Are Aussie House Prices in a Bubble?

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Today is all about housing. We’re going to take a big step back from global issues and focus on the biggest local of issue of all: whether Aussie house prices are in a bubble or not. So sit back, buckle up, and get ready the case against property.

First off, house prices are still rising in Australia, but for the second month in a row sales are falling. Here in Melbourne, the average house price is now $510,000 according to the RP Data Index. Melbourne prices are up 15% since January. Granted, that’s not quite as good as the stock market this year. The All Ords is up nearly 30% year to date. But it’s not bad for houses is it?

Nationally, Aussie house prices are up 10% for the year. That’s a good year, even by bubble standards. The only somewhat alarming news yesterday is that thanks to the retreat of first home buyers and the chance of higher interest rates, sales have fallen for the second month in a row.

We’ll get back to the insane level of Aussie house prices in a moment. But about those interest rates. The Reserve Bank, as you know, meets today to decide whether to hike Aussie rates again. If the bank did hike the overnight cash rate to 3.75% it would do so in the face of pretty weak growth everywhere else.

Would it be bold? Would it be prudent? Or does it even matter?

Our guess is that central bankers here are pretty much making it up as they go along and hoping for the best. They will announce their decision with wise central banker words that sound a lot like this: “Blah blah blah blah. Blah blah blah! Blah blah….inflation expectations are muted. Blah. Thank you. Blah blah.”

And while we’re on the subject of doublespeak designed to obfuscate the truth, check out the graph below. Unless we’re statistically illiterate, it appears to suggest that the number of households compared to dwellings has actually grown in Australia in the last twenty years.

Gasp! Wouldn’t this mean there is a housing surplus and NOT a housing shortage (as is repeated ad nauseam by real estate industry spruikers?)

Ratio of Dwellings to Households

RBA Deputy Governor Ric Battelino explains in the report linked to above. “A significant proportion of dwelling investment,” Battelino writes, “appears to have gone into holiday homes or second homes. Census data show that the number of dwellings built has exceeded the increase in the number of households by a large margin.”

Emphasis added here is ours. “As a result, the ratio of the number of dwellings to the number of households has been rising over time; as at 2006, there were 8 per cent more dwellings in Australia than there were households. Presumably, most of this surplus reflects holiday houses and second houses.”

Well how about that?!

Obviously the definition of two terms here is key, dwellings and households. If a dwelling is a caravan or shed out back where you nip away for a drink on the holidays to escape the in-laws, then the data don’t suggest there are too many unoccupied houses in Australia. After all, we know some people who spend 30% of their waking hours sitting on a bar stool. But you wouldn’t call that a dwelling, would you?

The ABS defines a dwelling in the following way, “In general terms, a dwelling is a structure which is intended to have people live in it, and which is habitable on Census Night. Some examples of dwellings are houses, motels, flats, caravans, prisons, tents, humpies and houseboats.”

Okay then. Having learned that a hupmie is a kind of lean-to in the bush, this definition appears to suggest that not every dwelling is a brand new suburban McMansion. Some places you can live in, others you can pass out in (the Gatwick Hotel on Fitzroy Street…or the drunk tank at the local lock-up, for example). It would be fair to say that not all dwellings are houses.

But we must still define the term “household.” Is that a family unit? Or is it an idea of suburban nuclear family wellness?

Luckily, the Australian Bureau of Statistics is good enough to define this for us. It writes that an Australian household is, “One or more persons, at least one of whom is at least 15 years of age, usually resident in the same private dwelling.”

Now that we know what dwellings and households are, it’s fair to ask if there is a housing shortage in Australia. So we’ll ask: is there a housing shortage in Australia? Our answer is pretty simple: no.

There are plenty of places for people to live in Australia. But many of them are apparently not for sale, or in places people would prefer to live (and you know these days it’s all about what you deserve, not what is realistic). According to Battelino, much of the dwelling investment is on second homes or improvements to existing homes. It doesn’t go to produce new homes.

Blah blah blah.

The persistent claim that underlying demand for housing suggests a housing shortage continues to be pure garbage. People buy houses when they have access to credit and can support the mortgage payments with rising incomes. Interest rates are coming off multi-generational lows in Australia. They are headed up globally. As the price of money rises, wouldn’t you expect demand for it to fall, and “underlying” demand for housing finance to fall too?

