will be impacted. Everyone will have the same limitations on credit. And everyone will have the same reduced equity or value in their existing home.
Banks are already at the limits of providing credit. As was seen last year, Australian banks were within a whisker of going broke.
And nothing has changed since then. They’ve borrowed a bunch of money to replace money they lost, but they are up to their eyebrows in housing debt. What is their capacity to lend even more money to keep house prices sky high?
They’ve gotten through one collapse by the skin of their teeth, odds are they won’t be so lucky next time.
As I’ve said many times before, we’re not talking rocket science here, we’re talking common sense.
Whichever way you look at it, a housing price crash is near if the banks start to contract credit, or it’s merely postponed if they can keep the housing pyramid-scheme running for a while longer.
Other Stuff on the Markets
The S&P/ASX200 jumped 1.62% yesterday, while overnight on Wall Street the Dow Jones Industrial Average dropped 47 points. In Europe the FTSE100 lost 0.12% and the CAC40 slipped 0.28%.
The price of gold in Australian dollars is trading at $1,136.74, while in US Dollars it is trading at $993.40. And the price of silver in Aussie dollars is $18.53 and in US Dollars it is $16.19.
The Aussie dollar gained versus the US dollar and Japanese Yen, trading at USD$0.8725, and JPY78.51.
Crude oil closed overnight at USD$66.47.
For the biggest movers on the market yesterday click here…
{ 51 comments… read them below or add one }
Kris what is your problem? Tony Richards does a fine job of explaining the supply side restrictions that prevented supply increasing in response to high prices.
Of course he is not going to blame his own mob for the low interest rates, nor blame his master (federal govt) for allowing too many immigrants to come in. So to get the full picture you must add in these factors.
Kris do you honestly believe that supply on the fringe of Sydney has not been choked by govt? Do you think that zoning restrictions, $100,000 in levies, and poor transport has no effect on the ability of a young family to obtain a house?
You seem to think that prices are completely unconnected to the physical reality of houses and we can all have a cheap house without building any more, and we can keep immigration at 400,000 per year and need no additional train lines or no changes to zoning.
I am sorry to note that this article on house prices is the worst to date of a very bad bunch. The pot and the kettle and something black comes to mind when reading some of the accusations levelelled against the “spruikers.” As far as I can tell, Sayce has learned absolutely zilch from the discussions generated here, and I am tempted to think that he is simply baiting us for more. Anyhow …
abc, are you still with us? You asked some time ago about potential sources for alternative views on the global economy, etc.
Here is one, for the much celebrated and flamboyant trend prognosticator, Gerald Celente. He is a hoot, very entertaining, and take no prisoners commentator on Washington politicians and the “white shoe boys” on Wall Street. (Scroll down the page to the start the latest video posting.) Well worth a listen. Enjoy.
[http://geraldcelentechannel.blogspot.com/]
try that again:
http://geraldcelentechannel.blogspot.com/
lol – I have to agree with Claw here. The government have much to answer for here in relation to the unaffordability of house prices in Australia.
For heavens sake – vote the SOBs out!!!
And this link will take you to the blog of star performer, Dr Doom:
I follow him very closely. He is a character, and mostly on the money.
http://www.marcfaber.tk/
Discussion closed for my part – good luck everyone
Housing is Sooooooooooo overpriced here in Perth its absolutley hillarious that these property spruikers out there can think there is any growth left in what is a high maintainence, high entry & exit product…..so funny. Anyone buying property here in the West thinking this Gorgon deal will reap in the dollars for you are A) too late and B)plain stupid.
What I particularly enjoy is that anyone at the Reserve Board has the hide to pick up a paycheck after offering opinions and forecasts with utter conviction then expect them to be taken seriously! Are these the same people who were consistently hiking up interest rates to fight ‘inflation’ (succesfully demonised by Swann & Rudd) whilst world economies were on the lead in to the GFC toilet? Well spotted crew! They must really have had their finger on the pulse of the economy eh? What short memories we choose to have. We love to have someone patting us and telling us they know precisely what they are doing and what will happen next. That’s okay when we are kids but with wisdom we should become aware that very few people we will ever meet are actually able to deliver on this. Most people, particularly those in positions of structured authority are afraid to offer a real answer such as “I don’t know”. Based on their previous efforts the reserve suits certainly don’t deserve to be on that highlyexclusive list of givers of good advice.
