It’s all happening here on Fitzroy Street.
With your editor writing two monthly research reports, two weekly updates for the reports, and a daily newsletter six days a week, plus all the research we have to put in for those newsletters, we thought it was about time an editorial/research assistant was hired.
Well, yesterday Shae started work and already we’ve been able to fob off a bunch of work.
Result!
But that wasn’t until she’d completed her first task – chair construction.
“You’ll need to build your chair first,” we casually instructed.
“Ha, ha, ha,” Shae responded.
You editor smiled.
“Oh, you’re serious.”
Twenty minutes later and the chair was finished. “Good, you can stay!”
Now, we don’t believe in ‘taking it easy’ on the first day here, so Shae’s next task was to proof read the latest issue of Australian Wealth Gameplan – which I hope to have out to you tomorrow if you’re a subscriber – and also get stuck into a few other tasks.
But part of Shae’s role in coming weeks will be to add more content to the Money Morning newsletter. I’m sure you understand that on a busy week with deadlines for Australian Wealth Gameplan and Australian Small Cap Investigator, I’ve got to put the paying customers first.
But that still shouldn’t mean this free newsletter drops its standards. So now we’ll have someone to step into the breach. That means if your editor is pressed for time elsewhere on the odd morning each month you’ll continue to get top quality analysis of the markets and the economy.
You’ll start to read Shae’s input from next Monday. But until then she’s asked me to say, “Hi!”
This morning we’ll take a look at the housing market again.
We think it’s been a while since we’ve gang-tackled it property. But we can’t ignore. Not following the torrent of emails that came into the Money Morning Mailbag over the last couple of days with a link to the report from The Sydney Morning Herald and the headline, “House prices hotting up.”
I linked to it yesterday, but I’ve put the link in again just in case you missed it.
Not surprisingly, the shrill call from the SMH is that house prices are booming and that the doomsayers have got it all wrong.
The article claims:
“Here are the facts. Australian average house prices have risen 7.7 per cent in the year to date. (In Melbourne the figure rises to 11 per cent.)”
Of course, you could argue whether a government statistic or a statistic from a vested interest in property is really a fact? I mean, it’s a fact that the earth goes around the Sun (yep, we’ll concede that one), and it’s a fact that 2 + 2 = 4.
But a “7.7 per cent” house price rise as a fact? Hmm, we’re not sure that counts. But anyway, we’ll leave that point alone for now.
The article was quoting Paul Braddick, who is naturally an independent observer of the property market. Mr. Braddick is just the head of property research at the ANZ Bank.
OK, maybe he isn’t independent. Actually, he’s the double-whammy of vested interests. A property analyst who works at a bank. But at least we know we can take his analysis of the market with a few grains of salt.
Not that the SMH is prepared to doubt anything he has to say. If this analyst says there’s going to be a boom in house prices then there surely must be.
I mean, if he says it enough times he’s bound to get it right at some point.
That’s a tag we’ve been labeled with on our housing crash call. A stance we’re not only happy to stick with, but a stance that we become more convinced of as time goes on.
It will take a lot of convincing for us to waiver from that view. But as I’ve said before, I’m more than happy for you to convince me that I’m wrong. Although it must be said, after two weeks of waiting, the property bulls have still yet to provide the evidence to back up their claim that rising population equals rising house prices.
If you’ve got the evidence to hand, then send it straight through to Shae. I can see her from here, she’s standing right next to the Money Morning Mailbag now: moneymorning@moneymorning.com.au
But anyway, it seems that it’s not the first time Mr. Braddick has hyper-ventilated over a property boom.
We stumbled across this interview he gave to ABC Radio in 2006. You can see the full transcript by clicking here. But here’s a couple of highlights I’ve picked out:
“Housing lending is going gangbusters at the moment. The finance commitments have surprised even us on the upside… We’ve had one of the strongest forecasts out in the market for some time now, and yet we’ve found ourselves over the past six months continually revising our forecasts up, just because households are continuing to go out there and borrow money.”
Read the rest of the transcript for yourself. It’s a good insight to how desperate the banks are for you to borrow money from them.
But this is perhaps our favourite quote from the interview:
“Over the five years to 2004, where the total level of household debt more than doubled to $700 billion, there were still two-thirds of households still had little or no debt, where little debt is defined as a debt service ratio of less than four per cent.”
Look at that! Two-thirds of households in 2006 with no debt. Clearly it’s not a question of the quality of the potential borrower, it’s the quantity. The more borrowers the better.
What a shambles. Is it any wonder we take such a negative view of the banking system?
But even better than that is the exchange between ex-JPMorgan banking analyst Brian Johnson and an unidentified banking analyst.
As I say, click on the link and you can read it for youself.
The gist of Johnson’s argument is that the banks were going dizzy at the prospect of the debt servicing commitment increasing by 50% while wages growth was only forecast to increase by 12%.
“This thing is just going to explode” was Johnson’s final line.
Well, it hasn’t exploded yet. But it will. There is absolutely no doubt about that. Look, we’re not talking anything complicated here.
For debt levels to increase the banks have to do it one of two main ways: either they reduce their lending standards or they allow borrowers to increase their leverage.
Either way, it’s setting the market up to explode. And with both happening then it just makes the explosion even bigger.
But getting back to Braddick’s more recent interview with the SMH. Not surprisingly it’s full of the usual gumf about housing shortages and population growths and how much better Australian banks were/are with managing risk.
All of that’s rubbish of course.
But this whole idea of population growth not only propping up prices, but increasing house prices just won’t go away.
And neither will the new excuse about how the US housing market suffered from an “overbuild” whereas the Australian housing market didn’t.
Look, we’re aware that you can’t directly compare two different countries and draw exactly the same conclusions for why there will be a housing price crash. We accept that.
But surely the argument goes the other way too. The property bulls are the first ones to compare Australian housing with US housing and claim that it couldn’t happen here because things are different.