And what about household incomes? If household income includes the rather generous definition given by the ABS, then you could argue that Australian house prices might not be as high, relative to household incomes, as the more often quoted house-price-to-median-wage ratio. And after all, most households have two wage earners these days, which might lower the ratio even more.

Since our financial newsletter business does not depend on advertising dollars from the real estate industry or banks for survival, we feel compelled (and empowered!) to point out a simple fact: Aussie house prices are built on a bubble of borrowed money. Prices will fall when the money runs out and the national delirium over rising property values recedes.

The facts show that the level of debt in Australia has been steadily rising faster than incomes for ten years. Most of this borrowed money went to buy houses because houses were going up in price. Hurry! Get on the ladder now! You don’t want to miss out! You idiot!

But this whole household financial model – using debt to bid up asset values – is no different in principle than businesses or investors gearing up to speculate on stock prices. Once the easy money – the money borrowed by Aussie banks globally to fuel local house prices through new lending – goes away, so do the house price gains. Underlying demand vanishes as credit gets more expensive and home prices decouple from reality (and incomes).

In case you hadn’t noticed, the easy money IS going away. That is, the global boom in assets from loose central bank lending practices is blowing up. Right now, it’s succeeded in inflating new bubbles. But when it blows up the second time around, it’s going to take a lot of assets and markets with it. China…some commodity prices…and Australian house prices.

According to the ABS (emphasis added is ours), “Between September 1990 and September 2008, the ratio of total household debt to assets held by households rose from 9% to 19%. In other words, debt grew twice as fast as the total value of assets held by households. The sharp increase in the debt to asset ratio from December 2007 to September 2008 was due to a decline in the value of household assets.”

But because prices have been rising faster than incomes, the increased debt ratio is actually delivering Aussies less ownership of their new homes. “Among the different types of debt, housing debt as a proportion of housing assets rose from 11% to 29%, which means overall, households have come to own a relatively smaller proportion of their houses.”

This is why households in Australia will eventually join the global trend and deleverage. They’ll reduce debts to match slower income growth. And if you’re going to argue that a mining investment boom leads to GDP growth in Australia that’s counter to the global trend, you still have to prove that GDP growth translates into higher income growth. In the meantime, have a look at the chart below.

Household Debt to Household Assets Ratio, Australia

Household Debt to Household Assets Ratio, Australia

Source: Australian Bureau of Statistics

The ABS reports that, “Over the past decade, household debt grew much faster than income. The ratio of household debt to annual disposable household income peaked at 160% in December 2007 and March 2008. The ratio decreased over the last three quarters, reaching 153% in December 2008. Housing debt as a proportion of disposable income followed a similar pattern, and made up 87% of all debt in December 2008.”

A bubble by any other name would still look like a bubble. You can talk about Australian preferences for large houses. Or their willingness to take on higher debt levels and reduce saving because of rising stock prices. Or the “underlying” demand for houses.

But all those are variables in the supply and demand dynamic. And the thing about variables is that they vary. When the cost of credit changes, financial behaviour changes too. Part of the process is rational and part is psychological. Deleveraging is as much about fear as it is about prudence.

The end result, however, is that all over the world asset prices supported by debt are falling. Why would Australian housing be any different?

Dan Denning
for The Daily Reckoning Australia

Dan Denning
Dan Denning examines the geopolitical and economic events that can affect your investments domestically. He raises the questions you need to answer, in order to survive financially in these turbulent times.
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Comments

  1. Yes. Yes. And very much Yes.

    Always told from a young age that (like any market based purely on supply and demand) that when the average man on the average wage cannot afford the average house, then a correction is due.

    That principle has changed in recent times to reflect the average family.

    Since the average family cannot afford the average house, a correction is highly likely. The latest trend bucking price inflation is just making it an absolute certainty.

    On another point. I am glad I managed to finally (with some delays in the setup) got my mortgage locked in at 5.54% for 3 years. I believe that the debate for or against rate locking will be proven to favour the ‘for’ at that rate and over the next 3 years. I can’t see me losing on the agreement. Gloat over.

