We were going to relay part of a conversation and a few subsequent thoughts following a lunch we had with three old broking pals yesterday.
The US dollar, US healthcare costs, US debt, and China were on the menu.
But, I’ll hold that over until tomorrow. Mainly because your editor is still thinking about it. So look out for that in tomorrow’s Money Morning where we’ll cover at least one of those topics.
But for today…
Well, that has to be the shortest lived reason for a housing bull run in history.
As little as a week ago property spruikers were telling us that rising immigration would underpin the Australian housing market for the next thousand years.
And as per usual the mainstream press fell into line. At times we feel as though the newspapers are as easily influenced by the spruikers as the Stormtroopers were in Star Wars…
Jedi Spruiker: Property prices always go up.
Mainstream Journo: Yes, property prices always go up.
Jedi Spruiker: And rising immigration will push them up further.
Mainstream Journo: Rising immigration will push them up further.
Jedi Spruiker: You should write about that in today’s newspaper.
Mainstream Journo: I’ll write about that in today’s newspaper. Thank you.
Jedi Spruiker: No, thank you. <Chump>
Junior Spruiker: I can’t believe you can still convince the press to write that rubbish.
Jedi Spruiker: The real estate industry can have a strong influence on the weak minded.
Yet today it seems that the mainstream press may have broken the spell of the Jedi Spruiker. Although not completely.
Page 60 of the Australian Financial Review announces, “Foreign buyers now on full currency alert.”
And the Sydney Morning Herald says, “Migrants, expats priced out of property market.”
Well, that’s no surprise to us. As we pointed out the other day, all those Chinese buyers are paying nearly 40% more for an Australian house today than they were nine months ago.
And those poor Poms and Yanks are being stiffed for a similar increase.
Of course if we believe Ross Savas from real estate agency Kay & Burton, “Australia’s advantage is that we are still seen as a safe country, still good value.”
I’ll spell this one out, D-E-S-P-E-R-A-T-E.
So now Australia’s house price will rise forever because… it’s a ‘safe’ country.
What next we wonder? It’s an island? It’s got trees? People like trees. The stuff they come out with is amazing.
We continue to say it, we don’t underestimate the skill of these property guys. They’re like Weebles, they wobble but they just won’t fall down.
Or they haven’t yet anyway. The spruikers bash away on the rising property bandwagon. All the while the day of reckoning gets closer and closer. When will it be?
Who knows. Like I’ve said before, I’m not dumb enough to put a date and time on it. But what I do know is that the property spruikers are quickly running out of ammunition.
But still they roll on. And they’ve got the banks riding shotgun. The Sydney Morning Herald quotes one of their property patsy economists, Julie Toth:
“With interest rates expected to rise, no big increase in household income projected and no tax cuts on the cards, housing affordability is set to worsen… Official interest rates rose earlier this month, starting a series of increases which may last at least a year, markets predict. That means now might offer the most affordable prices for several years.”
Wrong!
Another bit of mainstream led claptrap. Contrary to popular belief housing isn’t affordable.
“Yes it is, even the RBA says it is” some may shout.
“No it isn’t” we retort, pantomime style.
House prices are still at record highs. That’s something your editor and the property spruikers can agree on. House prices may have had a little dip, but they certainly didn’t crash.
And again, to disappoint the property bulls, it wasn’t that we missed the housing fallout, it’s just that it hasn’t happened yet.
But back to the ANZ Bank’s misguided analysis.
Housing isn’t affordable at all. But what about the low interest rates, that makes it affordable doesn’t it? Doesn’t it?
Nope.
The low interest rates merely give borrowers a false impression of good value. But it’s the bank created money that’s cheap, not the properties.
Borrowers are borrowing more than they’ve ever borrowed. How can something be cheap or affordable when you’re paying more than ever?
And they are doing so out of fear that they’ll miss out on further price rises, and they are also doing so based on the lies from the property spruikers who claim house prices always go up.
House prices aren’t affordable at all.
But Ms. Toth does get something right, although I’m sure she doesn’t mean it this way. She says that “housing affordability is set to worsen.”
