Day three, and still nothing from the property spruikers apart from statements such as “of course increased population leads to higher house prices.” There’s no of course about it.
Gee whizz, if your editor used such flimsy arguments when tipping a stock in Australian Small Cap Investigator or Australian Wealth Gameplan we’d be locked up.
Seriously, the basic argument put down by the spruikers is this: chronic housing shortage equals rising prices, and massive population growth also equals rising house prices. Therefore property investors get rich.
In reality, if the housing shortage is that bad, and the population growth as high as they claim, we aren’t looking at a get rich quick scheme, we’re looking at slums and ghettoes as 35 million people squeeze into 7 million houses – not counting the holiday homes of course.
But we’ll give the property bulls a while longer to come up with some real arguments and evidence to support their simplistic claims.
Until then…
We’ve seen a lot of bravado from across the range of politicians, commentators and analysts recently. None more so that Michael Pascoe.
If there is a bigger cheerleader for government intervention and the idea of spending our way out of debt, and that Australia’s banks are the strongest in the world, and buy property now while it’s cheap, then we’d like to see them.
Take his recent effort supporting the bullish view of the economy – rising airline travel. Again, another flimsy extrapolation of data if we’ve ever seen it.
Of course, he’s not the only one. Mainstream economic commentators seem to have lost their marbles over the last year. We wonder if they really are incapable of seeing the poor shape the US economy is in.
Forget rising airline travel, and look at two iron clad proofs that spending your way out of depression doesn’t work.
Reports overnight show that US auto sales fell 41% in September as the ‘cash for clunkers’ programme ended.
That sales fell in a heap doesn’t surprise us. That it surprised the market, well that doesn’t really surprise us either. Not when you consider most commentators inability to understand how an economy works.
The government can’t just borrow a few billion dollars from the taxpayer in order to give it to car manufacturers, so they can give a discount, and then hope buyers keep coming back when the discount ends.
One-off discounts may work for consumption items like peanut butter or bread or cereal. Give a discount this week, hope people give it a try and then maybe they’ll buy again when it’s full price next week.
Funnily enough people tend not to buy cars on a weekly basis. A discount, paid for by the taxpayer achieves absolutely nothing. Or nothing positive anyway. All it does is rip money from the future pay of taxpayers.
Because remember, the US government is broke. It doesn’t have any money to spend. It has to borrow it and print it.
The other news item that should be creating more concern than it is, was news of the 95th bank failure in the US this year.
That’s right, so far in 2009, ninety-five US banks have collapsed.
Why does no-one in the financial markets seem to care about this? Shouldn’t this be a sign that proves things are not good? Shouldn’t this be evidence that not just the US banking system, but every other banking system in the world is unsustainable and on the brink of collapse?
And don’t think Australian banks are any different. Like we’ve written before, we don’t care that they’re up 50% or more in the last few months, we still wouldn’t touch them with a barge pole.
Once you really stop and take a look at how banks operate, no-one in their right mind would ever invest in them again.
But back to the US bank collapses. The reason why no-one cares is the absence of moral hazard. Most depositors don’t care whether banks survive or not. That’s because as far as they’re concerned their savings are insured by the FDIC – a government agency that is effectively insolvent.
It means savers have no need to be careful where they put their money. If there was no savings guarantee or no implied savings guarantee, you can be sure investors would be more cautious with their savings.
If they thought the bank was taking too many risks they’d pull their money out. If everyone did that there would be a ‘run’ on the bank and then it would collapse. But the point is, there would be an incentive for the bank not to take unnecessary risks, and investors would be more careful about where they invested.
The irony of course is that even if savers don’t lose their dollars now, they will lose them over the coming years as inflation eats away at the value of their dollars. It’s the proverbial death by a thousand cuts rather than a swift jab to the heart.
But what about Australian banks? Does any of this have any relevance to them?
The answer is yes. Simply because banks worldwide operate in the same way. The difference is that Australia only has six banks, compared to thousands in the US.
But that doesn’t make things any better. It just concentrates the same problem into a smaller number of financial institutions.
Potentially that could make the problem worse in Australia when one of our banks collapses.
Of course, Australian banks are even more tightly aligned to the property market than those overseas. You only have to look at the spruiking from the economists at the banks to see that.
