We’re still beavering away on the December issue of Australian Small Cap Investigator this morning. But we’ve just enough time to take a break and knock out today’s edition of Money Morning.
We were heartened by news yesterday that Standard & Poor’s (S&P) had given an AAA rating to $920 million worth of residential mortgage-backed securities issued by Westpac Banking Corporation [ASX: WBC].
According to S&P:
“The preliminary ratings reflect our opinion of the transaction’s credit support, collateral pool, servicer, and other features based on our current criteria and assumptions.”
But let’s make one thing clear, the mortgages backing these securities are – apparently – ‘prime.’ In other words they are not ’sub-prime.’
Based on the details in today’s The Age newspaper:
“The weighted average loan-to-value ratio (LVR) of the mortgage pool is 58.3 per cent and less than 1 per cent of the loans have an LVR greater than 80 per cent. The average life of the loans is three years. There are no low-documentation loans in the pool.”
That’s alright then. But Westpac did also take the opportunity to throw some rubbish out as well. It’s flogging $55 million worth of AA rated securities, and $25 million worth of unrated stuff as well.
So, what does this all mean? For a start this $1 billion issue of residential mortgage backed securities (RMBS) is a mere drop in the pond of the total RMBS market. According to the Reserve Bank of Australia there is over $128 billion of RMBS outstanding.
Of that amount, about $7.7 billion is owned by the Commonwealth Government through the Australian Office of Financial Management.
And it’s just a drop in the ocean compared to the $12.9 trillion worth of off-balance sheet business the banks have floating around in OTC forwards, OTC swaps, credit derivatives and other tasty morsels.
But what this RMBS issue also means is that the bank is desperate to get its hands on more cash.
You can see that from the banks’ advertising. If you look at the interest rates being charged on loans and compare it to the rates being provided on term deposits it’s a revealing picture.
Take out a variable rate home loan with Westpac and you’ll pay around 6.11% in interest.
Take out a 12-month term deposit and you’ll receive up to a 6.8% interest rate.
But even if you compare the term deposit rate with the fixed mortgage rate Westpac is still running it at a loss for the first year. Its 1 year fixed rate is currently 6.54%.
Clearly the banks would only do this if they believe interest rates are going to rise further. You can take that 6.8% term deposit rate as the low-ball figure of where mortgage interest rates will be by the end of next year.
In fact, you should try something closer to 8%.
The issuing of the RMBS means that Westpac gets to flog off a bunch of mortgages and in return it will get cash from the investors in those securities. Naturally, it can dish the cash out to provide even more home loans.
And so the lending glut continues. It can never stop.
Although there could be trouble on the horizon if lending by the banks does drop by 9% next year as forecast by Market Intelligence Strategy Centre (MISC).
It believes the value of new home loans will be $14.4 billion lower through the year to September 2010.
If there’s one thing that events over the past twelve months have shown you, it’s that banks are as far from being stable and conservative investments as you can get.
Their actions truly are a sign of desperation. Now, don’t get me wrong, I’ve got no problem with the banks putting up interest rates. They never should have been slashed so low to begin with.
The very reason the banks are so desperate for cash now is because they’ve gorged themselves on giving out ultra-cheap money over the last twelve months.
While the mainstream press slams the banks for increasing interest rates just in time for Christmas, we slam the RBA and the banks for enticing borrowers to load up on cheap debt. Cheap debt which they know full well will lead to pain for borrowers twelve months from now.
And we slam the mainstream press for supporting them with their “Houses set to boom forever” headlines.
But it’s not just Westpac. It’s all of them. It’s the entire framework of banking that’s rotten. You may recall we likened the ANZ retail share offer earlier this year as being like taking “Lambs to the slaughter.”
At that point ANZ Bank [ASX: ANZ] shares were being offered to the market at $14 per share. Don’t touch them with a barge-pole was our general advice.
Since then ANZ Bank shares have risen by 50% and those investors that bought at $14 would have done quite nicely.
Do we regret missing out on that price action? Are we embarrassed that we got the call so wrong?
Nope.
As we’ve written before, with over 1,800 shares listed on the Australian stock market we just don’t see the need to take such a massive risk on four rotten companies (ANZ, Commonwealth Bank, NAB and Westpac) that claim to be ’safe as houses’ but which are nothing more than super leveraged bets on themselves and the housing market.
As far as I’m concerned, investing in bank stocks is no less risky than playing Russian Roulette. An investor may have been lucky over the last few months, but soon enough the banking crooks will deliver a ‘bullet’ to investors’ heads.
Besides, when we looked at the issue of the RMBS by Westpac, something else struck us.
It was this comment by S&P:
“This will be the first issuance of securitized mortgage loans originated by Westpac Banking Corp. (AA/Stable/A-1+) for 2009.”
We won’t claim to be an expert on the workings and theories of ratings agencies. I’m sure they’ve got all kind of fancy models that gives them guidance on the rating level.
And we’re sure there’s a bit of subjectivity in there as well.
But here’s the thing that amused us. It’s the fact that S&P considers a bunch of home buyers to be a better credit risk than Westpac. In fact it considers a bunch of home buyers to be a better credit risk than all Australia’s banks.
After all, the best rating the banks can get is AA. Whereas ‘moms and pops’ in the suburbs can get themselves an AAA rating – providing they’ve got a mortgage!
I know we’re only talking the difference between AAA and AA, but the difference is perhaps somewhat symbolic and telling.
It’s a good indicator of how leveraged and risky the Australian banks are. Let’s look at this comparison. If you’re a lender and you had the choice of lending to Party A that was leveraged by about 12 to 1 or to Party B that was leverage by around 2 to 1, you’d see that Party B provided the lower risk.
And that’s exactly the conclusion S&P have made. Banks are leveraged to the eyeballs. Sucking in cash from sucker depositors and then lending it out to anything with a pulse.
That’s what makes the rating so bizarre.
Normally you’d expect investors to have greater faith in a big company to repay than you would in individuals.
Especially when the big company – the bank – has a diversified range of assets at its disposal whereas the home buyer has most of his/her assets concentrated in just the home.