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  2. i’m curious about the RBA rate rises. The RBA have focused on CPI and adjusted rates based on it but recent comments by Glenn Stevens about how prices are too high and shelter should be possible for all citizens might mean a change of tack. The RBA may now focus on asset price inflation instead of CPI. So if assets rise then rates rise…

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  3. GB,

    Same as in the UK with the BOE. The RBA would need a request from Treasury to change its’ remit. That would probably be published, but, you never know, may not.

    I do agree. Between 2000-2003 in the UK house prices doubled.
    100% spread compound over 3 years works out at about 28%.
    So the biggest asset class in the country was running at 28% and it had no impact on CPI and therefore rate setting.
    The BOE was denied the very tool it needed to prevent the bubble.
    It seemed the government liked the bubble (until it popped of course).

    It is what is needed for the RBA to do its’ job effectively, but, will they be given it?

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  4. Great read Dan,

    I appreciate all your points. I will look to follow your future articles on this topic as the day of reckoning is fast approaching.

    If it is ok, I would like to share some of my articles on this topic with your readers located at:

    http://www.scribd.com/sidfalcon

    Cheers
    Sid

    Reply
  5. Young people that hope to eventually buy decent and affordable housing should participate in, and promote among their friends, the practice of boarding and communal living in larger households. Getting urban consolidation among McMansions and having singles avoid the renting of two bedroom apartments and terraces is about the only direct action available to them that will burst the bubble and provide an economic reward. Fighting back like this challenges the oldies political hegemony that is gouging them.
    The empty nest houses are already there as reflected above and the service economy’s impending struggles will provide the impetus, older single people living in those empty nests will lose disposable income as CPI basket inflation rises just as inflation adjusted asset price decline (the unwinding of over 30 years of unproductive racketeering).

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  6. Joe,
    Below is the CPI from the RBA website – why are they raising rates when CPI is falling? I guess its headline inflation not core that falling but still, the only thing going up at the moment is house prices and food

    Sep 5.0
    Dec 3.7
    Mar 2.5
    Jun 1.5
    Sep 1.3

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  7. Like it.
    For anyone interested, this paper by someone called Dirk gives a good rundown of how mainstream, neoclassical economic models used by governments allowed these debt-fueled asset bubbles to be created, and subsequently failed to see the looming crisis:
    http://mpra.ub.uni-muenchen.de/15892/1/MPRA_paper_15892.pdf

    Norfolk Enchants
    December 1, 2009
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  8. I like to look at the housing boom from the little person’s perspective – the little person that thinks they’ll get rich because (gigantic) home loans include the guarantee of automatic, and constant, increases in asset prices.

    I think that people (the mob) are drunk – and totally consumed – with the illusion that they’ll make lots of money because housing prices ‘always rise’. Someone on the weekend told me, ‘Housing prices don’t fall. If you buy now you’ll begin making money on your investment immediately’. This person, as you can imagine, was a mouth-breathing Neanderthal. He told me – using basic symbols – that only discovered the secret of fire on Friday night.

    It’s funny that nobody ever asks who loses (or which benevolent fairy bequests) the fantasy money that magically drives up the price of Australian housing. It’s really quite funny – a lot of people genuinely believe that housing prices always rise. I suppose its hard not to believe it when the REIA, HIA, RBA, BIS Shrapnel, state and federal governments, Fairfax and News Corp run quotes from press releases penned by Enzo Raimondo. A recent article in the Sunday Herald Sun had some little ripper forecasts from Raimondo who appears to forecast a different scenario depending on which newspaper he’s writing for.

    ‘Real Estate Institute of Victoria CEO, Enzo Raimondo, said median house prices could rise as high as $530,000 next year if today’s economic landscape of low interest rates and under supply of housing stock prevailed. By 2015, that figure would rise to $650,000 to $700,000 for an average house. And the median would hit $1 million by 2020, Mr Raimondo said’ (Sunday Herald Sun, $910m property boom hits home, 29 November 2009).