The fact is, it isn’t possible to borrow and spend your way out of debt. We would have thought even the mainstream commentators could have seen that.
Obviously not.
But does this mean that stock markets will rise, fall or remain steady? As you’ll have read in Money Morning, I’ve been cautiously bullish about the direction of the market, despite recognizing the major problems in the economy.
The key is to know when to get out. The borrowing and spending will have a short term positive impact, as it had with the ‘cash for clunkers’ programme in the US.
But longer term, just as that bail out wasn’t sustainable neither will the other bail outs, including those for the banks or the property market.
A twin collapse in the banking sector and the debt fuelled housing market will be the inevitable consequence.
The stock market won’t be immune, so you should continue to view it as a high risk punt if you’re after capital growth – a strategy we’ve followed and recommended to great success in Australian Small Cap Investigator.
Income producing stocks, while not immune either, should be chosen with care, and based on their ability to maintain dividend payments during another downturn.
The key here is to monitor your portfolio and set your own trailing stop levels to exit the market if you’re nervous. That’s the same whether you’re trading blue-chips or small caps.
Our guess is, the collapse hasn’t arrived yet as there’s still a whole lot more borrowing and spending that governments can do that will prop global economies up for a while longer.
If you’re brave enough to buy into the market before the weekend you could have picked up a few bargains as the economic rose-tinted glasses reappear on Monday.
But, it’s still a risk if you’re prepared to do it.
Other Stuff on the Markets
The S&P/ASX200 dropped 0.90% yesterday, while overnight on Wall Street the Dow Jones Industrial Average slumped 203 points. In Europe the FTSE100 crashed 1.68% and the CAC40 collapsed 1.97%.
The price of gold in Australian dollars is trading at $1,150.80, while in US Dollars it is trading at $999.36. And the price of silver in Aussie dollars is $18.83 and in US Dollars it is $16.35.
The Aussie dollar slipped versus the US dollar and Japanese Yen, trading at USD$0.8699, and JPY77.88.
Crude oil closed overnight at USD$70.43
For the biggest movers on the market yesterday click here…
{ 35 comments… read them below or add one }
Day three, and still nothing from the property spruikers apart from statements such as “of course increased population leads to higher house prices.” There’s no of course about it.
Technically that statement is correct if supply of dwellings and supply of credit keep pace with the population increase, in a market where rates and other factors remain the same. So Sayce is correct.
But that is not the case if supply of dwellings has not increased to match population increases. I fact we can manitulate the above to get any result we want, but alas in real life we only have the facts before us, and not some theoretical situation.
So we get back to the debate of whether there is an undersupply of homes or an oversupply.
Come on Kris, convince me that your oversupply theory is correct, because your last attempt fell short of a convincing argument. Way short.
Isn’t the argument that if the banks fail, it won’t matter how many poeple migrate here…. You won’t be able to borrow the money… And hence the prices will collapse?
What we need to figure out is what is the likelihood of the banks failing…. And what the heck to do if they do fail….
Since if they fail, savings will dissapear, stockmarket collapses and housing collapses…. So what on earth do you do with your money to prepare????? I would really like some help here…. Since what you’re saying alligns with what kiyosaki is predicting…
It’s refreshing to get independent commentary… I would love to know what sources you get your info from as it’s hard to distinguish. The truth from anything media related…..
Kris, Much of what you say can be true, or be mostly true, and yet fail miserably as justifications for your conclusions. Your arguments are largely broad brush and have more holes in them than a sieve. To top it off, your extrapolations from the US to the Australian context are vitiated by the many differences and disanalogous details that you largely ignore. Similarities count, but differences also, and equally.
Anyhow, after the jolly sacrifices to Bacchus tonight, I would like to offer just one half-sober idea for thought:
With all the homage I am prone to pay to the gods of free markets and freedom from debt, I would consider it idiotic, and criminally stupid, if for example, I refused to do the weekly shopping for the family just because I had to clock it up on the credit card. To take it one step further, I would consider it no better if I failed to increase my headroom by increasing my debt against my house in order to save myself and family from losing our shelter if I hit a rough patch and could not afford repayments from current income.