I mean, if BHP Billiton sold securities against individual assets to investors, you’d think that most of those assets would attract a lower risk rating than that given to BHP.
But look, maybe I’ve got all this wrong. Maybe it’s normal for individuals or groups of home buyers to have a better credit rating than a multi-billion dollar bank.
Maybe this is just how things work in the banking and finance sector.
Who knows? On this occasion perhaps the ratings agencies have got it just right.
But for your editor it’s another reason to give banks a wide berth and allow other investors to ‘enjoy’ the returns they’re getting from those ’safe and dependable’ 4 Pillars.
Cheers.
Kris.
60-Second Market Round Up
by Shae Smith
The S&P/ASX200 finished up slightly yesterday to 4,654, higher by 18 points. The news of the Dubai debt relief lifted the market higher at the end of the day.
The Dow Jones Industrial Average added 29 points to close at 10,501.05. Citigroup has come up with a plan to repay the bail out money.
Overnight in the UK, the FTSE finished higher to 5,315.34, up by 1.02%.
The Nikkei finished the day at 10,105.68, up by a tiny 2 points.
The price of spot gold in Australian dollars is trading at $1,230.20 while in US Dollars it is trading at $1,126.99. The price of silver in Aussie dollars is $19.00 and in US Dollars it is $17.41.
The Aussie dollar versus the US dollar is trading at USD$0.9173, and against the Japanese Yen JPY81.27
Crude oil has continued its downhill run, closing at USD$69.59.
For the biggest movers on the market yesterday click here…
{ 48 comments… read them below or add one }
I feel more comfortable now that we’re back on the subjects where I can learn something tangible (as opposed to Lord Monckton’s bunfight over climate change). Thanks Kris, I feel like I learned something from this post.
Are you serious?
First, I’m not going to waste my time with some counter arguments against your hypothesis.
Second, you’d have to be one of the worst sportsmen I’ve come across.
What are you too arrogant to have some humility? Maybe you should join the Nationals and assist Barnaby Joyce ranting about US defaults next.
“”"”"”"”"Maybe you should join the Nationals and assist Barnaby Joyce ranting about US defaults next. “”"”"”"”"
or that climate change is BS & aus national debt is way over the top
The thing I can’t work out is how a bunch of mortgages which are made up of around 2/3 AA rated and 1/3 not rated (but presumably less than AA rated or worse not investment grade) can possibly have a AAA rating which is higher than any of the loans that have been packaged?
If someone could enlighten me I would appreciate it. Cos I can’t work it out.
Etch, if we include all debt now we all owe $110k ( http://www.smh.com.au/business/dont-mention-the-debt-20090219-8c6e.html), which does include government and corporate debt. So the average 2 parent, 2 kid family owes something like $440k and assuming both parents working and earning the accepted average of $120k ($60k per parent) and assuming an average debt percentage of 10% you are looking at more than 1/3 of PRE TAX income to service debt. It is simply unsustainable and there has to be a reckoning. It is just common sense.
As of 2008 the RBA says that households owe $1.1 trillion in debt which excludes government and corporate debt. With a population of 22 mill or so each person owes $50k in personal debt or around $200k on average for the 2 parents 2 kid household. Again assuming an average interest rate of 10% you are looking at 16% pre tax income to service interest alone. That has surely gone up now with the recent boom in housing prices and increase in interest rates.
Now, its been argued that there is a housing shortage which maybe true now (Keen for example argues that there is housing deliberately left vacant so the housing shortage is falsehood. I believe that QLD and Melbourne CBD shows Keen to be correct).
However, even if true if something occurs where people lose their jobs then the demand disappears either because no one has any money or, as we saw in the US, people what for the market to “bottom” or both. Then you have desperate sellers and no buyers. Prices down regardless of whether housing shortage exists. It is really simple. I saw a spot on A Current Affair (yeah ok not great journalism) with a lady stating that they bought because if prices kept going up then they would not be able to buy next year! It shows clearly that people are buying out of fear of MISSING OUT and are, again, not making rational decisions (for example, it might be better just to rent).
As a final aside if these are such good loans why would Westpac want to get rid of them? Why not get rid of the trash? Also the loans that have a 80% plus LVR are all INSURED! And even they are recourse so some of the claims will be either partially or wholly paid back. Why package those? To me it is a simple way of Westpac making money at no risk and asking me to take the risk at less than what Westpac get for them! Westpac keep them and the bananas that go with them.
Anyway enough from me, written too much I think
Kevin B it is almost all AAA rated with a small portion of AA rated and an even smaller portion of unrated.
Please read the post, and even better read someone elses post on this subject so that you can get the facts instead of an incorrect version of the facts.
DAVE – you seem to have discovered the facts about the drivel that is staple diet here.
Kevin B – I found that very inspiring. I agree with all of what you have said, besides the remarks about the AA and AAA ratings (because as PF has pointed out, the tripple AAA rating was given because most of the mortgages were AAA – however Sayce did point out that Westpac managed to throw in some AA and unrated mortgages too)…correct me if I am wrong PF, but this kind of packaging of different quality loans was what led to the GFC???). So although Kevin B might have missed the exact details, he is spot on to be a little concerned that this can go on still. In my mind, if you are managing risk – you dont just ’round up’ to AAA ratings…although I am no expert on this (but neither were the ratingsx agencies!!!)
Anyway – enough about that. Kris, this was a great piece and I would like to ask you a question that maybe you could address in a future article.
Why was house price inflation not seen as inflation? I know rents are meant to capture the cost of housing, but surely it was idiotic to not think that the cash rate should be moved to cool down the housing market? I really dont understand why the CPI is so trusted, it seems to be a total rort and just another way in which Government has enabled this bubble to expand without the RBA ruining all the fun
I
PuntPal I’m surprised that you found Kevin B enlightening as he was way off the mark with the RMBS issue which is almost solely AAA rated with a miniscule amount of AA and almost no non rated securities. Don’t forget that Westpac will continue to manage these loans which have a low LVR and anything with an LVR above 80% has insurance. I believe that there are no low doc included. I would rate these 1st class securities, and whoever buys them will get a solid performer for their portfolio. The return is not spectacular, but a good portfolio has a mix of secure and higher risk with appropriate returns.
