Today your editor is scrambling to get the January issue of Australian Small-Cap Investigator out the door before the month draws to a close.
We’ve even put in a call to the Gregorian calendar to see if they can extend the month to 32 days so we can tie up the loose ends over the weekend. Turns out that’s not possible. We’ll just have to suffer through it and stick to our deadline!
So we’ll be shorter than normal today.
We’ve got a bunch of stuff we’d like to write on property today, but we couldn’t do it justice so we’ll leave that until tomorrow.
But until then, you may want to take a look at the latest research from Demographia. It will probably not surprise you to learn that Australia has the most unaffordable houses in the world.
Four of the top five in fact.
Anyway, take a look at the report yourself. To be honest, we don’t know the guys and girls at Demographia from a bar of soap. But we’re happy to give them some airplay. At the very least it should help to balance out the pap you read in the mainstream press such as…
“House prices soar 12pc amid recovery” in today’s The Australian newspaper.
Today I want to take a brief – very brief – look at China. You know China, that’s the economy to our north that saved Australia from economic death last year.
As you may have read in these pages before, don’t believe the hype about Australia’s resilient economy and sound banking system being the reasons why Australia scraped through without much damage.
It was all down to one reason – the Chinese.
But while the Chinese may have helped out last year, the news in recent days points to the perils of relying on the irrational whims of an overseas government to prop up your domestic economy.
News reports such as “China pushes to wean banks off lending” should be enough to send a shiver down the spine of any Australian corporate bigwig.
Because make no mistake, the Australian economy is tied at the waist, the hips and the legs to the Chinese economy. Should the Chinese authorities decide enough is enough it will be curtains not just for companies in the resources industry, but every sector of the Australian economy.
Even sectors that would appear to have little connection to mining will be affected. And so will individuals.
How come? Well, simply because the Australian economy has so much riding on the resources industry in terms of exports.
If the Chinese stop buying up all of Australia’s natural resources the consequences will be dire.
Simply put, while the Australian dollar has become stronger partly due to higher interest rates than other economies, it is still the commodity currency status of the Australian Dollar that has driven it higher.
That’s because all – or most – of the money used to buy up those resources is eventually converted from US dollars or Japanese Yen or Chinese Yuan into Australian dollars.
Naturally, when we import goods there’s also a bunch of Australian dollars that are converted into other currencies as well which helps to even things out.
But imagine if suddenly the export of resources hit the skids. We saw how this could look when the Australian dollar sank from USD$0.98 to around USD$0.60 last year.
That was just a short term hit, and was really influenced more by a ‘flight to safety’ rather than mindless dumping of the Aussie dollar.
A seizing up of the Chinese economy would be entirely different. That wouldn’t be a short term blip at all. And for Australia it would mean a similarly big fall in the value of the Aussie dollar.
And unlike during the mid-2000s when the dollar was priced around USD$0.50, just as the resources boom was taking off and the China story was starting to make front page headlines, there would be no ‘get out of jail free’ card for the Australian economy this time.
Look, we’ve seen plenty of headlines in the past about the Chinese authorities threatening to put the brakes on economic growth. In the most part the economy has continued to surge on and the Australian economy has benefited from it.
But like all bubbles and all winning streaks, this one will end too. The worrying aspect to all this is that there doesn’t appear to be a Plan B.
What will the Australian economy export if no-one wants our resources? Quite frankly, the options don’t look very promising.
Cheers.
Kris.
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PF you said “We certainly did fix most of the new ones, or at least 50% of their borrowings. (an each way bet)”
An each way bet on what?? That rates were going to continue going down???
Can it be that bankers are misleading their customers – ‘rates may go down because prices are going up and the economy is growing strongly so only fix half your mortgage’!!!!
GB – whenever some one fixes their rate they are betting that the rates will rise above the fixed rate, not fall, and so there will be some economic advantage for them to do so. the banks are also holding that bet.
I think that your question may have been “why didn’t the borrower fix all of their loan in a climate of rising rates” which is a fair question.
Some people are reluctant to fix all of their loan, and others have the capacity to make significantly higher repayments. With a fixed loan higher repayments are restricted, and additional payments may not be redrawn. So those who intend to accelerate their repayments will choose a variable split that will allow them to make bulk repayments and so lower their interest cost, whilst the funds are still available for redraw.
So they will choose a 50/50 split or any combination that suits their intentions.
In an enviroment where rate reductions are expected a borrower would choose to take a variable loan and fix at a time that they thought was beneficial to them.
Generally in Australia fixed loans are not popular.
I hope that answers your question.
PuntPal – yes you could put a different spin on the article, which is why news articles on the same event differ in their slant.
But does that make someone elses opinion wrong because it does not reflect your view?
We all see things differently and we interpret stats differently. How do you prove someones opinion is wrong? Why do you assume that only your opinion should be heard. If that is so, your going to be very busy writing about 1000 news articles per day on all sorts of issues.
I did point you to the original news release and I encourage you to form your own opinion. Keep doing that and rely less on journalists, but your opinion may be subject to the same human errors and public scrutiny as the journalists.