I’m afraid these indeed are the same fat cat bludgers, bb. The world economy was falling off the cliff, and these morons were still putting up rates. Unbelievable that they should have the hide to even show themselves in public. But, hey, they are being paid to know and to meddle. And guess what, now they are making noises that, not only are they itching to start hiking interest rates again, but also that there should be some more direct meddling with property prices to prevent them from going higher. Unbelievable. If they want to crash the market, they can any day, and damn the consequences. If employment has been suffering up to this point, watch out below if these bandits start their destruction of the economy again.
They would do us all a tremendous favour if they simply let the market, the banks and other lending institutions to set the rates as they saw it prudent to be set, not to mention returning us to stable and sound money. But no such chance. Why would they give up free lunches and dinners, and all else that keep them in the lifestyle they have become accustomed? With all this freaking meddling and professed expertise, how can anybody feel safe with regard to our economic future?
Kris, instead of bagging out Tony Richards, you could have given yourself credit for how much his views actually conform with yours. He did a great job giving his honest view given he probably wasn’t allowed to give a bullish or bearish opinion on house prices.
The first valid point he makes is that housing affordability has improved primarily due to abnormally low interest rates which he states won’t last, and when that happens, “housing affordability will again focus more on the level of housing prices relative to incomes”. In other words, house prices will have downward pressure once rates inevitably rise.
Second, notice how similar his view of supply, demand and price conform with yours.
* First, he says the concept of “underlying demand” is simply an estimate.
* Second, he observes that the trend towards lower household size has been broken this decade, which he attributes to the high price of housing. This is essentially your idea that price affects demand. Generation Y opt to live with parents longer because they cannot afford a house of their own.
* Third, he makes the point that supply hasn’t responded appropriately to price rises (due to red tape, etc). This, he implies, has contributed to excessive price rises). Assuming this climate of red tape is temporary, the temporary supply unresponsiveness will not last, and when supply becomes more responsive it will lead to a house price downside. This is a point you have not quite covered in depth I think.
The third point about housing as a consumption item I noticed you jumped to applaud, but perhaps he didn’t use the word “consumption” in the same way as you would. You would use housing as “consumption” to emphasize it in contrast to as an “investment”. I think he used that point to say, rather in contrast to his opening, that the recent house prices is actually a BAD thing, as it “allows less spending over our lifetimes on other items.”
Overall, his article reveals he is actually a property bear. You shouldn’t bag him out.
Nice article Kris. Hit the nail on the head. As soon as one mantra dies off, another one is born and done to death.
You got it spot-on there CB!
I reckon our reserve bank is the biggest bunch of imbeciles of all the reserve banks of the ‘free world’…
We are still reeling under REAL unemployment and underemployment (not the BS they spout as the ‘official unemployment rate’) and as you point out the fools are already wanting to raise interest rates from “emergency lows” (which happen to be almost 3% above most other developed economies) …
cb:
And what are the consequences of a crashed housing market? That people lose some or all of the paper equity that has been built up as a product of speculation? Equity that is hardly a product of productive endeavour. Are you saying that that is something that should be avoided? Were it not for government grants to keep it propped up, that would have occurred already. The market is trying to fall of its own accord, but the government keeps poking it.
You say that They would do us all a tremendous favour if they simply let the market, the banks and other lending institutions to set the rates as they saw it prudent to be set, not to mention returning us to stable and sound money.
But that would also suggest that you don’t think the government should be propping up the property market with grants – is that not also unnecessary interference? If the property market is so robust, it would not need propping up. Same goes for all manner of things – car makers for one.
Just as a market can deliver windfall returns because of speculation in a rising market, so it can also deliver losses when that speculation turns sour. It’s happened in stocks and practically every other asset class, but all stops are pulled out to prevent it happening in the real estate market. Why are the gains from speculation in a single asset class protected at all costs while other asset classes are allowed to fall with the market. The government has not stepped in the first share buyers grants because the share market has fallen. It’s left to fall – as it should. This is hardly free market capitalism.
Yes, there are political factors at play. So the reality is that Kev is scared that voters will turf him out because they’ve taken a hit to their hard-earned equity that they now see as a god-given right and won’t be able to use it as an ATM to fund holidays, renovations, private school fees and so on. And Kev is scared that the ALP donors (property developers) won’t be happy because they are not getting value for money from their donations.