In other words the bulls can’t have it both ways. They can’t claim the bears are wrong because Australia is different to the US while simultaneously saying the bulls are right because Australia is different to the US.
It’s not logical.
The reason we know we’re right on the coming housing crash is simple. In any market where there is manipulation and distortion of that market by government, it inevitably leads to a correction in prices.
The idea that government and corrupt banks can keep an asset price or market inflated forever is not only misguided it is just plain wrong.
If the property bulls can’t come up with the research themselves, maybe we’ll just have to help them out. We’ll do some digging around and see what we can come up with.
Other Stuff on the Markets
The S&P/ASX200 fell slightly yesterday by 13 points closing down 0.28%, while overnight on Wall Street the Dow Jones Industrial Average added only 20 points. In Europe the FTSE100 gained 0.94% and the CAC40 was down 1.40%.
The price of gold in Australian dollars is trading at $1,164.08, while in US Dollars it is trading at $1,056.05, up 8.25%. And the price of silver in Aussie dollars is $19.55 and in US Dollars it is $17.736.
The Aussie dollar dropped a little versus the US dollar, trading at USD$0.9066, and improved against the Japanese Yen JPY81.54.
Crude oil closed overnight at USD$73.27.
For the biggest movers on the market yesterday click here…
{ 73 comments… read them below or add one }
Hi Kris,
You say: For debt levels to increase the banks have to do it one of two main ways: either they reduce their lending standards or they allow borrowers to increase their leverage.
I just met with my lending manager at the bank today at a big4 bank.
Six months ago his calcs showed I could borrow about $370k, but today I can only borrow around $230k. What’s the difference?
1. Rates up 0.25% (not much change)
2. They now have to add 1.5% to the loan rate as of today for ‘responsible lending guidelines’ (he said he isn’t supposed to tell clients that)
3. The previous loan was for potential share investing so they factor in a dividend return of 3%. Now they don’t factor in any return so it doesn’t matter whether it is for share investing or buying your own home. I didn’t ask about property investment.
Borrowing standards are definitely getting stricter, so if they are going to increase their lending the banks need fresh blood. But wait, FHOG-B is ending…
As an aside he said he has seen a large increase in deposits from investors, from which he inferred that they were out getting a slightly higher cash rate with smaller banks, but have an inkling that the Government Guarantee is going to end in the foreseeable future so are coming back to the ’safety’ of the big boys. Interesting times ahead.
Thanks for that Stillabear – very interesting indeed.
Explains why the $8 bill was given by Gov to prop up the securitsation markets. If the Big4 are going to finally start lending more prudently, then the Gov is looking for the second tier cowboys to keep the party going.
p.s. Kris, I would love it if you did some research on cohabitation and how many bedrooms are vacant in Oz (i.e. bed rooms that are possiblly going to be rented out by struggling mortgage holders).
It is one of my core beliefs – that this supposed housing shortage argument will evaporate in a matter of months when people start realising their McMansions should be put to good use and they rent their spare room out to cover the increased costs to debt servicing.
stillabear – just a couple of small points. The banks have always serviced loans at a rate of at least 1.5% higher than the current rate, and I was no aware that they would factor in a dividend of 3% for possible future investments. Then again I don’t know which lender you were talking to.
Usually a rate difference of 0.25% will have a measurable but minimal effect on the maximum loan available.
A matter of interest to all.
http://www.businessspectator.com.au/bs.nsf/Article/Banks-to-scale-back-bad-debt-provisions-as-conditi-pd20091013-WRL9A?OpenDocument
The RMBS buy up of the federal government has been kept far too quiet for my liking, but it is proof of how serious the Canberra boys know the situation is. Looks like the Aussie government is willing to admit that it has purchased upto $15 billion of mortgage securities since the world realized debt has to be repayed.
How long this non-sense will continue I don’t know, but I know our service economy in Australia is going to be decimated when it does let go.
Oh, and Mr. Swann says these mortgages are AAA rated….I feel like I’m living in 2006 in the USA.
stillabear, your experience is no accident. My experience has been the same, and I have been hunting for finance for the better part of the past two years. I have not commented on the way the FHB lending went, whether they were given easier passage than the rest of the borrowing public. PF, perhaps you could enlighten us on that front? Were they assessed more leniently than non-FHBs?
In any case, this is partly why I have turned so pessimistic. The RBA is hitting us and sucking out liquidity at a faster and faster pace, while wages are stagnating and incomes are falling and the banks make it exceptionally difficult to borrow. What are we going to pay all that extra interest with, especially that higher rates also cut our export – based income? There is only so far that this can be pushed, before more and more of us cannot keep up with payments.
“”"”The RBA is hitting us and sucking out liquidity at a faster and faster pace, while wages are stagnating and incomes are falling and the banks make it exceptionally difficult to borrow. What are we going to pay all that extra interest with, especially that higher rates also cut our export – based income? There is only so far that this can be pushed, before more and more of us cannot keep up with payments. “”"”
cb maybe thats how they powers that be, intend to “engineer” a housing market bubble-bust
yes, etch, whether that is their explicit intention, or some other asset class that they might be after, I don’t know, but a housing price collapse could become a consequence. It will depend on how much they are going to put the screws on, and whether they will ease off again when it looks like it will all fall over. To be sure, if they want a collapse, all they have to do is to keep down this path, and something or other, sooner or later, will have to give.
I still agree debt is the only thing driving the market forward.
I also can’t believe there wasnt more comment in the mainstream media about the Gov propping up the market by buying $8bn of securitised bonds (RMBS). In short, buying these bonds allows the banks to shift these mortgages ‘off’ their balance sheets and ‘re-lend’ the same money without breaking their ‘lending to deposit base ratio’. So yes, another $8bn of tax payers money thrown at propping up the market.