Speaking of all the reporting ‘data’ used to fan the flames of the never ending phenomenon of rising Australian house prices I would love to have instead of the suburb by suburb alleged average sale price a suburb by suburb average mortgage scale. I know I have read data in 2009 that said the average mortgage taken out for home purchases in Australia was over the $350,000 mark. I would love to see the compulsion of the amounts actually borrowed on every residence purchased. This might reveal a realistic appraisal of measuring the true affordability of homes rather than relying on modelling and guessing.
I am yet to read any thing written by Mr Sayce that doesn’t mainly promote one of his journals, the advice that if china pulls back on the reins “we will all be ruined” said Hanrahan is a load of cods wallop – China, Japan, Korea etc etc. probably own more of Australian Industry than the Aussies do! for one example China’s Yanzhou Mining Coy. is at this very moment trying to buy ALL of Felix Resources! Felix operate coal mines in Q’Land & N.S.W. and are also developing the huge multi million dollar Moolarben thermal coal resource – the Chinese don’t just want to buy an interest, THEY WANT 100% – and I don’t believe that hog tying the Australian economy by restricting investment finance to their own companies is in the Chinese governments interests at all!
PF – its not about who has the ‘right’ opinion, its about people being provided with a variety of balanced information.
What makes the mainstram media spruikers so dangerous is they never offer the kind of perspective I offered in my mock article. Can you honestly you have read anything that bearish in any mainstream media outlet? I dont think so – and that doesnt make sense, because what I have written is entirely reasonable, it might not end up being ‘right’ but its a side of the story that someone needs to tell. Failure to point out the other side of a story is a total failure in journalist ethics and as I have said, may even be in breach of s.52 of the TPA
BB – I agree that info would be great! If the price rises haev coincided with the price rises (which I think would be the case) then that shows what is causiung the ‘boom’. Mortgage stress is something that should be monitored with more precision, but the whole housing market is Oz is the least analysed market in the world! Its unbelievable something worth so much to a nation can be so p0orly understood
PuntPal. As an example of what I mean I draw upon a recent discussion I had with a friend about a work colleague of his. These guys work in an industry (petrochemical) that you would think is fairly safe in respect of ongoing business – for the medium term anyway! They are very well paid (relative to the qualifications and skills they possess) for the shift work and hazards associated with their employment – something around $110K pa mark. Well the multi national that runs the business has decided to shut the plant. About 80 positions will be lost. This guy in his late thirties with a wife and three kids bought a $900K house in a coastal hamlet south of Sydney 2 years ago after trading up on his old home. He had $300K after the sale of his home so easily borrowed $600K. That’s a bloody big loan for the average bloke despite the 33% equity – which is probably a helluva lot more than many other purchasers actually have! So we have these market distortions too. The ‘step up’ purchasers each driving the other on – who probably stepped up a little bit too far with a bit too great an optimistic outlook on job security and low interest rates as well as all the pump priming going on from the media property spin experts – that have probably also been a factor in driving up unrealistic house prices.
Totally agree BB, the way these upgraders are portrayed in the media its as if they are all upgrading with cash – but your friend is a clear example of the over-extension that is rampant in the Oz housing market (and as you say, he has 33% equity, there would be plenty of people who have less than that.
A similar story, I had an argument with a girl from work where I said she had not gained anything from having her house go up in value by $100K unless she sold up now and either downsized or moved overseas etc… She kept saying the equity in their home is what they have gained, but that just means they can go and leverage up more and upgrade…this is the ponzi crisis we are facing. All these people think equity and leverage are good things – and they are – in a rising market, but not so much when it comes tumbling down.
And on that, I am sure you have seen the Sunday Tele story…
http://www.dailytelegraph.com.au/news/no-hope-for-aussie-homebuyers-as-thousands-struggle-to-foot-the-mortgage-bill/story-e6freuy9-1225825025688
Nich Gardiner (a lone crusader for objective journalism) reports that Fuji Consult surveyed 26,000 people who used FHBG in last 18 months – 45% are under either mortgage stress or severe mortgage stress. ALREADY!!! Some of these people dont have proper furniture or carpet and the overwhelming majority of them are on variable rates.
If you missed this story PF, I know why – its because the Tele editor decided these stories deserved to be higher up in the headlines:
- In-demand Jodi swaps channel (home and away star leaves channel 7
- Young girls becoming most likely demographic for tatoos
So somehow this is excused by PF as acceptable journalism by the Tele???
After plastering rising house price stories all over the site for the past week, they fail to show the flip side and the reason for the housing boom – TOO MUCH BLOODY DEBT!
Disgraceful!
“So somehow this is excused by PF as acceptable journalism by the Tele???”
Considering I haven’t read the story that really is a bit much PuntPal.
Your posts are getting more and more emotionally based. Do you really have the right to preach economics to some girl at work based on the one sided stories that you read on this blog. After all from what she has told you she is well ahead of you in the financial stakes, so perhaps you should heed her advice or at least have the commonsense to stay out of her business before she takes out a restraining order.
Are you not being exactly what you criticise others for – “fearing not I’d become my enemy in the instant that I speak” as Bob Dylan once said.
You need a holiday mate… I think your suffering from emotional fatigue and illusions of grandeur.
Your not the new messiah.
Oh and by the way your opinions are about as unbalanced as they get.
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