It’s ok that these are the reasons that house prices aren’t (and possibly won’t) fall. But let’s call it for what it is rather than have this pretence about letting the market have its way. Because if the government did let the market take its course, you probably wouldn’t like the outcome.
We should encourage the migration of qualified trades people. Tens of thousands of brickies, sparkies, chippies, painters, plumbers, etc…. Would that push up the price of housing?
Ralph – brilliantly said!
Thanks Sandra.
It just annoys me to see people praise the real estate market as free market capitalism at its finest but overlook the fact that it’s living on government-funded life support. In fact, it’s the most protected market in the country (for many reasons, including what I have mentioned previously, not to mention keeping the banks solvent). If it’s such a good bet, let’s take away all the government support and let it run under its own steam. We should then, of course, continue to see booming prices. Somehow, I don’t think that will be the case.
I’m a realist and expect the government to continue propping up the market for as long as it’s politically feasible to do so. I think we are coming up against political obstacles at the moment though. For example, how will the government rationalise new support for residential real estate when the general public thinks the economy is booming and that we need to think about winding back the stimulus.
I’m talking about new, fresh stimulus here. I’m sure the existing stimulus will remain in place right until the bitter end. But I think the government would find it very difficult to announce new stimulus measures, short of a GFC II – the public (not to mention the opposition) would see it as reckless and irresponsible. So I think the government is in a bind.
Perhaps all of this means that means that real estate is a safe bet. Some people see it that way, but it’s only a safe bet for as long as the government protects it in the way it does. The problem with that is that the government can, and often does, change direction. There is nothing to say that support for the property market will be reduced at some stage in the future. Will that happen? Probably not. But that is a risk that property investors take.
Ralph, very good points in both your articles. You bring a good clear perspective to the discussion. Only comment I would make is that the government support for property prices ( in all its many guises) may still not be enough to keep the property prices from declining (eventually). Many governments have been complicit in the same game across many different markets/countries/time…….not many (none) ultimately have succeded.
Very true, Simon. Everyone is in cahoots on this. And now we have a situation where the general public sees a house as the easiest way to wealth and are prepared to borrow staggering amounts of money to do so. The fact that people have been able to borrow using their paper equity to fund their lifestyles is also incredible. So now the whole thing is teetering on knife-edge threatening to implode. Right now, the government has achieved it’s goal. Obviously the political consequences of a house price crash are disastrous.
I reckon all that can be done now is sit back and wait a while. I expect all sorts of hysteria from the real estate industry telling us that now is never a better time to buy. But the real key will be what happens in 2010. Will the government let the FHOG lapse in December? As I suggested earlier, I reckon they have no choice. If they extend again, everyone knows that it’ll be around forever and there’s no hurry to buy. So what next? Favourable tax treatment? There could be something for real estate speculation in the Henry tax review. Who knows. I’m sure treasury is working on it as we speak.
We now have an economy based on digging up dirt and selling houses. We’re not that different to Angola, Nigeria or Venezuela. You would think that the government will have to run out of ammo to keep propping it up at some point in the future. They’ll have to decide what other worthy spending program gets cut so that we can continue to have high house prices. Sad but true. We’ll see.
Ralph, I happen to agree with you on every point, except for your assumption about where I stand on FHOG and other stimulus measures that might be propping up the housing market. Let me jot down a few points about where I stand, in no particular order:
- First, I have said absolutely nothing so far as to whether these are good things or not.
- Second, I have said repeatedly that I was all for property prices to drop, and that the sooner they do, the better, from my personal perspective.
- Third, I have said that just because prices should drop, we should not assume that property ownership will become easier, that housing affordability will improve. Why? Because even if you see a price drop of 40%, it is of no use to most people waiting to buy, if banks will not lend, if you cannot get credit.
- Fourth, I have indicated that I am all for stopping all government meddling and interference in markets. The comment you singled out just happened not to mention other forms of meddling beside the one it did.
- Fifth, while I would like property prices to come down for my own selfish reasons, I would also expect that a sudden, hard landing would have the same devastating effects on the economy and employment as it did in the US and Europe. Hence my comment that the meddlers should simply p!ss off, and leave us alone. It is bad enough that they have sat us all on a powder keg, now the morons can’t leave it well alone, but also want to light the fuse.
- Sixth, in earlier posts I have expressed the view that so-called capital gain “paper profits,” are a misnomer because they are not gains at all. Rather, they are the symptoms of inflation, and those who appear to be sitting on such gains have merely protected the purchasing power of their savings from the ravages of inflation.