We’ll agree with that too. You see, when this housing market crashes, people won’t be able to rush out and buy houses on the cheap. Don’t think – like some of the rabid bulls do – that a housing crash will be a good thing and that you’ll grab a bargain.
Because you won’t. Or most people won’t anyway.
That’s because by then the banks will be so up to their neck in defaulted loans they’ll be incapable of lending out dollars for anything less than double-digit interest rates.
The banks will be more interested in making sure they aren’t victims of a bank run. Rather than lending money out they’ll be more interested in keeping the deposits they’ve got and getting even more in the door – that means even higher interest rates.
So you might see a house priced at half of today’s price, but unless you’ve got cash sitting around in the bank you won’t be able to buy it.
And of course you won’t be able to sell your existing house because that will have slumped in value as well.
That’s why we laugh when we see the property bulls and spruikers blindly say “If there is a crash then that’s good, I can buy a few properties.”
Sure, there will be some that can and good luck to them. But for the 99% of property investors who have learnt to leverage up as much as possible and then withdraw equity to buy more properties, they’ll be too worried trying to keep what they’ve got, let alone having the time to look for a few bargains.
Of course, if you think we’re wrong, and you believe Ross Savas and Julie Troth are right, then there’s never been a better time to leverage yourself up with the biggest loan possible to buy some of the most expensive real estate in the world.
Good luck!
Other Stuff on the Markets
The S&P/ASX200 closed at 4,838.60 down by 7 points, while overnight on Wall Street the Dow Jones Industrial Average was down by 92 points to 9,949.36. In Europe the FTSE100 finished at 5,257.85, up by 0.28% and the CAC40 was up 3,873.22 by 0.05%.
The price of gold in Australian dollars is trading at $1,144.08, while in US Dollars it is trading at $1,059.48. And the price of silver in Aussie dollars is $19.08 and in US Dollars it is $17.68.
The Aussie dollar gained a little versus the US dollar, trading at USD$0.9259, and improved against the Japanese Yen JPY84.52.
Crude oil closed overnight at USD$81.37
For the biggest movers on the market yesterday click here…
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Etch – you raise some interesting points. Sustainability is a very real issue. We can’t manage sustainability issues very well with the population at 22 million – look at the Murray Darling situation for instance. Not to mention outer suburban areas being without good public transport in an era where we have peak oil on the horizon and the price of petrol about to climb.
Governments have shown they are incapable of managing these sort of intergenerational issues well. They are trying to manage a slow deflation of the property bubble as well. They introduced the first home buyers grant boost to stem house price falls and support the banks. But they’ve only succeeded in blowing the bubble even bigger. And now it’s all so big that even moderate adjustments would devastate the banks. Every bit of tinkering only makes the problem worse.
Also, I see elsewhere that APRA is looking to increase liquidity requirements for deposit-taking institutions from 5 business days to 20 business days. The SMH is also reporting that banks are resisting this, saying that they really are very well managed and very well capitalised (oh please!). And that any increase to liquidity requirements would reduce their ability to write loans and would therefore harm their profitability. And of course, there is squabbling over exactly what constitutes a liquid asset.
http://www.smh.com.au/business/banks-to-fight-against-push-by-regulators-to-raise-liquidity-levels-20091025-henj.html
So we have a crisis that exposed the leverage of the banks and they respond that their very future depends on continued massive leverage. Actually remaining more liquid directly impacts their ability to further expose themselves to the real estate bubble. So their plea to APRA – please let us remain highly leveraged so that we can continue to make bets on the property market. I reckon the banks are going to go all out here and then claim they are too big to fail and wait for the government to bail them out. Moral hazard, anyone?
Mr_Clean
You make a lot of sense! This country is in for a big reality check, upon which time it will become evident that our economy and banks are NOT as strong as we’re being lied to about.
In the meantime Simple Stevens will ocntinue to perpetuate this lie by pumping up the interest rates, and so inadvertently help to set up the impending collapse of the Australian residential property ponzi scheme.
Say Mr_Clean, you sure you’re not really Sayce?? lol
Agree, well said, Mr Clean.