Here is a link to the UK – it basically talks about the ‘UK HOUSING SHORTAGE’. In a nutshell, it states a shortage is helping prices to recover, but you have to remember there was a shortage in place when prices FELL 40% (in large due to the complete collapse of the first home buyers market as banks reduced LVR’s and reduced lending to wage ratios). So please don’t tell me we are different to the UK as well.
http://www.rics.org/site/scripts/press_article.aspx?pressreleaseID=132
stillabear – have had the same experience recently as you, popped down to our local Big4 branch and had a good chat to our bank manager, we could get pre-approval for over $6o0k to purchase a home almost a year ago, now we are lucky to get pre-approved for $450k, they also “highly recommend” a 20% deposit – to save on mortgage insurance! I asked how FHO could afford to fork out aver 120k cash to get into the market – answer was a mumble about FHOG or something – they must be getting a better deal! lending is getting harder for us second, third or tenth home owners!
cb – The criteria is the same regardless. If anything established homeowners usually borrow below 80% so the lender can make a commercial decision. Above 80% it goes to the mortgage insurer and they are very very tight at the moment. For those of you who don’t
The general tightening of lending is probably welcomed by the RBA as it will have a marginal effect in keeping housing in check. I saw something in the news this morning with another prediction of 17% increases supporting the Braddick prediction, so with that sort of an atmosphere the RBA will have to tighten more.
PuntPal – I agree with your comments, and as I have stated before I consider housing availablity to be a marginal measure which is highly suceptible to small population-level changes to living arrangements, and hence to the prevailing economic climate.
If the ongoing relfation is successful and results in a self-sustaing economic recovery, then yes I can’t see house prices go anywhere but up. I believe this is the gist of the bull case. On the other hand, of the current recovery is nothing more than a liquidity fuelled bounce and the economy and markets break again, then house prices can go nowhere but down. Most bulls seem to completely discount this possibility whereas I consider it very likely on a 2-3 year horizon.
This is why many of us simply disregard arguments regarding supply/demand, government grants, “affordability” etc. They are only valid ceteris paribus, hence they irrelevant particularly in this economic climate.
Sorry I was going to say – For those of you who don’t know home loans are assessed on a tick box scoring style, whilst business and commercial loans are based on a commercial decision.
That is due to both government tight lending regulation and volume processing requirements for consumer credit, whilst in commercial credit banks are allowed to assess the deals on different criteria.
N – I agree with your summary of the two ways this thing (housing bubble) can pan out. However because I nearly totally discount the chances that wea re undergoing a real and sustainable economic recovery, I feel as if house prices will not continue to grow. But, there is a third possibility which is quickly appearing as the most likely outcome. House prices, dont go up, dont go down – but just stagnate for years (maybe even a decade!). I say this is a chance because the Government seem so determined to stop the crash, that you have to presume they will find a way.
Although stagnate prices mean the price of houses is going down in real terms, it wont be such a political issue. Rudd can then claim he has supported home owners (by stopping a crash) and supported prospective home buyers, by improving affordability (gradually! but thats maybe the best we can hope for with such a populist and intrusive Government).
PF – the report you refer to talking about the next boom was carried by BIS Shrapnel on behalf of…. wait for it….QBE (Lenders Mortgage Insurance) – wow, imagine them prediciting another housing boom!
The way this report was run in the media should be looked at by the authorities because it goes beyond propaganda and amounts to misleading conduct in my opinion. These guys must really be getting desperate!
Their credibility will be ruined over the next few years, as will their whole business!
thanks, PF. that is a valuable insight. I suppose the much higher fees and commercial rates we are paying on business loans is more than enough to see these given individualised and detailed assessment. But looking at it from the other end, do you think that business loans are so much more expensive because they are in fact higher risk, or is it more simply because business is assumed to have more of a capacity to pay, and therefore lenders will make them pay? On the risk question, for the life of me I fail to see how a loan against an industrial or commercial unit should be more risky than a residential property. Overbuilding, or falling demand can hit both, it seems to me, and with equal probability. What am I missing?
N, all that may be so, but I would like to know a little more about where you think the “liquidity” might be coming from going forward.
If you actually try to get a loan, you will have a tough time. I know this from first hand experience and it has been driving me to distraction. Principally because of this, because I know just how tough it has been to borrow over the past couple of years, I find it hard to believe that current prices could be floating on easy credit. Getting credit is anything but easy. I could be missing something, though. PuntPal, for example, seems to have the opposite impression.
What say you?
And what about you, PF? You at the coal face, so you should know. Am I missing the bigger picture?
Incidentally, over at Max Keiser, there is an excellent two-part video on market manipulation, short selling, high speed trading, etc. If the stock market is your play pan, you might especially want to check it out. The only thing I am puzzled over is the question of how much of that might be also present here, on the ASX. Anybody knows?
http://maxkeiser.com/
PuntPal – self-sustaining recovery may be impossble, but I wouldn’t rule out a multi-year bailout-fuelled asset rally as Western governments go “all in”. Not saying this is likely, but a distinct possibility.
The Goldilocks scenario of static nominal house prices is surely preferred by all, but as with the business cycle, long-term interest rates and just about everything else I give our central banks and governments a 0.5% chance of a successful long-term price manipulation. I expect either be a boom or a bust, or one followed by another over the next 5-ish years. Not my choice for a buy & hold asset class.
cb – the stats are that 80% of small business doesn’t survive, so that is why you pay a higher rate and get lower LVR’s on business finance.
With a larger more technical commercial finance proposals the bank is allowed to assess the chances of success. For Example in the case of a startup business, no previous financials exist, so the bank will rely on past experience of the principals, and security available, as well as there assessment of the commercial viability of the business.
For ordinary consumers there is no assessment of future potential allowed. Once you fall into the consumer credit basket (mixed borrowings against your home) everything has to be proven on wages or income as it stands here and now. Unproven future potential of a small business venture is not taken into account. The Govt. regulations are very strict.
By mixed borrowings I mean part home loan and part business loan. If the home loan is larger than the business loan content, you have a consumer loan. There are two separate channels of lending.