- Seventh, I believe that we ARE sitting on a powder keg and our prosperity can be blown sky high by these gangsters, meddlers and busy body fat cats; and that much of the mess we are in is due to the bankster-political alliance, who live off the productive economy like so many ticks, fleas and lice. Their schemes and scams have enslaved the good people with debt to the point that hardly anyone can hope to own a decent home without paying them a “rent” for the privilege.
- Eighth, I see no change in sight, and in fact thing will probably get worse, and when we are blown sky high, it will not be the movers and shakers who will pay the price, but the good people.
- Ninth, in spite of wanting ans wishing prices to drop, I will probably not be so lucky, at least not in time to save me in taxes and fat cat fees.
- Tenth, I happen to believe that property is still a reasonable investment, when you compare it to the available alternatives, while conceding that prices can, and probably WILL go, both up and down, and therefore that anyone who invests in property should not try timing the market, but enter it when they have the opportunity to do so safely, and then simply ride out price movements, wherever they might go. If you try to time it, you might as well forget it. It is too illiquid, and entry and exit costs are horrendously high for that sort of speculative activity.
I probably happen to have a rather complex, but hopefully not contradictory position overall with regards to politics, the markets, and the economy. A simpler position would be easier hold and articulate, but, bane of my life, simplicity mostly escapes me.
Ralph, you said:
“It just annoys me to see people praise the real estate market as free market capitalism at its finest but overlook the fact that it’s living on government-funded life support. In fact, it’s the most protected market in the country (for many reasons, including what I have mentioned previously, not to mention keeping the banks solvent). If it’s such a good bet, let’s take away all the government support and let it run under its own steam.”
As I said, I have no issue with any of this, except for the mistaken assumption you make in that first sentence, but let me ask you this: \
In an ideal world, where would you draw the line? Or rather, where do you think sky high house prices come from? To say that stimulus is helping to sustain the bubble is one thing, but do you also think that government stimulus is what got prices to where they are? In other words, who, or what, blew up this bubble in the first place, and one we identified the cause, would you recommend that we eliminate it, so that there will be no more bubbles in the future?
Well put, CB. I think we’re largely in agreement. It’s a disgraceful situation that the economy is in when our national prosperity is pretty much dependent on ever increasing house prices. As a nation, we don’t produce much and continually bid up the price of houses to make us feel wealthier. But we’ve come so far down the road, there is no easy exit that will not hurt many people. So rather than face that unpalatable truth, the government chooses to try and hold the house of cards together. If they don’t they’re probably out of office, so it’s a no brainer for them.
The whole thing can only have a bad ending. The only point of real debate is when it happens. The government could well spend and print money for several more years yet, unfortunately. Will they do it? I’m genuinely uncertain. I’m thinking that Kevvie can’t justify doling out more stimulus and handouts that haven’t already been announced. He’ll appear to be even more Whitlamesque than he already does. But then again, we’re talking about the primary source of wealth/confidence for the majority of Australians, so I wouldn’t put it past him. Flip a coin.
The median price of a house might be $1m by then. If the great Aussie dream is still to own a house, then that is going to be a problem. Unless Aussies are prepared to give up the dream, a government at some stage in the future is going to have to let the market take its course. If not, the egalitarian notion that this country is built on will vanish in a puff of smoke. Or perhaps young Australians will need to wait till their parents kick the bucket before they buy a house. Maybe that’s just how it’s going to be.
I see a lot of new real-estate agents coming in and selling houses.
There are the big names opening up franchise two in one suburb.
And now we have these small time who don’t even have a web site they just use
Real-estate.com.
I thought when times were hard and house prices slow that only the big time players would hang in there.
The point I’m getting at is from an observation that we really have not seen that much of a tough time yet.
Yes prices did go down but not to the extent that the houses flooded the market, which slows down turn over and the real-estate agency consolidates or the small disappear.
So we still have maybe up to 5 years of interest rate drops until we get to 0 to 1% like the rest of the world, then the housing market bubble might pop in OZ.
CB @ 23:
Sorry, I missed that comment.
No, I don’t think it was stimulus that got the property bubble going. I think it was easy credit in the boom times that did that, followed by irrational exuberance associated with what seemed like easy windfalls that came from simply flipping houses. It all just seemed like a conveyor belt that everyone could get onto and banks just assumed it would go on forever. And they’ve been rewarded by the government in the form of the deposit guarrantee and the first home buyers boost.