    This Enzo Raimondo character is a salesman with an extremely effective voice. HE IS NOT A NEWS MAN. HE REPRESENTS THE THE REAL ESTATE INDUSTRY. this weekend’s Domain section in The Standard (Warrnambool) had some very interesting little articles sprinkled among the heart warming property prices. One of the articles, ‘Vacancy Rates Still Very Low (p.10), was written by, you guessed it, Enzo Raimondo. The article was a perfect example of fear mongering about the supply-side catastrophe (lie) that is threatening every man, woman and child’s dream of shelter. It’s too bad that most readers wouldn’t have realized that the article was written by a spruiker (Raimondo) disguised as an objective journalist.

    In my opinion, Raimondo’s article is extremely effective in (artificially) manipulating consumer sentiment – one of the most powerful factors in a capitalist economy. Raimondo’s article gave people that extra incentive – that all-important fear on a Saturday morning – to buy a home fast. It’s the oldest sales trick in the book – tell people there is a shortage and they’ll buy eagerly.

    I don’t think people can see the forest for the trees. Just like many people couldn’t imagine $1 million homes in Yarraville 10 years ago, I don’t think many people can imagine (or foresee) the calamitous crash in the housing market. Human beings have a very short memory and very little foresight. ‘Today’ is all there is in the minds of most people. We’re living in the eternal present and it’s deluding hardworking people. Whatever happens, I think the future will be rather interesting.

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  9. There is one question that the spruikers cannot answer:

    How come when we are faced with a supposed massive supply shortfall, with near record low interest rates, with yields on property investments going up at the same time we are told about record low vacancy rates and with strong property price increases, the sale of new houses is declining?

    Keep plugging away Dan.

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  10. OK…all agreed….Aussie property market is overvalued.
    due to a geographical advantage to the china bull, not completely brainless lending (US Style) and serious Govt. intervention has managed to keep the bubble inflated – and inflating.
    So anyone with John Paulson sized balls who wants to bet against this?
    How do you do it? Short Banks? Homebuilders? Developers? are there RMBS to short in Aust?
    Cheers

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  11. Very interesting that he is now focusing on Real-Estate. Since he mentioned in his talk in Perth that they didn’t focus their interest rates on the housing market since there was no accurate way to measure the growth……
    So does this mean that he is speculating on real-estate being overinflated now?

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  12. You are absolutely right that house prices are too high. But I cannot see the trigger that will cause the turnaround – there are no signs of signifant job losses – the banks have tightened a little, but it’s still pretty easy to take on a ridiculous mortgage – the fear factor is rampant, get in or miss out – so what can possibly cause a turnaround??

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  13. “but for the second month in a row sales are falling”..

    Just interest to know where this data was found. I have been trying to find information about sales volumes in queensland, but haven’t have much success.

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  14. Paul,

    That is one of the most accurate and observant posts I’ve seen anywhere. You mentioned Enzo Raimondo and the article with table showing rental vacancy rates within varying ranges of the Melbourne CBD. The upshot was a rate of about 1.2% (no change from 12 months prior). Not 6 weeks ago however he had the same table printed showing a vacancy rate 12 months ago of roughly 1.2%, but his 2009 data showed an increase to 2.4%! This was accompanied by the same article telling people why there was never a better time to invest. Since the rhetoric clearly didn’t match the data (rising vacancy rate), the article drew some criticism in certain sectors of the media. Funnily enough it led to the article you mention and this time he didn’t make the same mistake! In other words they cook the figures, from vacancy rates to clearance rates.

    A number of industry members have commented on the REIV’s tactic of ignoring passed in properties in clearance rate calculations. They’ve kept the clearance rate at around 80%, despite the reality often being closer to 55%. The behaviour is nothing short of deceptive and bordering on criminal. The data is used to push vendors towards expensive auctions, to the benefit of its members (and self). No different to Henry Kaye really.

    jimbo james
    December 1, 2009
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  15. Dan,

    few ways to do it.

    you could also

    short AUD.
    short aussie gov bonds.

    Reply
  16. Short your investment property and get something that’s more likely to keep rising.

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  17. This web site has been calling for a crash in house prices for a long time now. We are still waiting……

    What this web site doesn’t seem to realise is the government has allowed foreigners easy access to our property market. They have been keeping the prices inflated.

    Most people limit themselves to investing in either shares or property (should I say sheep?). If there was a big drop in Aussie house prices, its safe to say the Aussie sharemarket would take a huge beating of at least the same size. So to the average sheep you may as well put your money into property, the only other option (sharemarket) is riskier.