On Kevins other point he mentions the approx $1Trillion in debt but makes no mention of the $1.3trillion in superannuation holdings or the savings in Australian banks of $442 Billion by households with total deposits held by households and institutions of $1.24 Trillion
You can verify that from here – http://www.apra.gov.au/Statistics/upload/MBS-October-2009.pdfhttp://www.apra.gov.au/Statistics/upload/MBS-October-2009.pdf
So for Kevin B to get worried about our debts without taking our assets into consideration is a bit uninformed for my liking.
You also mentioned that in the USA it was the cocktail of bad loans amongst the good that got the securities rated AAA, but in fact they were largely rubbish. That is true, but there has not been any problems in the past with Australian RMBS issues and I wouldn’t expect any. PuntPal it is easy to be negative and to get people worried, but I regard careless scandalmongering by those who know but indulge nevertheless as extremely dishonest. Sorry mate I know that you admire this columnist but he is economical with the truth.
To evidence the difference between countries with their RMBS qualities, the USA is still wallowing in the mire as far as housing is concerned, but other countries such as NZ, Britain, France are starting to pick up in the home prices again after the falls in 2008. Why you may ask, because they lending quality was better than the USA so the clean up is not as untidy.
Take care PuntPal
Kevin B ,,excellent response ,,
thats wats happening people jumping into property now are at the LEMMING STAGE , hurry-up-dont-want-to-miss-out-stage
a property in aug 2008 sold for 425K
in same street another sold for 560k in dec 2009
thats 135k increase in 15 months =60 weeks
=$2250 per week increase……………. incredulous
i suppose in the next 18 months they go DOUBLE $4500 aweek
AND OF course so on
(((((((in the meantime to ask for a payrise ,the management will look at you with such discorn it could even cost you your job)))))))))
i mean it has to, to keep the ponzi schemme going .
maybe the CEO wench OF westpac will buy all these props up with her $ 90 million payrise ? who knows
however you know wat ???????
those repackaged bullsheeeeeeeeeeets are covered by a LITTLE area of OUR superannuation
the property segment part espescially when YOUR super is invested in the BALANCED or HIGH GROWTH options
not the cash capital guareeneeteed
PF – you must be a banker
“On Kevins other point he mentions the approx $1Trillion in debt but makes no mention of the $1.3trillion in superannuation holdings or the savings in Australian banks of $442 Billion by households with total deposits held by households and institutions of $1.24 Trillion”
So what you are saying is that Westpac can just keep pushing debt down throats of Australians because we have heaps of super to pay off any defaults!!!!
Now let me put on my bankers shoes: Who cares if everyone defaults we’ll just use Australians hard earned savings to pay back our lenders. They’ll end up with squat but hey ‘as long as we get our bonuses right!!!’
Westpac cant use my savings or super to pay lendors so if people start defaulting Westpac, ANZ …. are stuffed. Therefore assets are not worth mentioning
Hmmmm, about this question of sufficient assets backing a debt does seem a little complex. On the one hand, a secured debt with adequate asset backing is much more preferable and less risky than unsecured debt. But on the other hand, you cannot lose sight of the fact that the value of the security is prone to value evaporation, which sometimes can be rapid, and even sudden. Plus, other than pawn shops and loan sharks, no lender will lend on the basis of asset backing alone. Current cashflow/income seems to be the more fundamental consideration, since the idea behind debt is supposed to be that the debt will be serviced and eventually repaid from other/current income, not from the foreclosure and sale of the security backing the loan.
“”Westpac cant use my savings or super to pay lendors so if people start defaulting Westpac, ANZ …. are stuffed. Therefore assets are not worth mentioning”"”
they will burn some of super as they did in the uSA super equivilant of 401K
PF – I liked Kevin’s summary of how much debt we have as a nation. I also liked how Kevin pointed out that despite the housing shortage (myth!!) being accepted by everyone who is unable to think for themselves, it wont stop price crash anyway. I have said this for ages! America has an oversupply, yet tent cities are propping up everywhere. People will only pay debts that they can realistically afford to pay back; there will reach a point in 2010, when struggling families give up under the strain of higher rates.
You deride Sayce, yet you cheer Joyce. Both of them have agendas, but Sayce is a lot more up front about his beliefs. Joyce is trying to salvage his Ponzi business model and refuses to answer straight forward common sense questions (such as why House price inflation does not amount to inflation – seriously – he can’t answer it!!!).
How can you trust a word Joyce says – the guy needs house prices to keep increasing (correct?), so why would he say anything that may concede we have a bubble and that it is in the interest of the nation to have some house price deflation?
On the issue of scaremongering – I believe it is much more dangerous to create false hope, then to point out realistic risks that could cause massive problems. This is the black swan approach, where people think that Event A will never happen, simply because it is very unlikely to happen. I have made a bit of money betting on 100-1 shots because the bookies have incorrectly priced the odds (they think that once something is over 50-1, then they don’t have to be too accurate with their odds). Well if something is 60-1 to happen and I can get 100-1, then giddeup!
So in my opinion, a lot of the predictions I have made are unfolding. You have been boasting about the resilience, but take this market off Government life support (as is occuring now). There has been a drop off in demand for new loans now the FHBG has ended and small interest rate increases are causing panic already. This nation’s housing market is about to fall off a cliff…and I think you know it.
Yeah fair cop on the AAA thing, I did not read the article properly.
PuntPal, I would say that PF does not believe that, and therefore he cannot know it. Even if something is true, you cannot know it without believing it, because knowledge is a kind of belief, and it is commonly defined as justified, true belief. This is a widely accepted, almost foundational truth in epistemology, or theory of knowledge.