In such a situation, it would be nothing short of criminal negligence to see the whole family’s stability crash and burn, just because of a puritan commitment to being free of debt. You have to have some faith in the future, and be willing to, or even be grateful for the option of taking on some debt to see you through a rough patch, so that you can avert imminent disaster and disintegration of everything you value and worked for so far.
And if there is something to that argument, then it might just be possible that a government taking on debt in the short term to protect the nation from a devastating upheaval and dislocation as a result of which it might lose much of its remaining industrial and technological capacity, might in fact be a sensible thing to do. Your narrow minded, ideologically driven arguments seem to have absolutely no tolerance for nuances or such practical considerations. So, my question to you is: Do you really believe all that you are spewing out seemingly without a pause to think, or is your contrarian harangueing simply the obligatory daily menu you feel obliged to produce?
cb – glad the offering to the gods has worked it’s magic for you.
I can just feel a book by Kris Sayce coming on here, create interest and controversy, and then flog off a book.
Ka..Ching Ka..Ching Ka..Ching
Yes, frankly, I am just not sure what to think anymore.
Incidentally, for those with an interest in this GFC and what has and has not been going down at the G20, there are a couple of short clips worth watching over at Max Keiser’s blog. Particularly the second video, deals with the question of the G20 and its failure to even consider putting an end to the banksters’ scams.
http://maxkeiser.com/
PF, I posted something on the question of central bankers and gold in an earlier message last night as well. Not sure if you have seen it. There were only a handful of comments, maybe half a dozen on that topic. Would be interested in your views.
But perhaps we could also bring the topic to discussion here.
I am puzzled over Keiser’s and other people’s comments that surpression of the gold price is essential for maintaining faith in fiat currencies and central banking. I just don’t understand why that should be so important.
cb – when gold was dropped as the standard, it deflated against the US dollar (and most other currencies) but if it started to rise again, as it gradually is, then countries may start to ask for payments in gold again. Not US dollars.
Most trade contracts are written in US dollars, so if the world lost faith in the US dollar (which is already happening) then trade could collapse until all contract were renegotiated in another currency that was stable. To cope with all of the worlds trade it has to be a BIG currency. ie even though swill francs may be stable, it just doesn’t have the ability to cover all of the world trade. It is not big enough.
Why deliver that shipload of oil or coal to China to get paid in a now worthless currency. Everytime our dollar rises against the US dollar, our trade contracts with other nations get devalued. If countries stopped using the US dollar as the common world currency, the value of the dollar would collapse as countries stopped artificially propping it up. ie central banks around the world trade us dollars to keep the price stable.
Just as when Lehmans fell over, all banks stopped transacting with each other as they were worried about getting paid back what was owed to them by the other banks (counter party risk), countries would also for a time cease trading because they would be worried about the real value of the greenback. Trade in food, energy, everything would cease.
That is why China is moving to create a basket of currencies to replace the dollar. It doesn’t matter whether you are importing or exporting, you need to know the real price of the goods being transacted to correctly calculate future cash flow and profits.
I hope that helps explain it.
cb – swiss francs – sorry.
cb – don’t forget that Max is on the edge, and China and co will fix what is broke before the old kingswood completely breaks down.
Hopefully.
From another angle entirely, one issue I agree with in this article by Kris Sayce is his observation concerning the reporting efforts of Michael Pascoe. When SMH lost Alan Kohler they lost a lot of credibility. This has been compounded by Pascoe as their replacement economics/business commentator. He would surely be better suited to host a morning show with fellow economic entertainer David Koche. I was looking forward to Pascoes contribution on Friday as markets started to get the twitches following on from his rousing declaration the previous day that ‘Its all over’ based on his extensive research project involving not being able to transfer his flight bookings from Brisbane to Sydney because of a fully loaded B737! The ‘bear’ reporters are probably seen as being overly cautious whilst the ‘bulls’ view things far more optimistically but the arrogant expression of flippant confidence based on ridiculously scant ‘evidence’ is simply cheer leading at best and propaganda at worst.
BB – You can get Alan Kohlers view on the Business Spectator.
Yes I’m an optimist (you might call that a bull) but I agree, views have to be realistic to have creedence.