    My guess is there will NOT be a big drop in house prices until 2030, when the baby boomers are all moving out of home and into a nursing home (or cemetery).

    The author of the article needs to put a firm date on his prediction of big house price drops. As they say a broken clock shows the right time twice a day.

    I challenge the daily reckoning team to put a specific time frame on their predictions about house price drops.

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  18. Does nobody here read, I posted this just yesterday;

    The Australian government gave a formal green light on Monday to a proposal to invest up to $8 billion in additional public funds to support the country’s residential mortgage-backed bond market.

    The government IS the market. If you short RMBS you could lose more than your shirt.

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  19. Justin yes I saw your post and the story in the media but what’s new? The Government is spending $43 billion on a broadband network that will be dated by the time it is ready, building school halls where they are not needed and handing out dollars for pink batts. It’s raining money! :)

    Greg Atkinson
    December 1, 2009
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  20. Tom Sugar,
    how can anyone pick a date when the government keeps sticking their finger in???

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  21. You made me laugh Greg. I know of a property investor who just had bats put in all their houses. I know the tennants in one of the houses and the house itself very well. Its almost worth bulldozing (and in a small country town). You just gotta laugh…lifes too short. What the heck, my kids can work it off.

    Lachlan Scanlan
    December 2, 2009
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  22. Failing large spikes in interest rates – in my opinion the other factor which will precipitate a fall in housing prices is rising unemployment. For whatever reason Australia has been spared a significant rise in the jobless rate and as a result people can continue to service their mortgages. Also let’s face it – you are not going to take a huge devaluation on your property unless you are desperate ie out of work and out of money.

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  23. Don
    that unemployment may come soon. The government keeps talking about this massive resource boom we are experiencing that will sustain Australia for years BUT stockpile levels of aluminium, copper, nickel, lead and zinc are at all time highs and growing rapidly. That confirms that nobody is buying resources at boom levels. In 2005 the stockpiles basically didn’t exist because we were actually in a boom

    Go to kitco.com and click base metals, down the left hand side select charts under warehouse stocks.

    You can see that China finished buying metals in the middle of this year and now copper etc… are being stockpiles by the LME. So we have a situation were prices and supply are rising rapidly and demand is falling. This is creating a really nice surplus but eventually, when the carry trade unwinds, copper prices will come back down to earth and mining companies will close. That will mean a lot of unemployment

    There is a huge bubble forming in resources/physical assets

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  24. The tipping point is the moment that the market borrowing interest rate beats the annual percentage increase in property prices + rental yields. Why own a property that goes up at 7%p.a. and gives 3%p.a in rent when it costs 11%p.a. to service it? At that point people sell up and pirces go down, those who didn’t are in a worse position, so they sell and the whole thing spirals down.

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  25. Joe – I think Don is right – it will take unemployment. High interest rates won’t do it, because after a decade of double digit growth in property, it will take years of low or no growth for investors to believe it is anything other than a temporary blip. There is an unshakable faith in property as a sound investment even when the spreadsheet doesn’t add up.

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  26. Expecting a deadline on when property prices will crash is a bit much to expect from a free newsletter, aside from the fact nobody has the answer.
    Property is a market, like shares etc. You can’t profit if you don’t participate. Having the advantage of DR’s advice served to us every day makes us all a little bit wiser about things, and if we are participating in markets to make some bucks, chances are we’ll get a “heads up” before the mob, to exit our investment strategy.
    Question to Dan Denning and Shae at MM – Have you sold your houses, or are you still particpating in the run-up.
    If you haven’t sold, let us know when you do.
    I recently sold an investment property, and feel better for it.

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  27. How is anybody supposed to know what’s really happening with house prices, when the median house prices realised can vary so greatly from suburb to suburb and from month to month.
    Realestate.com.au has a new suburb page, providing month by month median house price sales by suburb in Australia.
    My suburb in Nov 2008 was $750,000, rose to $975,000 in Feb 2009, dropped to $575,250 in August 2009 and in October 2009 was $787,000.
    So in 1 year, we’ve had a 30% rise in 3 months, followed by a 40% crash in the next 6 months and then a 37% rise in 2 months.
    It’s the ultimate roller coaster ride.
    This is not a suburb where just a few houses change hands each month, so you would think the data would be meaningful, but who would rely on these statistics to determine whether the purchase of a single property is good value or not.