Anyhow, as for the substantive question you are debating, there appear to be two main camps in the debate: the mainstream optimists, and the pessimistic fringe. And then there a few, like myself, who cannot make up their minds about what is going to happen. My gut instinct and dubious grasp of the fundamentals dispose me to believe that our economy is going to run out of money. There are just too many flees and parasites sucking away at its juices at the moment, and unless something radically changes, this road is a dead end.
But whether property prices will crash wholesale, like they have in the US, as a consequence, is a further question, and will not be decided by the first one about cash drying up of the economy. I just don’t know how vulnerable the dominoes are, or indeed what their configuration and interdependence might be for widespread, catastrophic defaults. It is like the deflation/inflation question. I haven’t got any confidence in one or the other prediction. The whole thing is just so unpredictable and uncertain.
Kevin B, this is, among other things, the age of information overload. So, don’t kick yourself too much over it. We all skim and miss a little, and sometimes lots, trying to cut through all the information we would like to absorb in less and less time.
I also cannot understand the logic behind balancing debt with superannuation assets. Is that a really a fundamental way of looking at debt? If it is, why can’t we balance our debt against state owned enterprise as an asset? National parks?
Is that the same logic that the Japanese govt uses? Debt doesn’t matter because we can pilfer the post office savings account of our citizens?
As an individual, I (without a great deal of thought) started a retirement fund through a European tax haven many years ago. However, I never think of it as an asset to evaluate my net worth as the monetary value cannot be realized until 2025. Isn’t this common sense?
I don’t see why a large corporation should be deemed more secure than a diversified group of households. At the household level, you get salaries, you pay the bills, you service debt – it is very simple. Mechanics of families’ finances are understood much better than those of companies. Company’s assets may be diversified, but if you package loans from multiple families – this is just as diversified. And in the case of Westpac, half of its assets are people’s mortgages anyway.
Thanks CB.
I think PF has made some excellent points about the increases in house prices in very recent times. An article by Adam Schwab (which I am unable to reproduce here but for the sake of disclosure is a property bear) states his belief that the average price of a home ($501k) now has to be service from an average household income (after tax) of around $82k or more than six times annual income. Adam also has other examples of house price increases of short periods of times.
Now I am not a property bear per se. It is very important to own your own home, a place on this earth that you can call your own and as long as you make your payments no one can kick you out. We had a very bad experience with a rental agent and that prompted us to buy about 3 years ago. There is some intrinsic value to owning property and I am even OK with buying property to rent it out (although I do not think that you should be be allowed to claim a tax deduction for it and then pay a concessional rate of CGT! Either the investment is a good choice on its merit or it is not).
But there has to be a limit to whether it is a rational thing to buy or whether it is better to rent or share and save or some other thing. I believe that the rational basis for buying property was exceeded some time ago. People are being seduced by the thought of “easy” money. There is no such thing. We know this.
The only reason we did not have a crash this time round, I believe, was because a lot of the resources we sold were sold against by a previously negotiated contract and not benchmarked against the spot market thus not as many firings occurred as no cost reductions had to be made at that time thus not having a ripple effect throughout our economy.
These sort of increases is simply not sustainable on a long term basis. The day of reckoning will soon arrive.
GB – exbanker. Why do you believe that every loan will fail? Don’t you feel that is a bit far fetched.
Kevin B – I appreciate your honesty.
PuntPal the level of debt or indeed the size of an asset is only part of a story, and in itself is relevant only to the nations wealth and GDP.
One number alone is not a story, just part of the story. EG someone could tell you that they owed $10 million to the bank and you may get concerned, but if they owned $50 Million of property and tangible assets that debt becomes less problematic.
As for your predictions – well about 300,000 people including myself predicted a slow down in 2010 so no cigar on that one. As for housing falling off a cliff, well that is possible if we get an “event” but without that it will continue as before. I can’t fathom why you want a crash, be careful what you wish for… Don’t make the mistake of thinking that you alone will be unscathed by that. Being able to buy a cheap house is irrelevant if you don’t have a job.
JC – refer to my answer to PuntPal. On top of that – no we can’t use the wealth of our parks and wildlife resources although they may generate tourist income, and have a value that way. Kevin mentioned the hard or tangible liability of household debt that has to be included on a balance sheet. Tangible assets such as cash, savings, superannuation holdings, and income earning assets are included as well.
We can do that on an individual scale, or a group (national) scale.
GB has a good point when he said that we can’t use his savings or super to pay off the total household debt, but some of our total savings and especially super will offset that debt. How many people are waiting to draw a lump super payment to clear their home loan upon retirement?
I don’t think for one moment that the debt is not significant, but a perspective has to be maintained.
JC – that retirement fund of yours is an asset, and as it belongs to no-one but you – it is your asset. In the same way that future debt obligations must be included on a balance sheet as a liability, so are assets such as superannuation. It may be a good policy to put it out of your mind, but it is still yours and will be collected one day.
Best of luck to all.
cb – I do think PF knows it, I think you know it and I think anyone who is intelligent knows it. The only reason people wont admit this is because they know confidence (false confidence) can maybe prolong this thing.
Like I said, people cant answer straigh questions – such as why is house price inflation not factored into the CPI? Renting is meant to measure the cost of housing, but if there is a disconnect between the cost of renting and the cost of buying (which there is!) then CPI totally misses one of the most damaging and harmful forms of inflation (shelter inflation!).
And the bankstas are trying to say dont ‘target asset prices’ THEY ARENT BLOODY ASSETS, THEY ARE HOMES AND WHEN THEY GO UP IN PRICE IT HURTS ANYONE THAT DOESNT OWN MULTIPLE PROPERTIES!!.
One final thing – if you are so distrusting of the Government when it comes to climate change, why do you not think they are being deceitful over the housing market.
Surely if you believe the FHBG was boosted to prop house prices (I dont think you dispute that) then this would indicate that the Government believe prices were about to crash?
Also – why does the media, that I also think you trust, keep needing to mislead people about the true state of the housing market (selectively using distorted clearance rates and running headlines like ‘prices set to boom’).
You seem so sceptical on everything else, but on houses you side with the mainstream morons. Well people on the fringe have proven to be right on everything since 2007, so I am staying a contrarian for a long time yet.