PuntPal – I take your point, but note that just because there is a vested interest, it can’t automatically be discounted as being wrong every time they say something.
We are starting to see a few of these bullish predictions now and I am getting a little concerned. You know my preference is for a flat line or at least a curve below wage increase levels. But this market continues to surprise, so nothing can be taken as gospel until after the event.
PF, this is my response to your post at 36, on the 9 October thread.
I brought it here, as it is still topical and relevant, and others might also be interested to join in again:
Thanks, PF. I take my medicine as all must do. My point, though, is not about how rate rises affect me, but how they affect everybody who has a mortgage or a personal or business debt, and consequently the entire economy, and especially since higher rates also hurt us in our ability to compete with our exports.
But maybe I am not getting my point across very well. You, for example, do not seem to find the robbing of the people surprising or objectionable. Indeed, you may disagree with my analysis that that is in fact what is happening in a climate where we are saddled with more debt to keep us afloat, while the RBA is sucking the economy dry through raising rates.
What is your view on this? And in considering your answer, please project forward to a likely scenario of rates going up by another 100 basis points, while Rudd finds novel ways of stimulating through proportinately more and more borrowed money on the nation’s credit card. What is this, if not the robbing of the good people in broad daylight?
CB – liquidity will come from our central banks (short rates) and banks/lenders (backed by government support). Don’t get me wrong – this is not a sustainable game but there may be one more spasm of the corpse. Or not. Whatever you do hedge your bets.
N – good points and my prediction for stagnate prices is purely derived from a belief that the housing market is now a policy issue, not an economic market. Yes the business cycle, interest rates and so forth will be hard to manipulate/control, but I have never seen a period of such direct Government market intervention (I am only 27 so that doesnt say much i know).
I just think that politically, there is a floor on how low the Government will let house prices fall. They can use all kinds of fancy tricks, or they could simply go ‘All in’ as you say and just directly finance the housing market (more than they are already). This is the most likely outcome in my opinion. I dont know if they will suceed, but every day I become more convinced they will try.
I also think that politically, there is a ceiling on how high prices can go (there is also the fact that people wages cant support another boom – but leaving that to one side). Housing affordability is heating up as a political issue and when the election is held next year, housing affordability will be a real achiles heal for the Government. They preach and preach about working families and fair go etc… but to purposely prop up the most unafforable housing market in the world is disgusting
PF – I certainly dont right off anything presented by parties with a special interest, but when the media doesnt clearly spell out this interest and presents the information in such a biased way, then you cant help but be cynical.
You say the market continues to surprise and because I have predicted a crash for years now, it may seem weak for me to claim that nothing about house prices in Oz has surprised me so far. I say this because it is obvious that when the Gov, the RBA and media all conspire to fuel house prices, then a crash cannot occur. I was basing my predictions on the assumption that market forces would be allowed to operate and house prices would be allowed to become more affordable (which I thought was implict in the Government’s campaign in 07).
In this sense I feel like Steve Keen. I know the market forces would lead to a crash, but I just cant predict where the next form of market manipulation will come from
Thanks, N. Well, yes, if something like that starts happening, it would be a repeat of the Clinton era where US banks were effectively told not to discriminate with their lending between the rich and the poor. That is, in part, how they got the NINJA and liar loans up and running, counting solely on price appreciation for security.
Well, PuntPal, Welcome to the real world!!! Or shall we say, the world of real politik?
But I am yet to be convinced that the RBA is on the same page with the govt. Glenn Stevens seems to me clearly duplicitous in his own way. In senate committee hearings he talks against withdrawing govt stimulus, while at the same time he is jacking up rates. Sayce’s mother might well have been right: You cannot trust a man whose lips don’t move while he is talking. And I certainly do not trus Glenn Stevens. His actions contradict his public testimony in a very clear way, and to the obviousl detriment of the country and our economy.
Does he have a hidden allegiance other than the good of the Australian people? Until I see clear evidence to settle this question conclusively through his actions, he remains a dark horse to me.
At least I can read the govt motives and make sense of their actions and likely future actions in that light.
I cannot similarly read or have confidence in the motives of Glenn Stevens, and therefore, in my eyes, he remains not only the principal source of risk and danger to us all, but also the unknown variable, the uncertainty that makes reliable predictions about where we are headed virtually impossible.
kris,
I have been following your comments about the banks for sometime and agree with your general position regarding the banks.
I think Ausralian banks and the government have been smug in their self congratulory remarks about how good the banks are run.
For example, I would like an explaination of the $13 trillion in ‘OFF BALANCE SHEET BUSINESS” as detailed in the RBA’s B4 table. $191289 million of this is identified as credit derivatives not related to foreign exchange or interest rate swaps. Maybe property?
No one ever talks about this startling $13 trillion “off-balance sheet ” business. Clearly it would only take a small percentage of the off-balance sheet position to go wrong and the banks would be have to bring it back ono their balance sheets. Who ever talks about this?
Another question I would like answered is whether off-balance sheet business is regulated by APRA.
cb – I’m not sure how to answer your question on the ethics of the game. I tend to just note the rule changes and move on. Years ago I tried to fight them but found that getting on with playing by the new rules gave me a better outcome. Some time ago I was involved in an industry that was de-regulated for all of the wrong reasons (not the CBA) and those who chose to fight were decimated. You learn from experiences.
PuntPal – don’t worry about only being 27, the life lessons you are learning will make you a wiser and stronger for the road ahead.
N – I agree, if the market looks like stalling the RBA simply adjusts the rate to accommodate.
Thanks, PF, and in a way I agree. And I suppose your brief response to N might be pointing to one of the parameters of the game:
The RBA will keep rates as high as it can without perhaps actually pushing the economy right over the edge, and if this benefits whoever it is going to benefit, then Rudd being willing and able to borrow more to stimulate, this will suit the grand plan down to a T. The more Rudd borrows and stimulates, the higher they can put up rates, and the deeper we are going to be burried in debt.