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  28. Yes unemployment forces peoples hands, and hurts rents as well as property demand plus boosts property supply.
    When might we see a big rise in unemployment? Probably after US, Japan, Europe and China start to experience it.

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  29. ” … all over the world asset prices supported by debt are falling …” Are they? I could have sworn stocks all over the world and gold and Asian property prices (including those in Oz) were going up???

    Course if DR said This is just a bit of irrationality in between US subprime and Alt-A resets with world governments being too fiscally prudent to keep the printing presses going to avoid deflation in future, then the argument might be based in a hope for some rationality (even though that hope would seem to be a bit forlorn?)

    But either way, it would still be more use than It’s a bubble; So it’s gunna crash; Can’t tell you when; Or by how much – But trust me; It’s true – I know – All you Aussies who don’t own a house can stake your homeownership on this 100% DR guarenteed!!!

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  30. Although not a closed system, I would consider Cairns (where I live)to be a bit of a “canary in the coalmine” with regards to housing. It is a reasonably large city with the unemployment rate hovering at 14% and so the pressure of rising interest rates along with the decrease in the first home owners grant should make things interesting. Of course people from interstate tend to juice the market a bit but eventually that has to give way to reality (no pun intended). So far there has not been a collapse as such but the prices are certainly feeling the pressure.

    GB I work in mining and I await with trepidation the flow through from the lack of stock buying from the Chinese, certainly interesting times but I have my fingers crossed :)

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  31. The house prices will have to fall, either nominally or through no growth in a high inflation or hyper inflation environment.

    Remember no assets in this world appreciates without correction. Longer the boom harder the pain when the eventual correction does come.

    I think the interest rate in Australia will spike up to double digit when the US $ finally tanks, perhaps in two or three years’ time. The global credit market will lend to our banks at very high rate or won’t lend to us at all. If the banks cannot secure credits then new loan will dry up. If buyers can secure the loans no sales can be achieved. A couple years of high interest people will change their minds about investing in property.

    Australians governments, on the other hand, will find themselves having to pay a lot more to service their debts. The federal government’s $300B debts will mean higher taxes, lower social services and welfare. This means households will have to spend more on living and pay more taxes.

    The Chinese boom will come to an end in the not too distant future. There is no doubt that the vast majority of the population have seen drastic lift in their living standards in the last two decades or so. However, there is huge disparity in household incomes in China. The population there have to pay for a lot of things that are “free” in Australia, the real growth in ordinary people’s income isn’t as flashy as the crooked growth rate of China. What this means is that the domestic growth in consumption will never fully make for the loss of export in China. Chinese government is popping up the growth with capital investment at the moment. But without much real growth in ordinary people’s wealth, China’s growth will slow down if not come to a halt.

    The implication for Australia is that our resources boom will come to an end. There will be less jobs and more importantly less company taxes and mining loyalties for the federal and states governments.

    And we also have record household debts to deal with. People are still spending like the good days will never end.

    So there are a few risks that could potentially trigger the house market to fall in Australia. It may not happen soon, but it will happen, and it won’t be pretty…

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  32. Ditto for Russia as I’ve said before Don – House prices are holding. Despite being maybe 8 times the average wage and with most people not getting anything like the average wage and with banks not lending – But their inflation (that they confess to) is 9.4% pa (low by their standards) and the CBR has just dropped interest rates to 9% pa to support growth – Funny old world eh?

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  33. One of the problems that DRA has (just maybe?) is that while DRUS only has to answer to a bunch of Yanks who sit at home on their bottoms sure in the knowledge that America always has been and always will be the centre of the universe, a fair number of Aussies own passports, have had a look overseas, and allow for the possibility that medium to long term it just might not be so.

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  34. America is getting up my nose bigtime – Just like those banks what they reckon are too big to be let go, America seems to be too big to be let go? Unlike the likes of Iceland and Ireland and Spain and Greece and Dubai and even the UK – Or China and even Japan if it should come to it!
    Just don’t seem healthy does it? Maybe someone should bring in a rule that no one nation can use financial tricks to get anymore percent of global GDP than 2.5 times its share based on it’s bit of the world’s population – In the sure knowledge that them what do are either bludging or cheating or both.