PF,
So does that mean that Australia is a net saver like China and Japan? We always hear this rhetoric about how the Anglo Saxon nations are the most indebted in the world (or have the largest current account deficits anyway), but perhaps it’s because we’re looking at the wrong way. We’re not lumping in our superannuation assets, our SOEs, etc. Perhaps, we could ask the government to gift government land or property to the under-30s to “give them a leg up” in the wealth stakes. It’s the same with super assets. Why can’t I “take” or “borrow” some now if I wish?
PuntPal, now that you raise the question, I reckon I don’t trust the mfs on property either. I definitely do not trust the ABS figures, such as employment, GDP and the CPI. They are all docotored to suit the status quo and those who most directly benefit from it.
But, if you want to be fair, then you will notice that I am simply unsure as to how house prices are going to work out in the short to medium term. The most likely reason for my indicision – paralysis of the mind, more like it – is the massive information overload, much of which is contradictory and undigested to my own satisfaction. Hence, I cannot have any confidence in taking a firm view on the question, and as soon as I manage to form a firm view, you would be more likely to make money on betting against it, given my sorry record.
But let me chide you over something, while I am still at it: Your insistence of not taking PFs views at their face value would seem to imply that you regard him to be either self-deceiving, or outright dishonest in this forum. I doubt that this is what you are trying to say or suggest, but it would seem to be implied by the repeated insistence that he somehow knows better than what he in fact is saying. I thought that you might want to think about that and perhaps clarify what you are trying to say.
I think he is self-decieving – certainly not dishonest. I think he worships Joyce, just as he think I worship Sayce. I have criticised Sayce for his views on public education and on competition policy. Whereas PF seems to never want to question Joyce…on anything. This to me shows he may be heading into this argument with blinkers on – I am sure he would say the exact same thing about me.
cb – I am yet to hear a shred of rational reasoning as to why house prices in Oz are not massively inflated due to Government distortions and the mainstream’s (media and mainstreet) ignorance of economics and finance. The more spin I read from the spruikers, the more their desperation is revealed.
PF argues other things with such conviction and uses rational reasons as to why house prices are not in a bubble – but when it comes to houses in Oz he relies on the shortage myth to fend off an argument. Until someone can prove to me that there actually is a shortage and that this is responsible for price rises in 2009, I will regard their use of that line of argument as a way of avoiding confonting the possibility that we are about to face a massive collapse.
But I stand by claims that the very healthy level of scepticism that you possess should show you that this property bubble is the mother of all Government-sponsored scams. It makes Super and Climate Change seem like good government policy.
It is a national disgrace and I make no apologies for claiming people are decieving themselves by arguing we have nothing to worry about.
Once again – I ask this (someone please answer me – anyone)….
WHY WOULD HOUSE PRICE INFLATION NOT BE CONSIDERED AS INFLATION THAT SHOULD BE TARGETTED BY THE RBA???
The answer to this question reveals what a scam we are all a part of and how those that exercise monetary policy in this country have no idea about what they have created.
PuntPal I accept that market confidence is a big factor, but that also applies to soy beans, pork bellies, gold, and any other commodity. Yes houses are commodities and assets and I can’t change that.
I have continually stated that I believe house prices would be relatively flat (check my posts from before they jumped in Melbourne and Sydney) and I continue to believe that if you drew a graph from the start of the GFC to the end of 2010 you will not see any more than a 5% per annum rise in prices, which in real terms after adjustment for rising wages is not that big.
Certainly nothing like the “property doubles every 10 years” mantra.
If I turn out to be wrong so be it, that is my best prediction. Your prediction is a complete capitulation in the market. Lets wait until Dec 2010 and compare notes.
go to http://www.creditcrunch.co.uk/forum/index.php?showforum=57 where you will find an army of like minded bears to exchange ideas with. And me of course, but a good debate helps everyone.
JC – In australia we save via superannuation. In China they don’t generally have superannuation and there is NO OLD AGE PENSION. That is why they save so well, their need is so much greater than ours. Here we have the Government safety net to fall back on, and since Keating introduced compulsory super for employees (just forget when, about 1984?) people just stopped saving as they thought all will be ok. That has changed a bit lately both here and overseas.
So yes we are net savers but in a different way. The Chinese are better than us though, they save 40% to 50% of their income.
Unfortunatley you can’t “borrow” from your superannuation fund, but in future it may be possible for your super fund to “buy” a portion say 10% or 20% of your own home and so reduce debt that way. If you sold then that portion of the total purchase price plus a bit extra would have to be repaid to your super fund (ie you keep your own money) and that could be used to assist with your next home purchase on the same basis. So your super scheme could make a profit out of your own home (or a loss if PuntPal is right, but shares lost as well in 2008)
You would win two ways. Once by not having to make payments on that portion, and secondly you could then invest the savings into either more super, or another investment of your choice.
Hope that answers your questions.
cb thanks for sticking up for me.
Thanks, PuntPal. The only answer I can give you to that question is this, that such is not part of the mandate of the RBA. Having said that, you will be perfectly justified in regarding that to be the answer when I really do not have an answer.
The reality is that in the absence of sound money, thieving pollies and bankstas will keep printing and printing, because that is how they live off the rest of us working in the productive economy.
It is also part of this distorted and tortured reality that part of the thievery involves the pushing of debt onto individuals and businesses, and the creation of a dependency on debt for the functioning of the productive economy. Without credit and debt, everything would be scaled down, scaled back to a much lower level of activity. That would mean that prices for virtually everything, including wages and labour, would collapse massively and virtually all of us with debt would become insolvent at the drop of a hat.
Money, as the saying goes, keeps the world going around. It is the lifeblood of a well functioning economy, where money, whatever it is, is the means of exchange between the many participants. In a fiat monetary system, all the extra money that is being pumped into the economy through borrowings will end up in higher and higher prices. As long as debt grows, this is how it has to be, and as long as fresh money keeps being created and pumped in, the party will continue indefinitely.