It must be a perfect world for some.
Incidentally, there has been some discussion here about the unreliability of government statistics. Well, here is a link to a very interesting chart, which compares official US Govt statistics of the CPI with Shadow Government Statistics take on same, which calculates the CPI the same way as the government did before they started fiddling the figures. The comparison is telling:
http://www.bmginc.ca/lib.pl?rm=show_document&record_id=619
PF – I actually think my age is a bonus in these unprecedented times. I start with a clean slate (no ideological bias) and I am sponge for new ideas (most economic theory is being re-written anyway).
The only problem with my age is that I am getting the roar end of the deal (i.e. HECS debt of 30K to pay off, housing unnafordable and over the next decades I will be lumped with taxes to pay for idiotic policies now being implemented…and for the boomers pensions!).
Does anyone have a source for the claim that Australian houses are bigger than the houses built in other countries? I have read that claim somewhere, yet I cant find the source.
Is this true and if so (I am playing devils advocate here) wouldnt that be a logical reason why our houses cost more than other countries (i.e. they are better?)
Just trying to think outside the square on this one
There’s a massive reliance within many opinions on the ‘government’ getting things right in respect of any intervention strategies implemented to combat the real impact and shakeout of the GFC. I’m a fair bit older than 27 and I can confidently advise one thing based on my experience. Governments will rarely (if ever) get things right. The solutions and remedies they come up with are always politically motivated, overtly expedient or extensively obfuscated depending on the circumstances and extremely short sighted in respect of the range of implications and impacts they might have. Wayne Swan’s wholehearted support for accelerating immigration and population growth as a solution to Australia’s problem of an aging population is a current classic example. Negative impacts from this artificially stimulated actions cannot even be contemplated! Rudd’s present golden incumbency will be no different. Since Curtain turned away from the traditional role that the British Empire played and placed our future reliance in the stronger empire of the USA, Australia, almost without exception will trail and mimic the major trends of the US albeit always a few years behind. A real estate meltdown we most certainly will get. Then we can all feel important too and St. Kevin the Stimulator can come up with a real world class rescue package just like his hero Obama! A dead set certainty is our very own Kevin ‘ Pink Batt Man’ Rudd for the Nobel prize circa 2010. If you trust politicians to do the right things for the right reasons then you need to read a bit of history or at least have your head examined. We would be a much better and stronger nation if we treated politicians with the contempt they generally deserve.
Well, PuntPal, that will probably depend on which country you do the comparison with, and probably also on what time periods you compare over. For example, even over here, the average house size had been smaller 20 or 30 years back than today, so that could also complicate things a little.
In any case, my guess would be that the US would have just as large, if not larger, house sizes on average than we do, and the difference in prices could not be accounted for in any meaningful way for the difference in sizes. When you consider that, my feeling would be that this would be a very tenuous line of justification or explanation for our prices. It is good to see you keeping an open mind, and continuing to search for meaningful explanations, though.
CB – no doubt that government figures are rubbery to some extent. Any serious CPI ought to include changes in asset prices. That would be a real measure of inflation. It’s not like we are affected by the change in a carton of milk but not the change in property prices.
The figures aren’t dodgy in an outright sense – more a case of the statistical parameters being tweaked to ensure the government gets as favourable outcome as possible while still seeming to be impartial and legit. It’s the usual garbage in, garbage out argument. Witness the classification of anyone doing one hour of work a fortnight as being employed. That might not be the precise definition, but it’s pretty close. You get my drift anyway.
PuntPal – I’m on a similar wavelength. Best to go into things with an open mind. I find ideology a bit old hat. Going in with a particular slant just closes you off to other options. In general, I find the left/right, Labor/Liberal, red/blue, commie/capitalist etc is largely irrelevant these days. People just want to see government and services that work.
PuntPal – I don’t know where you’d find data on houses nowadays being bigger than in the past or elsewhere. Perhaps somewhere could provide a square metre comparison. But it’s pretty fair to assume the houses we build these days aren’t the same as the plain brick boxes that were built in the 1970s. We have shinier finishings, more bedrooms, more bathrooms etc. We also have things that once were an optional extra (e.g. dishwasher) that are now standard in many new houses. So to that extent, we’re not comparing apples with apples. That makes it difficult to compare house prices as a multiple of income nowadays to back in the 1970s. Perhaps the 90s wasn’t that far back though.
I will second that BB.
By the way, still on the topic of government statistics, Shadow Government Statistics apparently put the current US unemployment rate at 22%, and the real GDP of the US at – 6% (yes, that is a minus, a negative). You can watch a good interview with an intelligent guy, called Afonso, at HoweStreet.com, a Canadian site I like to check out with some regularity to keep abreast with what is happening in North America.
http://www.howestreet.com/
And Garth Turner, one of my favourite bears, is a regular guest on their show.
BB – I can just imagine St Kev the Stimulator, flying through the air with a dull grey cape flapping in the breeze, a halo above his head and a massive $ on the front of his superhero suit!
I have confidence!
In today’s headlines:
Home buyers are betting on permanently low rates: http://www.afr.com/home/viewer.aspx?ATL://1255491517779§ion=home&title=Fixed+home+loans+demand+fell+in+September
Business confidence sliding again: http://www.news.com.au/couriermail/story/0,23739,26207222-3122,00.html
Consumer confidence running on bailout fumes:
http://www.news.com.au/couriermail/story/0,23739,26209341-5003402,00.html
PuntPal – being 27 is always a bonus. If you could swap property for youth you would have plenty of takers.
especially if you also took the debt that goes with it!!! ROFL.
On the subject of climate change, today’s DR has a section at the end of Bonner’s article. I will post it in here for those who have not read it. My comment would be that if the media per chance should decide that there is more value in debunking the scam in progress, the scamsters might feel ashamed enough to desist. Only time will tell.