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  35. Im no economist and dont invest in anything. I own a property (thanks to a mortgage). Id like to know where is the right place to invest my money (considering selling property via auction).
    I initially believed Prof Steve Keen regarding properties to fall.
    But our Govt has a policy (my guess) to keep the housing shortage as is – since its the great Australian dream to own a home. But Govt dont want u to be free from debt, so need to keep the balance as we are in today.
    Hope this makes sense – or im speaking nonsense dont know.
    Yet am still questioning future of house prices. May go down but Govt is stubborn (prefer) to keep prices at an inflated level but not too inflated. Maybe the Govts formula for the Australian economy hangs on property price as well ? (just a wild thought – u never know)

    I think gold will rise – maybe to $2k.
    Though i think it may fall in short term then just skyrocket.

    Its all still vague to me – id like to know who to invest my money (FROM sale of property – if it sells)

    I first caught of this GFC in mid 07. My reaction was China and India will follow. It hasnt happened yet but i believe it will.
    I also foresaw 25% unemployment (for Australia). But we see this figure coming close for US (unofficial rate approx 18%).

    Comments regarding my thoughts and questions is appreciated.

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  36. Jim, you have pretty well summed up what everyone would like to know so I will give you my 50 cents.

    Firstly I would like to point out that I am no gun investor at all, I have done ok for myself and have no complaints but of course could have done much better. I didn’t lose anything in the GFC however I also missed the boat with the rally but don’t feel too fussed about it.

    I like coming to DR as it offers a very interesting viewpoint and they are more than happy to admit that they could be wrong (plus it’s free!). I would also suggest that you look up (try youtube for example) people like Marc Faber, Jim Rogers, Hugh Hendry, Peter Schiff and see what they have to say – although it is along similar lines to DR (except for Hendry). I also like the odd article at http://www.brookesnews.com – although some of the stuff is a bit on the nose but the economics analysis is interesting.

    Australia has again largely dodged a bullet – how many times have we done this in the last 15 years? – but that said we are also getting ring side seats to what is happening in the US which I believe is a preview of what we could expect here. With all the money printing and expansion of government debt I completely concur with DR and the rest that this will lead to an eventual large devaluation of the US dollar. Note that this does not necessarily mean hyper inflation, that is just one scenario, but I believe that the US consumer’s purchasing power will be severely eroded whether by dollar devaluation, drop in income or value of their assets (houses and shares), inflation or a combination of all of the above. The other interesting factor to watch is what the US states do as their income streams come under pressure but at the same time they are hamstrung in trying to reduce expenditure – especially on their public servants and pension funds. Our states are not doing as bad but make no mistake they have racked up a considerable amount of debt on their own – 120 billion is a figure I have heard – along with our federal debt of 105 billion odd (and rising) which you can find directly at:

    http://www.aofm.gov.au/content/borrowing/commonwealth/QuarterlyData/september2009.asp

    Add this to Australia’s privately held debt and it all gets a bit scary. I think you can agree that this cannot go on indefinitely.

    Anyway time to stop rabbitting on and put the c*ck on the block as they say:

    Gold – this is all about maintaining your purchasing power ie a hedge against the devaluation of your currency so I don’t think buying a heap of gold will make you rich, you will just be treading water but still better than nothing.

    Aussie shares – things just look too fragile at the moment (look at the shock that Dubai caused, I am sure this is not the last) so until things make more sense I am out.

    Real estate – where is Bikerpete when you need him? Jokes aside check out what is going on in the US. They are doing anything to try and prop up the house prices as so much of people’s equity is tied up in them the more they drop the worse things get. So tax credits, refinancing, prevention of foreclosures etc etc all designed to soften the fall and hopefully buy time for the “recovery”. I don’t think the Australian government would go to those lengths however as has been shown they will step in and juice the market with things like the increased first home owners grant for similar reasons. That said if you buy a good property in a good area – read a place where unemployment is not too crap and the prospects are good – I think you will be ok.