It is a nuissance, of course, because you have to keep re-pricing everything all the time, but it is manageable. The only problem is when the money is sucked out faster than it is being pumped in. Your economy is going to dry up and shrivel and deflation will eventually take hold, which is a far worse thing to accommodate than inflation. Gearing up, as it were, is much easier than gearing down.
Anyhow, the long and short of it is that rising asset prices are right and appropriate as long as there is inflation, and a continous pumping up of the economy with fresh money. And, therefore, it would seem to follow that property or any other asset is getting overvalued only if the economy is going to be starved of fresh money going forward. If the money keeps pooring in, then nothing is too expensive, because you have plenty to pay with, but if the money stops flowing, then everything starts to become expensive.
It is all relative, and that is why I am reluctant to even guess whether property prices are overvalued or not. It all depends on whether money will keep flowing into the economy, or not. I am not sure if I am making sense, but pretty sure that this is along the more useful ways of conceptualising asset prices and valuations. Not in absolute terms, but in relative terms, always in relation to the money flows into and out of the overall economy.
That’s interesting PF. So if we’re net savers, why do we have such a large and persistent current account deficit? Are we proving something to the world here? From my limited knowledge, super is overweight in equities and controlled by the govt, yet we are constantly being bombarded with the notion that international equities are worthless and residential property is bullet-proof, yet we are net savers and our banks have to borrow offshore to fund our spending.
Whew, it’s complicated isn’t it.
Lol, JC – me suspects that the system is not meant to be simple. The sharks feed best and easiest amid confusion amongst the prey. When you struggle to figure out which way is up, you won’t even know what hit you, let alone dodge the blows aimed at your savings and financial welfare.
cb you said – “The only answer I can give you to that question is this, that such is not part of the mandate of the RBA.”
But the RBA’s mandate is quite clear (and flexible)…this is from the RBA website
What are the Objectives of Monetary Policy?
The Reserve Bank Board sets interest rates so as to achieve the objectives set out in the Reserve Bank Act 1959
•the stability of the currency of Australia;
•the maintenance of full employment in Australia; and
•the economic prosperity and welfare of the people of Australia.
Since 1993, these objectives have found practical expression in a target for consumer price inflation, of 2–3 per cent per annum. Monetary policy aims to achieve this over the medium term so as to encourage strong and sustainable growth in the economy. Controlling inflation preserves the value of money. In the long run, this is the principal way in which monetary policy can help to form a sound basis for long-term growth in the economy.
——————————————————————-
OK – so when deciding what goods they would use to measure ‘inflation’, they decided to use the cost of renting and not the cost of buying houses.
So throughout the late 90’s and until present day, the cost of living has been limited to the cost of renting. This has allowed low interest rates to fuel a credit driven housing market that has seen remarkable growth in house prices.
Dont you see the scam here? During the low inflation environment of the past decade or more, we were told things werent going up in price too much (CPI was underc control). Yet the biggest purchase that Australians’s have to make is their house and during this time the price of houses were experiencing massive inflation – which was seen as a good thing.
Now, finally – the RBA have come to their senses and realised that people borrow money to buy houses and therefore our inflation targetting has been useless at stopping the most hurtful kind of price infaltion – the inflation on the cost of shelter.
I am sorry cb – your answer has not eased my fears whatsoever.
My point is simple…
Year Annual Salary Median House Price
Jul-98 $37,768 $142,000
Jul-09 $62,218 $470,000
Increase 65% 231%
How is that not inflation and why did the RBA allow it to happen???
Good one, PuntPal, we are making progress. These are the ideas that come to mind:
1. Since the RBA is complicit in the obfuscation of the concept of inflation, it is part of the thievery that goes on with the money printing and debt pushing over and above what would be justified by the creation of goods and services supposedly measured by our GDP. Hence, do not be surprised to see that they have not been helping with regard to house price inflation. The fact is that if you push debt and increase money flows into the economy, the extra money will have to go somewhere. Sometimes it is resources, sometimes it is industrials, sometimes it is property and sometimes it is metals, etc., etc.
2 The RBA’s claim of controlling inflation is a furphy. The CPI is always doctored downwards, and the GDP figures are doctored upwards. The gap created through the witchery, can then be justifiably pumped up with debt money, distributed to you and I, and to our children and grandchildren for generations to come. So, forget the 2 – 3% inflation they are talking about, it is probably double or tripple that, with all the extra debt they push onto / make available to the good people and the government.
3. Not at all conviced that the RBA has come to its senses, but suspect instead that they are simply trying to crash the system so that their banker buddies can fleece us of our savings, equity, and super.
4. Sayce and Denning keep identifying Henry as the greatest danger to this country’s prosperity, but it will be Stevens that is going to do us in. Mark my words. A system built on a continuous expansion of money and credit cannot be starved of the same, not without crashing and gutting it.
PuntPal the RBA use data collected by the ABS. It is the ABS who determine the measure of CPI. That method is being reviewed at the moment.
The RBA can’t change that. I doubt that another reliable index exists.
As I suggested earlier join other forums and you will learn quickly.
JC _ super is overweight in equities. There is a move afoot to use super to buy RMBS and to invest in Equity Finance Mortgages, but it will be a slow process. The writers here will oppose it, but a spread of investments is better than over exposure in one asset class.
On the current account deficit question – I would be guessing and I won’t do that. If I have time to research that I will, but don’t hold your breath.
Hi Peter,
Yes, it’s quite bizarre that a nation of net savers and an economy with such superior advantages in natural resources that the world needs has consistently run CA deficits (and that was during the greatest economic expansion in our history). You can argue that it’s largely about capital formation, but I have an inkling that’s only part of the story.
If our super is what’s keeping our heads above water, why do we have it invested in stuff that we don’t believe and don’t trust? That’s a rather wacky approach to investment if you ask me. I guess if we use as equity finance, that would make much sense if the property shortages are to be believed. But there’s another strange scenario. Apparently, migration is driving demand, so we’d be effectively be lending to wetback to buy houses!
The Aussie Super-Economy–Stranger than Fiction
JC there are many puzzles at the moment.