Here is the relevant section by Bonner, in full:
“What happened to global warming?” asks a headline at the BBC.
Folks in the Rockies are shivering. “Western Montana breaks records,” says a report. Missoula reported a low of 8 degrees yesterday…14 degrees lower than the previous record for this early in the season.
Nearby Idaho had heavy snow last week too. Same thing in New Zealand, where roads were blocked by heavy snow.
In New Zealand, two major North Island highways remain closed after unseasonal heavy snow days stranded motorists for two nights. “Even if this was the middle of winter this is extreme,” said an analyst.
And right now, it’s spring in NZ. They had a spring snowstorm that put their winter snowstorms to shame.
“Forget global warming,” says old friend Jim Davidson. “Get ready for another ice age.” Buy Brazil, he advises; the cold will drive down farm output in North America and Europe.
As the BBC reports, worldwide temperatures are not increasing; they’ve been falling for the last 10 years. No one knows why. Global warming enthusiasts say the trend is still towards higher temperatures. Their opponents say the world is actually beginning a major period of cooling – driven by solar activity, not by man-made carbon emissions.
Who’s right? We get out our mittens and wait to find out.
Until tomorrow,
Bill Bonner
for The Daily Reckoning Australia
Yeah Ralph I think it was a square metre comparison and I thought us and the Yanks had the biggest houses by a fair bit (I thought we pipped them – just).
The time frame issue is obviously relevant, but surely you could do a start date (say 1995) until present and talk about the average size of the house (square metres) being built in each country during this time period. You could then compare the growth in the average prices of houses during this same time period, to see if there is a causal link between size and price. Obviously quality is another factor – but too subjective I think and too hard to measure. Size is black and white and so is price.
Surely the size of housing in Oz should be a factor when making comparisons to other countries.
The McMansions are constantly referred to in both the US and in Australia – but its not a term I haer in reference to other countries that have suffered a housing crash. Did other countries not only go nuts during the housing boom, but did they also build big houses?
I know what you are saying PF – even I would trade my measley savings for the chance to be 17 again!
PuntPal – If you have ever been to Europe you will see that their dwellings are much older and generally smaller than ours. Attitudes to home ownership also are quite different. The British are house obsessed like us, but the continental Europeans are happy to rent, and prefer something new. A rundown chateaux that we would kill for, will be allowed to degenerate into ruin over there. Too much trouble and money to fix.
Asia is apartment based living. Probably the USA and Canada are closest to our standard and attitudes.
The USA has some huge mansions, but a lot of homes are not large. If you look at homes such as the shotgun style in New Orleans you will find small but practical dwellings. Over here we got a bit carried away. Newlyweds want mansions that they can’t afford, but those extra 2 bedrooms, an extra bathroom, a BIG walk-in-robe etc etc Why not throw in a wine cellar? but it does add to the cost of the build, so someone has to pay.
I’m not sure where I am going here, but comparisons across countries and attitudes, culture etc are very difficult.
PuntPal – I found this comment somewhere
“American homes, on average, are nearly twice as large as those in many European countries, including Britain, France and Germany. Only Luxembourg comes close among European nations, with average homes about three-quarters the size of those in the United States.”
From what I have read average sizes in France and Italy are 70 to 100 Sqm, the USA is about 222Sqm, Australia is 227 Sqm, Canada is 165Sqm. Some figures are from the below links, but some of the above is unverified. Perhaps someone has a reliable table for you.
http://realtytimes.com/rtpages/20030313_cabuilders.htm
http://www.infoplease.com/askeds/us-home-size.html
http://www.abs.gov.au/AUSSTATS/ABS@.NSF/Previousproducts/1301.0Feature%20Article262005?opendocument&tabname=Summary&prodno=1301.0&issue=2005&num=&view=
mate if i could be 17 or 27 ,,to go back & rectify me mistakes ,,i would give me 2 a cheeks…………………………………………..
anyways the real reason govt wont want house prices to go down is because out of 100% housing , a third own their house ,another third are paying off their house & other third are renters
so say 65-70% of population votes FOR the presiding govt to KEEP house prices on the UP is a lot of votes not to be sneezed at in that dept
that why the gov MANIPULATES THE MARKET UP
I wouldn’t give a snowball’s chance in hell for the housing market “stagnating”. Two thirds of property investors declare a loss. I can’t see any residential properties for sale where the reasonable market rent would pay the interest bill. The only reason to stay in the game is for capital appreciation. If there’s even a suspicion of long term stagnation, “investors” will sell…really really fast. Sure, you can tax deduct your losses, but if they’re real losses rather than fake accounting losses the size of fleas on the gigantic arse of capital gains, the game stops being fun. It’s either capital appreciation, or crash. I find it difficult to believe that capital appreciation can continue without a massive increase in real incomes (redistribute wealth away from the banks and back to the people who pay the bills). Is that going to happen? Exactly.
Could our government keep the bubble inflating in purely nominal terms? Of course it could. So could the US government. Choose the Zimbabwe option, dish out money to the citizens without borrowing it first, and house prices will keep going up. The consequences for the value of the currency might make you a fraction unpopular, so things have to be so bad that inflation looks like a pleasant alternative, but governments can always create rising prices if they really want to. Without taking that option…debt can’t increase forever faster than income, unless there is no interest. Eventually interest payments mathematically exceed income, even leaving out the question of needing to pay tax, bills, and occasionally eat. Eventually the chart has to turn down, or we will have to find out what real inflation means. The only question is the timing, not the mathematical fact.
So, what is it going to be, Dan? Will it be high inflation, or high interest rates? Assuming you have some saved money to invest, should you sit in cash, property, or something else? Why not take a stab at it?
I have seen a fair bit of the world but didnt take good notice of the houses as I was usually drunk or jet-lagged. But from what you have said PF, then surely this is a major reason we have more expensive homes.
It doesnt mean there isnt a bubble and it doesnt mean there wont be a crash, but it might explain why we spend so much of our income on houses.