That’s fine – that’s what markets can do sometimes. But when it started to turn downwards (as all markets do) in mid-2008, the government stepped in. That’s where I think the stimulus has given it a life of its own. The gov’t was happy to let everything but property go down the gurgler – and that’s why I think we’re now on the brink of a crisis. And you can almost feel it in the community.
On one hand, Swanny and Kevvie crow about our fantastic GDP numbers and that our economy is going great, but then they say that we can’t withdraw the stimulus because it all might collapse. So which is it?
In terms of future bubbles, of course they will happen in the future. That’s the nature of the market. I genuinely think the problem is the banking system. That banks are so highly exposed to property is a problem. Even with so-called tightened credit, it’s still very loose. The only thing I can imagine might prevent something like this happening again is legislating something like a 80% loan to value ratio so that the crazy lending doesn’t pump too much money into the market to send prices soaring again.
Ralph – We don’t manufacture a lot, but we do produce a lot.
By my lights, that is one cogent analysis, Ralph. The problem is the fact that bank lending has infested the property market. A home is essential for shelter and for raising a family, and there is virtually no upper limit to what people will pay for it. It is almost like food or water. When the chips are down, a home beats even gold, if it should make sense to make such a comparison.
Hence, the banking system, aided by a fiat currency that they can simply print up on a piece of paper, managed to invade and infest the property market, and has positioned itself to extract an ever greater share of the household income. It is a pernicious situation that should have never been allowed to happen. But now that it has, who can wind it down? Who will be brave and wise enough, and should we ask, decent enough to do it? It probably will not be a politician, as they are in cahoots with the bankster establishment. Ah, … why am I doing this to myself?
CB , I have read with interest many of your posts on this topic over the past month. The more you post (and read other posts)…the less certain of your earlier opinions you become…..which makes sense I guess as we are all learning as we go and it is refreshing that many who blog on this site are open minded and welcome various different points of view…whether they agree with them or not.
I think my opinion has also changed as the past month has progressed.
Kris wiould be very happy that he has helped encourage a healthy debate and has at the very least educated all of us just a little bit ( even via each other) through this process.
Re property, there really does not seem to be any consensus. I think most think its overpriced …….but who the hell knows!
Well done to all on this topic.
CB , I have read with interest many of your posts on this topic over the past month. The more you post (and read other posts)…the less certain of your earlier opinions you become…..which makes sense I guess as we are all learning as we go and it is refreshing that many who blog on this site are open minded and welcome various different points of view…whether they agree with them or not.
I think my opinion has also changed as the past month has progressed.
Kris would be very happy that he has helped encourage a healthy debate and has at the very least educated all of us just a little bit ( even via each other) through this process.
Re property, there really does not seem to be any consensus. I think most think its overpriced …….but who the hell knows!
Well done to all on this topic.
Peter – sure. It’s just that one of our main industries is producing paper equity on the back of speculative residential property flipping.
Ralph – Fair enough, I accept that you were emphasising to make your point.
Well, thank you Simon for such a good natured comment. You are probably right, my levels of hope, fear and certainty do fluctuate somewhat and it may not all be due to good reasons. Even the gods could have an influence, depending on whether the right sacrifices have been made. And, yes, I do make a conscious effort to stay open to good arguments and well reasoned points of view, which sometimes can result in a complete loss of confidence in what I should believe. But may I kindly ask you to be a little more specific about where you see my confidence to have waned? I should reflect on that.
CB – Yes, that’s the big question, isn’t it? How is it all corrected?
As you say, the financial system is practically ruined. It’s just a shell. The tide has gone out and the economy is naked. Many countries (such as the US) have debts they will probably never pay back. Banks are sweating on homeowners paying back loans on overpriced houses so that the banks themselves don’t go broke. Hence the first home owners grant boost and government deposit guarrantees. And the government can’t even talk about it – ssshh, we might lose confidence.
For the time being, I think the game is to borrow and print to stimulate the economy and paper over the cracks for as long as possible. All while praying that the house of cards stays upright. We’re trying to fix too much debt with even more debt. And somehow we’re meant to believe it’s going to be ok. How long will that be? Probably a few years, I reckon. I don’t think there will be any politicians brave enough to do anything else.