The situation will eventually correct itself. With or without government intervention. As you do, I believe it fundamentally comes down to house price inflation running ahead of wage inflation. This can continue for a time, but there comes a point where wages aren’t able to service increased debts.
From that point, house prices can’t increase unless credit becomes more available or wages increase. Alternatively, we’ve got things like shared equity mortgages and siblings/friends going into debt together. Taken to it’s logical conclusion, people won’t be able to buy a house unless their parents use their own house as collateral for their children’s mortgages. Perhaps expectations will change such that that is the accepted way to do things.
Sandra,
Your points about Stevens and the RBA raising rates is an interesting one. Raising rates could well pop the real estate bubble. Or it might not – people might just go on believeing the spruikers and house prices rise anyway. In the event that it does pop dramatically, our entire economy will collapse and the RBA will have to slash rates again.
Actually, Ralph, I fear that that is precisely the plan.
You raise rates until the bubble pops, then the economy collapses with it, which in turn will allow the RBA to cut rates to the bone, enabling the banks to have lots of free money to speculate with, without even having to bother with writing any more loans.
Isn’t that precisely what happened in the US and Europe?
Ralph – Sorry I overlooked your question at 50.
An excerpt is “More houses are needed to help boost economic recovery and to create a lasting legacy of affordable homes, treasurer Wayne Swan says.
Speaking after meeting state and territory treasurers in Canberra on Friday, Mr Swan said Australia wasn’t building enough houses in terms of population growth.
Mr Swan said the treasurers had discussed social housing, development approval processes and the need for more to be done to improve rental affordability as well as what could be done to get private sector investment.
He said all of these issues stemmed from a lack of housing.
“The Commonwealth has this view that we have got to get ahead of the curve here,” he told reporters.
“We have not been building enough houses. We do have strong population growth so it will be very important we move through to economic recovery to ensure that we don’t have capacity constraints that flow from a shortage of housing.
“That is why we put significant resources into social housing as part of our stimulus plan, not just to create jobs for now, not just to support small business for now but also to leave a lasting legacy of more affordable housing.”
Business Spectator is free at the moment (well it was when I joined) but you have to register. It is a good online newspaper.
The reason why house prices have been allowed to rise so dramatically is because they are not included in the RBA’s inflation basket of goods and services which contains food, energy, clothing, utility bills, etc . And the big reason why we have been able afford high house prices is due to the masking effects of cheap Asian goods, which in effect means that Australia has been importing deflation for the last 12 or so years. The falling costs of living has enabled us to throw more money into lifestyle sectors such as holidays, larger homes, expensive SUVs, etc.
Falling prices for cameras, TVs, clothing, DVD players, furniture, computers, white goods, kitchen utensils, workshop/farm tools and equipment, etc, have been the trigger of keeping interest rates well below the necessary levels for far too long. And because we can afford to buy these items with much ease then we are more tolerable to rising costs for fuel, food, medical treatment and general services. As the rates have been so low the banks have been comfortable in lending more as the repayments were easily serviced even by the lowest paid workers. Of course the more buying activity occurred the higher house prices went. And the higher they went the more confident the borrowers and lenders became. Why worry about lending someone a half a million dollars when the house they’re buying will be 1 million dollars in 7 years time? Everyone joining in on the gang bang was a winner and no-one caught an STD. The bankers won (and most have left with nice packages thank you very much), house buyers won, the tax man won, the politicians won, tradesmen won, the developers won, furniture shops won. In fact the whole show was so perfect only a numbskull would want to stop it.
And yes I agree in the perfect world we have right now it will continue indefinitely. But the world is not perfect and it is run by humans and the world’s financial dynamics are changing daily! So now we have borrowed as much as we can while the times have been good. The negative side to all this is that as imported goods have been so cheap we have allowed local manufacturing businesses to fold or go offshore. We cannot take on any more debt – we are full to choking point!