PuntPal it probably does mean that comparisons to house prices in other countries may not take into account the differences in the house itself, and so those comparisons may be meaningless, but I don’t think we can just explain everything away that easily.
So many of the arguments in the debate over the last 12 months have been simplistic. Take for example the oft mentioned supply of land. We have an almost unlimited supply of vacant land for building, but there has been a migration to major cities, and in all major cities land within 10Km is scarce. We could solve that by demolishing low density and replacing it with high density, but is there the resolve amongst councils, developers, and current owners of those properties to achieve that? At what point does sufficient pressure on resources drive change. When do we just build a new city to solve the problem?
There is also plenty of cheap housing, but it is in towns with a negative population growth, so who wants to live there?
PuntPal since the time of the industrial revolution nations have had moments of transition that take some time to resolve. This could be one of them. You will already be aware that these boom and bust cycles did not exist prior to the industrial age. Changes today that take place within one decade would have taken 200 years in the middle ages.
There are plenty of soothsayers and pundits who have appealing little one liners that appear to explain everything, but the reality is they don’t know. We will just have to ride this wave and see where it takes us.
Well, we have have just had a fresh dose of “The Sky is Falling In” by Sayce’s new asssistant, Shae Smith. Judging by the carbon copy replica of Sayce’s writings, I would believe her if she told us that she is his twin.
Dan – I fully agree, it’s either capital appreciation or crash. P/E is no longer a consideration.
Anecdotally – as a newly fledged renter I am amazed how much my living expenses have dropped. We are putting more money in the bank than ever before, even though our rented property is valued at about $200k more than our previously owned property. I suspect that rental yields are wildly over-stated and do not take into account the full cost of home ownership in rates, administration, ongoing repairs, maintenance etc. AND opportunity cost of time spent on above. I see absolutely no reason to own/occupy in the absence of a very substantial, long-term capital appreciation.
N, a few things come to mind, in response:
1. The govt and the banks will love having you put in extra cash in savings. These are the low hanging fruit for white anting you out of your purchasing power. The more you save, the more they steal from you without you even noticing, let alone complaining about it.
2. For anyone expecting an end to house price rises in nominal terms, is a big call to make. It is a fallacy to assume that the market will always trade on fundamentals. A lot of the time, it does not.
3. Although money supply is being choked off by the banks at the moment, it is unknown how far this is going to continue, and price jump in nominal terms could be just as likely as a price drop in the short to medium term.
4. As for the long term, until we return to sound money, and as long as politicians see advantage in buying votes with money that their buddies at the central banks can print up for them free, the overall rational expectation must be one of inflation. If you look around the world, EVERYBODY is printing, stimulating, and is, in one form or another, a competitor in the currency race to the bottom. And if that’s right, real property may not prove to be the disaster that so many expect.
Here is an article worth reading about our rising interest rates:
http://www.businessspectator.com.au/bs.nsf/Article/The-drive-behind-the-Aussie-dollar-pd20091015-WTU6X?OpenDocument&src=kgb
cb – the article from that link is about the rising Aussie Dollar, does it have a connection to interest rates?
Dan and N, both of you make good points and you are probably right (its either crash or boom). My belief in a flat property market is because the economics suggest a crash, but the politics require a boom with more capital appreciation. With these two forces pulling in opposite directions, a stagnate property market over the next few years is a possibility in my opinion. I also think that because property is not easy to sell without incurring loss of time and high transaction costs, some owner/occupiers and investors will be willing/able to sit on their houses even if they are not getting capital appreciation and this will neither increase or reduce the market price for houses…
Interesting that Glenn Stevens is flagging rapid increases to interest rates…I am sure cb is breaking items of furtniture right now! ; )
p.s
PF – if you think I am cynical, then look at the equal coverage given to the speech by Stevens today and yesterdays bogus ‘report’ on rising house price forecasts (released by a mortgage insurer!!).
The former is a massive in terms of the future of house prices in Australia. If rates return to pre-crisis levels, then not only will a lot of people be in trouble very soon, but the demand from new buyers will evaporate in months.
The later is just another forecast by a vested interest predicting a boom without any discussion of how this will be paid for when incomes will not rise anywhere near that much and when so many Aussies are already up to their neck in debt.
Yet the later recieved more coverage on the online newspapers. It is just so obvious that the ‘old media’ is worried sick about a property crash. Not only are they already losing ad revenue due to places like MM being more appealing to their customers, but now the industry that has been their life blood looks set for a major decline. Its the perfect storm!
The fate of the polticians, the media, the banks and the whole real estate and construction industry is vulnerable to a house price crash. There will be some desperate measures pulled out in coming months!
PuntPal – interesting, I read Glen Stevens speech as well. I agree that he is flagging increases, but I missed the word “rapid”
cb – leave the poor girl alone. She took half an hour to construct a chair so writing a good article could take some time as well.
PuntPal, read the article. Rising interest rates are part of the reason for the strong AUD, and what that does to tourism, export income, etc. Among others, every rate rise by Glenn Stevens will be working away at neutralising our exporting advantages, especially including our unique position of being able to dig up and sell dirt to China. On that score alone, he should be declared public enemy No. 1.
With Henry and Rudd being a close second as enablers.
In short, the advantages we are supposed to enjoy from exporting commodities to Asia where the growth is expected to be, are being neutralised, cancelled out, by increasing the rate differential between us and the rest of the world. At a time when almost everybody is trying to maintain exporting competitiveness with low reates, we are going in the opposite direction with ours, and borrow heavily for stimulus to keep us from collapsing into a heap. It cannot end well, that is for sure.
Yeah, Stevens is definitely exercising his jaw muscles. This tells me that the RBA will keep on upping rates – to not do so makes Stevens look like the boy who cried wolf and his credibility is shot. He also needs to do something to counter the money that the gov’t insists on pouring into the economy, which at some point in the future will translate into inflation. Not sure whether he’s brave enough to go a 0.5% increase – that’s the jawboning part. But I think we will get 2 x 0.25% increases before the end of the year.