Yes, thanks, PF. There is a saying on Wall Street, apparently, that you should never bet against the Fed. Given their grip on the system, they will raise the dead if they have to, as long as that is what is required in the service of their own interests. As for China, I suspect that China’s oligarchs and most important party officials are too vulnerable to stand up against Western banking interests, and will more readily join them in cooperation, than challenge them. As I suggested with reference to Uighurstan and Tibet, China has much to lose from a confrontation to resist the scheming and scaming by Western banking interests.
I am worried somewhat about my tendency to give credence to conspiracy theories, but I have just come across another one, which I have not seen before. It is a shocking testimony by someone who seems to be a credible and honest man. I am still going through it, and if anyone would like to check it out, here is the link:
http://www.youtube.com/watch?v=dseAUTFQm8Q&feature=PlayList&p=465DECA95B9A8337&index=2&playnext=3&playnext_from=PL
That is it, BB. It is becoming almost impossible to tell who is reporting or arguing any particular view from a position of neutrality, as opposed to being a mouthpiece and a pusher of partisan interests.
I also suspect that the confusion and uncertainty created in this regard itself is a perfectly exploitable state for those in the know to be rip off those who are not, and who are instead paralysed by conflicting stories, uncertainty and fear.
As for Alan Kohler, I don’t know how much credence to give the man, to be honest. I follow his views and commentary, but his reporting and commentary on gold, for example, looks more like a shill job. Given the man’s intelligence and demonstrated competence, it is hard to believe that his treatment of gold should be due to ignorance.
I just clicked on that link I posted, and it seems that it will take you to part 3 or an 8 part video. You may need to watch them individually, and go back to part 1 to get the full story and context.
Hey, Kris, I thought that these comments by one ..Flynn De Freitas.. on another blog could just as well have been addressed to you and Co.
You might want to use it as a sprinboard for some much needed research for your posts. Have fun.
Flynn De Freitas
Posted 2 Oct 2009 6:43 PM
Nicholas Christian, [Kris Sayce], you seem to be confused.
The commercial property market has collapsed because the ‘weight of money’ from super funds and REITs buying CBD office, then commercial buildings and then finally industrial (when there was nothing else to buy) – driving up yields – evaporated due to the credit crisis.
So commercial prices have corrected 20% or more. In some cities there is also new supply coming on to the market which is compounding the problem. (Though I note this is only a problem in the $10m+ price range – yields have remained firm or even risen in the $2-10m space)
However, residential is different. Yes, prices have been inflated up by 1) prolonged, strong economic conditions over the last decade, 2) structurally lower interest rates, 3) entry of non-banks with access to securitisation markets, 4) the relaxation of credit standards due to non-bank and mortgage broker competition (eg, low doc loans and 95-100% LVRs) 5) non-banks’ access to the securitisation markets.
Yes, conditions have changed with 1) non-banks disappearing due to credit squeeze, 2) banks pulling LVRs back to sub-90%, 3) banks demanding ‘real savings’ not just FHOGs etc, 4) rising unemployment/weaker economy.
But, demand is fundamentally there in residential property. There was no ’substantial’ demand in commercial – just too much money needing a home.
Median residential property prices are now higher than they were before the GFC because of the 1) huge housing shortage, 2) strength of the major banks, which have kept on leanding, 3) very strong immigration, 4) total shut down of lending to developers (particularly apartments) that has meant that dwelling approvals are near record lows and less dwellings are built now than 5-8 years ago, 5) continued resistance by councils and State governments to support new land releases (due to associated infrastructure costs), and 6) very low interest rates.
All this has continued to fuel demand, real demand for people to live in a house and at the same time cut supply off.
You are right – the residential property market is not in equilibrium.
However, the market is in chronic undersupply not oversupply as you suggest – unless you can provide evidence to the contrary, you are on the wrong side of the fence…
For those interested, here is another link to the same man, which I am still watching, and apparently it should spill the beans on what has been planned for 2009 by the banksters and scammers.
http://www.youtube.com/watch?v=kA5v9XyWJW0&feature=related
“”"In reality, if the housing shortage is that bad, and the population growth as high as they claim, we aren’t looking at a get rich quick scheme, we’re looking at slums and ghettoes as 35 million people squeeze into 7 million houses – not counting the holiday homes of course.”"”
talk real figures please …………….current population is 22 mil & how many houses (residences) =wat?????????
Etch – the comment above by Sayce was made using the projected population figure of 35M, not todays population figure.