I think at some point though, there will be wholesale debt forgiveness. I reckon the government will have no choice but to legislate that perhaps a certain proportion of debts (owed by businesses and individuals alike) be written off. Perhaps they’ll print the value of the debt and introduce a new currency?
And I reckon there will be all sorts of accounting trickery employed – we’ve seen it in the US with mark to market conventions suspended because it’s convenient to do so. Anything to ensure that governments, banks and big business won’t have to face up to the enormity of the situation.
Overall, I dunno. Too many variables. That’s just my lazy reading of the situation. But I can’t see it ending prettily. And fairness won’t really be in the equation either.
It is funny, isn’t it, that debt keeps being pushed onto the good people right, left and centre. Debt is already the problem, and they want to push more and more onto us as a solution. Are these pushers stupid, or criminal?! Looking at it from their perspective, the more debt they push onto people, the more “rent” they can collect from the productive economy. That is why they will avoid the only decent and workable solution, which is, as you say, good old fashioned debt forgiveness.
Even the ancients realised that the Jubilee was an essential part of maintaining social harmony and economic health, but the small minded greedy oligarchs of today are too stupid to realise that there is such a thing as pushing an otherwise good thing too far, so I am less than optimistic about avoiding disaster and unnecessary upheaval and misery. Modern day oligarchy seems to be so greedy and stupid that they would much rather take a nation to war as a distraction than give an inch to gain a yard for themselves and the common good.
I mean, how much future income has Washington poored down a black hole just to keep up a few select banks, and the bonuses to their greedy fat cats? They could have instead wiped out all the private debt with the same money, and have had by now a booming and humming economy. Instead, more and more people are being pushed out into tent cities and losing their livelihoods and basic human dignity. When you see that goes down, it is hard not become jaundiced about the entire system.
The housing market is no longer viewed as an economic market, it is a policy dillema…I think Richards made that clear and he was pointing out what a fix the Government has got itself in.
The best part about the Richards speech is that he highlights the fact that high house prices are not a good thing for most people and the only people it helps are people who ususally dont need any extra help.
This is the first important step in correcting the policy wrongs of the past few decades. Government’s should have as one of their core responsibilities, the task of ensuring the cost of cost and shelter doesnt rise beyond the reach of the average person.
If Governments around the world are willing to run all kinds of private entities, then they should be willing to create the environment needed to lower the cost of housing in Australia.
I agree, PuntPal, it’s a special market that’s become a policy dilemma. The government needs to keep property prices high for a whole range of reasons. Australia’s entire economy lives or dies on ever increasing house prices. Let’s imagine how the banks would cope with decent falls across the board – say 20%, much less than the extreme 40% that some commentators refer to. And imagine how people would react to 20% falls. Confidence would go through the floor because they no longer felt as wealthy as they did the day before, equity would disappear and private spending would probably contract considerably. And the downward cycle begins. So we can see why the first home owners boost was put in place.
It’s quite incredible to think that continuing high house prices are as essential to the Australian economy as continuing to sell iron ore and coal to the rest of the world.
I think this is becoming something like climate change – I believe Australians do care about house affordability for future generations, even if that means their own equity falls a bit. If house prices get so high that ordinary people can’t buy a house without going into staggering debt that requires extraordinarily loose lending from banks, the great Aussie dream will come into question. And to the extent that the great Aussie dream of home ownership stays true, political parties will be forced to take action to put downward pressure on house prices.
I don’t think we’re quite at that point yet, but the RBA jawboning indicates that we’re heading in that direction. I think all of these RBA statements about interest rates and home affordability are actually conversations with the government. Kevvie and Swanny want to borrow and print as much as necessary to keep the economy afloat, but of course that is inflationary and will necessitate a rise in interest rates. So the RBA is talking to the government and warning them that the RBA will have to act if this silliness doesn’t moderate a little.
I keep coming back to what happens in early 2010 after the first home owners boost is withdrawn completely. If we get a rate rise or two between now and then, things will be interesting. The government will have to make a choice as to whether to pump more money into real estate or let it go. I’m crossing fingers they’ll let it go, but don’t have much confidence of that.
Puntpal – I agree. Right-wing free marketeer that I am, I would still support a federal program for construction of medium-density housing. Rather than auctioning out land that is “banked” by developers to choke supply, government should develop the land and then sell the assets to the market. Problem solved.