What happens when interest rates rise to 8%? Does that mean home repayments will rise? No! Home repayments will rise along with petrol, food, clothing, medical, education, TVs, cameras, etc. You see, we think of rising interest rates as nothing but higher loan repayments. But the rate rises are implemented as a reaction to rising costs of everyday items, not house prices! So when we are having to pay higher monthly mortgage bills we will also be requiring more money for everyday items to get by. That is my concern. Once consumers are hit with double whammy fees for home repayments and rising prices for everyday things then there will be very little money left to feed into the economy. Will our economy be able to sustain long term home mortgage rates at 8% plus?What if the rates go beyond 8% and petrol is over 2 dollars a litre? Would our wages keep rising even though the rising cost of fuel is killing businesses?
If/when this scenario becomes reality then the outcome would be the exact opposite to what we have endured over the last 10 years. We would see money become scarce once again. We will see people fight tooth and nail to refrain from spending because getting money via credit will be very hard and expensive. Once that cancerous action filters through the economy it will then feed on itself. As I said, we have been importing deflation. And with that we have had full control over our economy with the RBA playing with interest rates like a chess game with the subsequent moves being reactive and very successful. But when we start importing inflation (and we will) what happens when the rising rates cannot slow inflation? They then have to be risen more. Eventually inflation will be reined in, but for that to occur sacrifices in our economy must be made. Will we cut back on our food? Will we cut back on our petrol use and heater use? Will we choose to stop buying clothes that we don’t need? Will we forgo to go on that interstate holiday? Will it be all of these? There the problems start. From there the economy will go backwards as business activity will be hit hard. But the sad part would be that core inflation will remain high forcing the RBA to keep rates above the safe level. Falling business activity, rising unemployment and high interest rates. And the longer it goes on the worst the outcome would be.
We know China’s currency is at a great discount to western currencies giving the Chinese the advantage to out-price and to outsell all western manufacturers. This has given them consistent and reliable money flow during the hard times as their cheap goods had remained in demand during the GFC. Whereas America was hit hard as customers were shying away from ordering the latest Boeing Jet Airliners or Caterpillar’s earth moving equipment the China juggernaut kept on rolling as consumers had no problem buying 20 dollar Chinese jeans or 40 dollar Chinese DVD players. But eventually China will no longer be able to keep its currency suppressed due to the damaging effects of extreme inflation. So they will have to lift its currency closer to western levels, which will hurt their exports but will reduce their costs for fuel, commodities, gold, dairy, wheat, etc. So China will then have cheaper access to these items to begin a self sustaining economy. At the other end the western world would be left speechless as the discounted Chinese goods are suddenly expensive. Not only that but fuel and food costs would be soaring due to China’s consumption. Would we be strong enough to do it alone and manufacture our own goods as a result?
It must be said that near the end of a boom 95% of opinions are always bullish, with only a few idiots countering public sentiment. Of course when markets are at their bottom and the news is bleak 95% of the public remain bearish and only a few idiots would gamble on getting in then. I was one of these idiots. I got out of the share market last year in June missing the collapse of Bear Stearns and the almost complete global financial meltdown as AIG had to be given an emergency bailout package by the US tax payer. Then I had the foresight to gradually feed myself back into the share market last December, accumulating good company stocks at great discounts every month since. And as most know the market has rallied some 50% since March! That does not make me right with my forecasts. But it shows that with a little for sight and with some strength within to go against public sentiment one could beat the herd at their own game. No one wanted houses in the 90s. They were cheap but not cheap enough so to speak. Now we acknowledge house prices are dear but not too dear. Time will tell if the housing market bears are wrong.
What I don’t like to hear is hearing the public wishing first home buyers to default on their mortgages with their homes being repossessed. Why would that be good? Why should they be punished? It’s not their fault for living the dream of owning their own home. It’s the fault of the banks for authorising these excessively big mortgages for the young buyers. It’s also the fault of our government for taxing savings but rewarding debt with negative gearing. Hence the crap we find ourselves in now. Who decided it is now okay to give out loans based on a couple’s income rather than the sole bread winner? Did they never consider that times get tough and that unemployment levels can run high. As a result we have no safety net in our economy for high unemployment or high interest rates. If people were encouraged to save, such as with zero tax payments on bank interests earned then the economy would just trickle along at a more sombre, but reliable rate avoiding booms and the following busts. If only!
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