His style is to over state or under state depending on the point that he wishes to make. Just like the spruikers and politicians he denigrates.
PF ..yeah thats correct wat u say ..if this debate etc is to be treated seriously ..must deal with serious figures … not 35 mil..which is 13 mil short & 10-15 years into the future . the crash Kris is predicting.. they way he is talking it up seems to be happening,,,soon or next week
but its not ..prices are going up & up weekly literally
the only way i see a crash happening is serious interest hikes,or downfall in exports ,lending criteria increasing
etch – Yes I agree. I don’t assume that house prices can’t fall because I have seen that happen before, but I just don’t see any evidence of it right here and now.
BB, cb and others – you can get a fairly conservative economic report every Saturday from Bill Evans as the “Weekend Economist” from the Business Spectator todays article at – http://www.businessspectator.com.au/bs.nsf/Article/Interest-rates-Inflation-Australian-economy-pd20091002-WF7BW?OpenDocument&src=sph
I find it almost compulsory reading.
Thanks, PF. I have a lot of respect for Bill Evans, and pay attention whenever I hear him. As you say, he is conservative, and might I add, a wiley old fox who has been around the block.
Ladies and Gentlemen, may I highlight here a quote from above analysis by Bill Evans on a topic so close to our collective hearts at this forum:
“House prices – demand/supply balance
Finally, we come to house prices. There is clear evidence that house prices are now rising (up 17 per cent annualised in the last six months). This may be another example of the impact of ‘emergency’ rate settings. However there are a number of other complicating factors. Prices are driven by the gap between demand and supply. Interest rates can affect demand but will have little impact on supply. We would argue that the inertia of supply (national housing completions are running at around 130,000 per year compared to underlying demand of 190,000) has been a significant factor in the current upswing in prices. The bank would argue that over-stimulating demand in the face of rigid supply is inappropriate and does provide a case for tightening. However as rates rise this argument will quickly lose its relevance as the stimulus to demand fades and it becomes solely the inertia of supply which is driving prices.”
…………….. And so we lurch forward from insanity to sheer madness, in light of which it is hard not to be at one with our salutary host:
This is not going to end well – whatever that means.
At some risk of speaking against my own sense of foreboding about apparently still rising house prices, I have just read through the weekend edition of the DR by Alex Cowie. I am not sure what the correct diagnosis is, but his treatment of property prices and the certainty of an imminent crash, the following three possibilities come to mind, none of them flattering to the author:
1. The good doctor is a victim of group think.
2. He is a hired gun for the weekend, dutifully re-gurgitating the official line of the DR and MM.
3. Incapable of thinking for himself.
4. Too lazy to investigate the question properly and give due consideration to contrary evidence.
I have just finished watching Alan Kohler’s ‘Inside Business’ on the ABC this morning, and he had done a good interview about gold and gold stocks, and was pleased to see him finally taking a seemingly more sensible attitude towards the metals. For example, he asked a highly relevant and perfectly neutral question of his gues analyst:
“So, do you think that gold is a monetary metal, or a commodity?”
To this he got a sensible answer, saying that it is both, and that going forward the pressure on the price is likely to be up, in the short term by volatility and uncertainty, and in the longer term by inflation.
One more observation: While it is true that gold is both a monetary metal (it is money), and a commodity, it would be even more accurate to say that it is primarily a monetary metal, and only secondarily a commodity. I don’t know the excact percentages involved off the top of my head, but the vast majority of annual gold production, and of above ground gold, is held/used as an investment, as a store of value, as money, and only a very small proportion is used in jewellery, dentistry and electronics.
Does anyone here have the percentages?
Incidentally, here is a link to Kohler’s program, for anyone wanting to check it out. There was also an excellent commentary on housing prices, interest rates and supply-demand issues, which will be well worth a watch. Last time I checked, today’s show was not posted yet, so you might have to check it later:
http://www.abc.net.au/insidebusiness/
Kris, You might consider viewing this commentary by Alan Kohler on the subject of house prices. It confirms that prices here are high indeed, but it also points out some relevant differences between the US and Australian property markets, one of them being that there was a massive overbuilding of new homes and condos in the US, while, if anything, for four years running, the opposite has been the case here. Your audience here would be most interested to see, I should think, to see you address Kohler’s comments and observations.