Except of course – government is owned by the RE industrial complex, and so is media. So let’s not hold our breaths.
Sweden suffered a severe housing shortage in the 60’s/70’s as the boomers came of age, and Government acted decisively to fix the problem by building a million dwellings over a ten year period (”The Million Program”). Ugly buildings for sure, but a social disaster was averted. Bear in mind that Sweden had no more than about 7-8M citizens at the time.
http://en.wikipedia.org/wiki/Million_Programme
N – I’m getting worried here because we all seem to be on the same page, but rather than more government interference in housing prices, I prefer your suggestion of low cost cluster or higher density housing to alleviate the shortage. With private sector involvement the government could even turn a nice profit.
The main danger that I can see is that government forays into housing in the past have been at the tacky end of the spectrum, but a great range of architectural styles and materials are in use now, it is possible to build low cost housing especially when govt owned land is being released.
PF – agree that the architecture of Sweden’s million program was (in some cases) vile, but that is a comparatively minor problem. By the end of the day we NEED modest, high-density housing to cater for young people and low income earners.
Joint government/private ventures is the obvious solution, assuming that the finished product auctioned off into private hands. But who would stand to loose from such a deal? Follow the money. It won’t happen in Australia.
N – agreed, but I don’t want to drive down the price of houses, that would de-stabilise, I would prefer to hold an almost flat price curve for some years thus increasing affordability, and deflating debt. You’re probably right, it won’t happen, but it is worth trying for.
I’m not smart enough to come up with a better idea, so if anyone has one you have my attention.
PF – a plateauing of prices and steady decine in real cost through controlled inflation would be the best outcome, but as CB said in a previous post, we are balancing on a knife-edge and the risk of falling hard either side is high (higher probability on one side in my view, but let’s not go there again).
N – To hold prices flat we need increased supply and lower govt costs in land subdivision, building, and stamp duty/transfer costs, rather than a grant.
N – Agreed, but as I stated previously I don’t have a better plan with a better outcome.
My outburst the other day by the way was not because I can’t see any possibility of a downside, but due to my angst at the general belief on this site that the population increase cannot cause greater demand for housing and thus price increase. I hold the reverse to be self evident, so I apologise if you got caught in the cross fire. I can be a prick I know.
If we don’t admit the problems we cannot fix them
PF – my view is that house prices are goverened by 1) supply, 2) demand, 3) availability of cheap credit and 4) the public’s propensity to take on more credit. Even if conditions 1 and 2 are favourable for increased prices at this point, conditions 3 and 4 point very much in the other direction. Hence my view is that price falls are likely in the medium term.
Think of it this way – there are X number of dwellings in Australia and they will all be inhabited irrespective of where property prices go. Ponder this for a minute and you will probably come to the same conclusion. That leaves credit availability and debt service capability as the major determinants for price.
And don’t worry – if I wanted a fully civilised dialogue then I wouldn’t be posting anonymously on this blog. Like McEnroe I perform best when I have an adversary to throw arguments at.
N – I don’t disagree with the importance of the 4 points mentioned, but point 3. We do have cheap credit, and plenty of it albeit on a more conservatively qualified basis, and.
point 4. the public are again taking on more debt, so I think that the short term risk is on the upside.
BUT – Future interest rate increases will impact on point 3 and point 4. Bear in mind that interest rises that are too steep will also severely impact on the largest employer group and hamper the recovery.
The next few years and probably beyond will continue to interest.
This is an interesting blog, I hope the govt reads it – Anyhow, I think they can salvage things using my easy to follow two step plan
(a)tax the hell out of residential investment property income/rents and (b)reduce income taxes across the board (even the high end). So instead of steering Australia’s wealth into soil and bricks and splitting future generations into systemic owners/renters, it would go towards productive and taxable outlets. Australia would then be able to grow its economy and compete globally. Negative gearing is a cancer which must be eliminated – it’s criminal. Prices would drop but banks would receive record deposits and people will earn more…everyone’s happy. Failing that they’ll have to resort to a death tax as their coffers dry up.
Hi Folks there ,
It si refreshing to find out different viewpoints to look beyond the Govermnebt RBA & & the Nespapers especially real estate spin doctors .It was only yersterday 4/10/09 that the real estate Dr. Spiner saying & repeating the same old thing that there is no better time to buy then now as the prices will always go up due to increase population , undersupply , low interest rate-the same slogon become very repetitve and tiresome
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