If a part of our super is put into the RMBS marjket yes it will go to any credit worthy borrower, but anyone receiving an equity finance mortgage I expect would have to have the super to cover it. Thats my theory anyway.
It is a new idea though and I cant see APRA etc in a rush to allow that, but it would cut household debt significantly. Perhaps 10% to 15% as over 45 Y/O looked to use super to cut housing debt. All a bit pie in the sky just yet though.
I can’t see migration abating as we need to replace the boomers in the workplace and as tax paying members of society. We can’t leave that until the last minute.
Well there you have it Peter, the government is the solution to all our problems. Pay your taxes, keep your mouth shut (and DON’T ask any prickly questions), and you shall be taken care of cradle to grave. That’s where you and me part ways philosophically.
“If a part of our super is put into the RMBS marjket yes it will go to any credit worthy borrower, but anyone receiving an equity finance mortgage I expect would have to have the super to cover it.”
Yeah, I know, use the taxpayer to pick up the tab. But you have to admit, if that’s the way we’re going, then credit-worthiness is not really an issue (not that access to credit has really been an issue in this country for many years). As an migrant, it’s going to look pretty tasty with the mortgage application forms being passed out as you pass through customs.
lol, JC – those in search of slaves need to get in early, if there is any competition.
cb – Now I don’t understand the money fiat currency issues that well. From my simple minded opinion, any massive and general devaluation of the currency can be detected (eventually) through such things as the price of gold soaring (other precious metals as well) and even just through price inflation of goods and services. When this occurs, the Government in power will have one angry population to deal with and I presume they can withdraw some money (through monetary and fiscal policy). I presume I have way too much faith in our ability to fight inflation?? But I am cynical of the ‘our currency is doomed’ scenario that is pushed by those that are conveniently trying to sell us gold…sorry but its like listening to a real estate agent for their advice of the property market.
But I want to focus on the CPI – House Price – monetary policy scam that will cause the biggest financial upheaval this country has ever seen.
So – the CPI is determined by the ABS – the RBA rely on the CPI to work out whether inflation is under control – the cost of buying a house is not included in the CPI (renting is used).
A few things come to mind here:
1) Why would renting be seen as a fair measure for the cost of housing when Australia has such high home ownership rates and owning your own home is always portrayed as the ‘Great Australian Dream’…what a crock!!
2) Why is this never discussed – I have only just found this out and I read fairly widely and consider myself pretty informed. Just another way the media are complicity with tyhe Government and the banks on this scam.
3) How can our monetary policy be so loosely defined and loosely monitored. The RBA determine the cost of money based on some bogus inflation figure, that has been concucted by a Government Department made up of faceless buearacrats!!
Sorry about the spelling etc… but I am bloody angry
Kris Sayce – please do a piece on this! We need this changed, for the sake of the nation!!
——————————————————————————-
16TH SERIES AUSTRALIAN CPI REVIEW
The CPI is subject to periodic reviews. While an important objective of the reviews is to update item weights, formal reviews also provide an opportunity to examine the scope and coverage of the index and other methodological issues.
An information paper: Issues to be considered during the 16th Series Australian Consumer Price Index Review (cat.no. 6468.0) will be published on 15 December 2009. It will outline some of the major issues to be considered in the review, as a basis for public consultation. Public seminars will also be held in capital cities in early 2010. The closing date for submissions to the review is 12 March 2010.
PP, I think KS has consistently referred to inflation being much higher than the official CPI figures (a safe assumption and referred to in the discussion here). To expect the guy to give up his free time on our behalf (for a task requiring complex computation and detailed analysis) is a bit much.
Sorry, PuntPal, I missed addressing that question of yours before. The answer is this:
1. CPI is always manipulated downwards, to disguise the real rate of extra money being created, borrowed, and lent out by bankstas, which eventually ends up one way or another as moneyflow into the real economy IN EXCESS OF GOODS AND SERVICES CREATED.
2. Any excess money and credit created like this, will end up pushing up nominal prices in some sector or other, simply because excess cash/liquidity is chasing the given and available goods and services at any one time. In other words, this is inflation. Money and credit hitting the economy in excess of goods and services created and available to purchase with that money within a the given period of time.
3. This is how you get rising prices, which nowadays is called inflation, instead of inflation being defined as it should be, as that which causes rising prices, and namely the said excess liquidity being pumped into the economy.
4. So, if inflation is defined as rising prices, then anyone claiming to fight inflation, will have to show that prices are not rising. This is one of the dirty jobs given to the ABS, so that the populace can be lied to about just how fast prices are rising. One of the purposes is to short change all those people who are on fixed incomes, including pensions, etc., which are all indexed to the CPI. So, as long as the CPI is low, pensioners of all sorts are getting tiny little increases to their payments, while their real costs of living are rising multiple times faster from all the excess money being created, as described above.
5. One of the ways in which the CPI is manipulated lower is to use median rent as part of the basket of goods and services being monitored, instead of the cost of the dwelling and the land it stands on, because the latter is always higher than the median rent.
6. One corollary here, of course, is that those who rent are being subsidised by their landlords. Anyone who has held and let out a residential property can attest that the rent is never enough to service all the maintenance and loan interest and rates and what have you, and that you have to subsidise that rent to meet all the expenses associated with that property. A property investor is willing to do this as a way of forced saving, and in the hope that the value of the property will keep pace with inflation, which it tends to do in the long term, but it can really go against you in the short to medium term, so the investment strategy is obviously not without risks.
I am going to go through your message later cb, flat out at the moment.