Dismissing him as just another spruiker would not wash, I would suggest. At the very least, you owe it to your readership to give detailed and serious consideration to what seem to be more and more compelling reasons to doubt what appears to be the Sayce-Danning-Cowie line on an imminent price crash.
Is it a coincidence that all three of you should be so convinced that Australia will have the same outcome as the US, in spite of several fundamental differences between the two markets – differences that, you and Co. fail to acknowledge and dismiss out of hand.
So as to make it easier for you, these would be the key ones to address:
1. The US (and other places like Spain), had gone through several years of a speculative building mania of houses and condos prior to the crash. Australia has not.
2. The US property owner can walk away from their home and be free of the debt with their non-recourse loans. Australians cannot. (If it is not obvious, I can explain why this is highly relevant.)
3. Stimulus money in the US, by and large, is being channelled to cronies and zombie banks and is not finding its way into the real economy, as a result of which employment and the economy continures to collapse. In Australia, by and large, the opposite is the case, supporting employment and economic activity during the slump. We may disagree about whether this is a good idea or not, but its relevance to the question of an impending housing price collapse should be obvious.
4. (I, and others, will add more, if, and as, they come to mind, but you can make a good start with the above three.)
I look forward to seeing a decent treatment of these differences between the US and Australian contexts, and hopefully without those worn out hollow accusations about property bulls believing that house prices can only go up. None of your most serious critics, I suggest, believe that, so you can stop demeaning them, and your own writings, with your accusations that they do.
http://www.abc.net.au/insidebusiness/
cb – Thanks – good link.
I had a look at the link – thanks for that.
I agree that there is way too little building going on …
And it doesnt take an Einstein to figure out why this is…
It’s due to the meddling ways and market manipulation of the interfering socialist state-, municipal- and federal governments who put up a labyrinth of red tape, and excessive fees and charges that discourage land and property development. Hence too little new development.
Get rid of the thieving pollies and Bob’s ya uncle!!
ah, yes, and to go with that, it is not difficult to see why this has been such a money spinner for the NSW labour party, with ministers overruling local council decisions for big bucks from developers. So, the motivation to restrict and control development at a state political level has been extra strong, and may not change in this state until the NSW labour party is thrown on the junk heap as they should have been thrown a very long time ago.
etch, PF and cb – once again you are ignoring the point Kris is making when he described the possible future for many Australian’s if house prices continue to rise…I actually think Kris’s provocative statement is brilliant:
“In reality, if the housing shortage is that bad, and the population growth as high as they claim, we aren’t looking at a get rich quick scheme, we’re looking at slums and ghettoes as 35 million people squeeze into 7 million houses – not counting the holiday homes of course”
Why is this statement so clever? Because it highlights the stupidity of what the spruikers are claiming about the Oz property market.
I have consistently pointed out the fallacy that Oz house prices will continue to rise as long as supply can’t keep up with vague notions of underlying demand. Implicit in your claims, is a belief that the ability of your average Australian to afford a house is irrelevant. You seem to think that even if houses are 12 times the average income in Oz, house prices can continue to rise…without explaining where these new buyers are going to come from??
So here are some simple questions, because the rubbish you clowns have written above deserves to be confronted head on (I have placed them in capital letters, so you appreciate at how frustrated your recycled comments are becoming).
WHERE ARE THE NEW HOME BUYERS GOING TO COME FROM IN 2010 AND BEYOND?
WHY DO CONSISTENTLY IGNORE THE ISSUE OF HOUSING AFFORDIBILITY AND HOW THIS ISSUE WILL AFFECT HOUSING POLICY GOING FORWARD?
WHY DO YOU CONTINUE TO QUOTE ECONOMISTS THAT WORK FOR THE BIG OZ BANKS, WHEN IT IS CLEAR THAT THE OZ BANKS ARE CLEARLY DESPERATE TO KEEP THE PYRAMID SCHEME GOING – DON’T YOU THINK THIS IS A WEAK SOURCE OF ‘EVIDENCE’?
PuntPal – it is affordability and availability of credit, not price that govern demand.
You may get your correction after a few rate rises, time will tell.
Sayce is just oscillating between comments on an oversupply and a huge undersupply that will cause serious housing shortages in the future. The brilliance in that statement is only in its controversail nature.
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