I reckon we’re at the nexus right now. The RBA has flagged that rates are on the way up while the Stimulator and the Goose resolutely refuse to take their foot off the stimulus pedal. The elastic band is being stretched at both ends. We might see some house price increases in the months ahead as spruiker hysteria takes hold, but if rate rises keep up, it’s going to be tested.
Meanwhile, it’s China to the rescue.
PF – You are right, ‘rapid’ might not have been explicitly used by Stevens – it was the journo that used it… apologies, my mistake.
cb – will read article now, sorry pressed for time and didnt want to waste time on wrong link. From what you are saying however, you seem to be suggesting that the RBA should use monetary policy in a way that allows us to maintain our international exporting competitiveness. That is a big ask for a blunt tool like monetary policy.
As Stevens said, the goal is to curtail inflation and keep that in check. I think house price inflation in particular is what they are trying to dampen out. Because the first 25bps move didnt seem to curb the totally irrational exuberance of home buyers in recent weeks, Stevens seems to be saying to people ‘No really, you better prepare for much larger interest rates.
I note another story today explaining that only4.5% of new loan products in September were fixed, down from 6.9% in August.
I found the way this story presented interesting – because they seem to claim less people are getting fixed mortgages because… “Mortgage Choice said borrowers appeared to be more comfortable with impending interest rate rises than they were with paying extra fees to fix their loan rates.”
http://www.news.com.au/business/money/story/0,28323,26209262-14327,00.html
Maybe – or maybe the people taking out residential loans in September were the last wave of the Ponzi speculators. They are so tightly squeezed due to new lending standards and the increased cost of houses that they can’t afford to pay the extra fees for fixed mortgage and would rather just take a punt on rates remaining manageable. That’s my take on it…and if this is true, then it makes it even more concerning for the market when you consider Stevens speech.
The one thing we seem to agree on for sure is that this is not going to end well.
Ralph, it seems to me that the China advantage is being neutered by the RBA through higher rates. That is one of the problems with the latter. If the Chindia factor was supposed to be our life raft in heavy seas going forward, Glenn Steven’s decision to lean against property prices, intentionally, or unintentionally, will neuter that supposed advantage, while the Rudd – Henry duo stimulates us into the debt driven depression that seems more and more like the one we will just have to have.
And may I add, again, that I find it more plausible to suppose that this travesty is being perpertrated on the nation knowingly and purposefully, and in cahoots, rather than by mishap or accident.
Yes, PuntPal, we have a Ponzi scheme. Ever more people are required to buy houses at inflated prices to keep it all afloat. And I think the government is well aware of it. Hence the first home owners boost and the recent purchase of RMBS. That’s what makes it all the more criminal.
Is there no one out there just a tiny bit interested in the fact that Australian banks have $13 TRILLION in derivative products held off balance sheet?
Yes, and I’m not convinced China is what it seems either. You never can be too sure of the info coming out of China, but they too have launched an enormous stimulus. So to some extent, their economy is running on stimulus, much like we are. Only thing is that they have a much larger stimulus, which translates through to a truckload of commodity purchases from us. China has their problems with bubbles, just like we do. And at some stage, China will have to live without stimulus as well. And the US is already groaning under the weight of too much debt.
So my overall take is that China has spun the wheels like every other economy in the world. Overall conclusion is that the depression has been postponed for a while as everyone hopes that some sort of ‘real’ growth resumes – whatever that is. If real growth resumes and everyone goes back to heady credit-based consumption, then I think it’s all apples until the next recession. If not, I think the world will limp along for many more years like we currently are avoiding the tough medicine while governments try to fill the gap.
kohl – exactly what is your evidence of that,
Kohl – if that is true, it’s scary. We’d be looking at nationalised banks in the event of anything too serious.
Kohl – you said WHAT???!!!!!!!!!!!!!!!!!!!!!
If you have evidence for that, it would be explosive stuff.
So, c’mon, mate, out with it ……………………………..
I agree with that, Ralph. Govt statistics are always suss, and those compiled on the planning tables, and often in advance, as the practice tends to be in communist countries, more so than any others. At the same time, it has to be conceded that if the purse strings are loosened in China, private capacity to borrow for domestic consumption can go on for decades. After all, who doesn’t want to have a fridge, for example? Or will it be a car first, since having a car is such a status symbol in their thinking? Probably both, and many times many other things, just as long as the money flows.
Plus, the Chinese govt doesn’t even have to borrow to stimulate, but simply spend the hoarded cash that they should have spent all this time domestically, instead of buying rubbish green paper in the US with it.
So, even if the numbers are suss, and they probably are, they have more than ample capacity to make them real in very short order, if that is what the communist leadership wants or needs to do. Ergo: our bigger concern is the way our higher rates and the higher dollar fence us off from the advantages that would come from supplying the Chindia booms. We will be busy shipping them commodities, in other words, without seeing all that much benefit from it.
kohl – put that bottle of glue away this instant…..
“”"”"”"Is there no one out there just a tiny bit interested in the fact that Australian banks have $13 TRILLION in derivative products held off balance sheet? “”"”"”"”"”
for the ponzis,buy the ponzis, toooo the ponzis
7 extra interest rates a forecasted in near future ,to be implemented by gLEN sTEVENS,,,,,,,,,,
WHY???????????????????
because to make a dent ,any headway on this huge astronomical debt ,well much more payments have to occur
Kohl is referring to the figure of over $13 trillion at the bottom of the right hand column of this Reserve Bank of Australia spreadsheet B04 http://www.rba.gov.au/Statistics/Bulletin/B04hist.xls
I’m a first time reader of this whole thread of comments. Fnding you all here is a breath of fresh air in a gloomy MSM / MXified world.
I saw the reference in an earlier post by Kohl, search up to find it.
Cheers,
The Gardener
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