JC – I can only ask and he is more than entitled to ignore the suggestions. And rather that vaguely say that the CPI is a con, I was just suggesting he focus on the exclusion of house price inflation. Kris seems to be pretty keen on showing why the property market is rigged, however since I have been on MM I have never heard him bring up this specific point. It was just a suggestions and I think I was entitled to put it forward
p.s. JC – I also think that those who are concerned about the housing bubble should haev focussed their attention on this. Rather than whinge about preferential tax treatment and media spruiking etc… the real way the bubble was allowed to form was because in 98 they removed mortgage finance from the CPI and that allowed people to think inflation was under check, when in reality the cost of living (paying off a mortgage) was going through the roof
PP, you’re similar to me is that you’re a keen learner and want to see through the obfuscation. We also both openly admit that we are simple-minded. I have noticed that you focus on property and it’s an emotive topic. I’m now viewing Australia from afar (Japan) and the cost of accommodation or the desire to take on a mortgage doesn’t affect me. It’s sometimes easier for me to put things in perspective; however as a salaried professional, I estimated that I would need to find a position in Australia comfortably north of at least 150K to give me a comparable lifestyle to what I enjoy now. The cost of living in Australia, of which shelter is a core component, doesn’t add up for me at this stage of my life.
JC – Sorry, I didnt mean to imply you were whinging and you’re right, for me it is an emotional topic. Not because I am 27 and want to buy a house one day, but because I think it will eventually financially ruin the nation…
To me, this is the missing link – its so simple, house price inflation has been excluded from the CPI and therefore monetary policy has totally and utterly failed to address one of the most damaging forms of inflation.
Presuming there is an accurate way of measuring the cost of buying a house, then surely this should be inserted into the CPI or even a supplementary component of the CPI (i.e. CPI + cost of housing).
I am surprised Steve Keen, Kris Sayce, Denning and others havent honed in on this point, thats all – I just find it amazing
Thanks cb – that was clearly explained and although I understand what inflation is, I wanted to understand exactly HOW the government manipulate the CPI. See it just sounds like we are crackpot conspirators when we make general allegations that the Government is effectively crooked.
But when it comes to house price inflation being specifically excluded in 1998 (about the time the boom was really taking off) then you have evidence and a smoking gun for the CPI conspiracy theory. As I have said too, this aspect of the CPI conspiracy is the most important due to the cost of living increase the housing ‘boom’ (I hate that word and its positive connotations!) has had on Gen Y and on future Generations.
So although the RBA doesn’t have the ability to include house price inflation under its mandate to manage inflation, it can probably interpret its mandate with enough flexibility to say that this house price bubble needs to be deflated in terms of managing the nation’s financial stability. I know you think Glenn Stevens is to blame for raising rates from emergency low levels – but I find that argument totally at odds with your concerns about excess liquidity causing inflation. Interest rates stop money from entering the economy because people are less eager to borrow from the Bankstas…
PuntPal – you sir a genius and have successfully opened the Pandora’s box on the issue of CPI figures and the cost to service the purchase of a roof over our heads. There is no reasonable explanation as to why this important and significant consumer price was thrown out of the ABS ‘basket of goods’ used to arrive at CPI but you can bloody bet that if it weren’t given the flick in 1998 then house prices could never have skyrocketed to the extent they have because of your spot on assertion that the RBA would have invariably lifted official interest rates to fight the massive hidden inflation effects of housing and hence put the brakes on excessive mortgage borrowing. Here’s my two cents worth for the conspiracy theorists out there and the GST lies at the heart of it. Keating (when treasurer) wanted a GST. His party slapped him down. Hewson tried it and got nailed. Howard slyly got it up. We were always going to get it as a celebrated example of a broad based consumption tax is what every politico/economist will go hard over. What is the basic requirement to make certain government coffers swell from this tax? Of course! CONSUMPTION by CONSUMERS on a scale of which we never imagined. Government wants us to spend big and spend often. Business likes it too. They don’t give a shit if its spending from your savings ( which is generally done with significant prior consideration of the purchase) or swiping the magic plastic credit god which requires almost no thought whatsoever. The machine works best when everyone ‘FEELS’ rich by buying things and stuff and more things and more stuff. Big homes, big SUV’s, big lifestyles – buy it now, pay it off – whenever! Leaving mortgage costs within the band of CPI items would have had a limiting influence on the great indulgence of the shopper in us all without which the GST cannot deliver rivers of gold as it did to Costello and Howard – to be subsequently pissed up against a wall by Rudd and Swan. Merry Xmas to all the fellow contributors at MM – just off to do that last minute shopping at Hervey Westfield’s never ever, no deposit buy now pay in 2018 3 day never to be repeated Christmas sales promotion. They say if you don’t spend a few thousand at Christmas on imported manufactured junk that no one really wants or uses then you just aren’t getting into the spirit of this special time of year. I’ve got my eye on a great $2,000 cappuccino maker that the brochure says is a must have in the kitchen even though I don’t like coffee.
In the Australian today
WESTPAC has priced $2 billion of mortgage backed securities – twice the size originally planned – in a sign confidence is returning.
Does this mean that Westpac wants to palm off risky assets to gullible investors?
Yes, that is a compelling argument that house prices would have been more contained if properly reflected in the CPI, and with higher rates I suspect that a lot of other prices as well, besides. But part of the scam is always to hide and disguise what is happening, and this is the primary reason why adjustments to the way the CPI is measured are being made. Consequently, similar to housing, ANYTHING that is being measured and looks like its price action will likely threaten the scam, will similarly be removed, or in some way modified, to hide the rapid rise in overall costs and prices.
But to answer your point about my seeming inconsistency, PuntPal, I guess my view is that, whatever system the RBA is supporting or pursuing, they should damn well keep to it, instead of chopping and changing and wrongfooting people’s expectations and calculations with business and money. So, if it is a fiat money system based on continuous credit and monetary expansion, then they must stick to it, or they will bring the whole house down. In some ways, the more fundamental consideration is consistency and certainty. Without these even sound money would be useless. The arguments behind sound money carry weight primarily because such would bring greater monetary and economic stability.
So, the reason I am saying that it is the RBA that is going to cook our goose is because I see them now flooring the accellerator, and now hitting the breaks hard at a risk of stalling the engine altogether, and as with driving a car, such is unlikely to end well.
I would think that a mortgage backed security would only be worth the rating of the riskiest parts or it’s pool, because that’s the ones which will go default first. how would investors differentiate between a good investment and some toxic ones if they package AAA, AA and some toxic waste all ab in one security. that will make them all look toxic to me.
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