    Where am I at the moment? Right now I am completely focussed on paying my mortgage off (property in Melbourne, paid too much for it but I plan to retire there so I don’t really care) whilst working in mining. I figure that way I hedge my bets – if things go to hell and gold takes off I am set employment wise but on the other hand if the economy fully recovers and choofs along nicely, gold will fall but base metals will shoot up nicely – same outcome. However if everything goes to hell in a handbasket (that would take a few years) I will at least be debt free and can make a decision from there.

    Hope that helped a bit – good luck with your decisions!

    Reply
  37. Yes! Don’t invest in housing you nongs! Subscribe to Diggers and Drillers and invest in stocks! Jeeeez, it aint that hard. If all else fails get yer facts from the Warnumbool Standard Awlright!

    Reply
  38. Oh the agony! So much expertise in one place. So many doomsayers, property crash gurus and Steve keen acolytes. What a load of tosh.
    OK experts of the property bubble, show me the money. Show me a graph from a reputable source that shows an Aussie property crash in say…..lets be helpful, the last 50 years. I don’t mean a dip or correction, I mean crash.

    John Mazzarollo
    December 3, 2009
    Reply
  39. Hi John Mazzarollo,

    I don’t know whether looking into historical data is necessarily going to give you a good idea on what will happen in the future.

    One wouldn’t have predicted the recent strong property prices rise based on historical data as the average house price over wage ratio is at historical high.

    I don’t know whether property prices will crash or not. But it should fall, either norminally or through no growth in a high inflation environment.

    Reply
  40. My confusion comes from our stock market having a direct correlation with the US market. Why does a fall or rise in the US market have any real bearing on what goes on in our market place? Correct me if i am wrong but our markets should be fuelled by and monitored based on our scenario, to argue that we have a heavy reliance on the US is absurd as we haven’t even sneezed while they ended up in ICU with nuemonia.

    Shouldn’t our stock market be heavily tied in with Chins and there scenario given they are also playing on as if the US scenario has no bering on there day-to-day

    There seems to be a huge contadiciton here that i dont really understand, can someone please explain. Or maybe it is all smoke and mirrors and the weehls will fall off it all soon?

    As for property the market has exploded becuse we have allowed foreign investment, Howard screwed us with capital gains reductions and negative gearing incentives and Rudd rammed us even harder with foreign investment and FHOG. He had a choice between letting the market correct itself or to prop it up and he took choice number 3 ‘artificially inflate it, what a winner.

    He had half a chance in being the firt labour prime minsiter that didn’t stuff things but it looks like history has repeated itself, or is close to repeating anyway.

    Watchful eye
    December 5, 2009
    Reply
  41. i realise the spelling is dreadful in my last post, i am having keayboard issues……………………

    Watchful eye
    December 5, 2009
    Reply
  42. The US is about 24% of world GDP, so if America is happy the world is happy. That’s my simple minded take on it anyway.
    It isn’t at all healthy of course. Because when the US stuffs up its finances the whole world gets damaged. And the US has a long track record of stuffing up its finances.
    But then it wouldn’t be healthy for China to be 23% of world GDP either. Or any country. Big is powerful. And they do say that absolute power corrupts absolutely.
    Nothing special about America in that regard – King Neb, Rome, the Aztecs, Spain, the Ottomans, England, the USSR etc, etc, etc – None of them were especially benevolent masters to their “slave” states.
    The only thing that makes America such an obvious pain is that it is the world’s current problem in that regard.
    Too big (to fail?) is obviously a very bad thing – Irrespective of whether we are talking about banks or nations!
    If I had my way I’d probably chop all countries up into little city states and do away with the idea of nationhood as a fundamentally flawed concept. I kind of warm to the thought of telling Kev his job description has been changed and he is now the mayor of Eumundi!

    Reply
  43. I am no expert either, but I can say that the thing about stock markets is they are really a cash exchange, and as such cash is fluid and money flows in and out of Australia in massive amounts overnight (not necessarily as direct fund transfers, but on the internal balance books of multinational companies, which adjust their exposure across global markets each day). This is reflected in the stock market.

    Things like debt, for example, can mean many things – “foreign investment” often really means a loan by a foreign owned company to itself (sometimes via what is essentially a front company) to set up an operation in Australia, which makes a loss (or reduced profit) because it has to pay interest and so avoids tax, and so the investment brings much less wealth to Australia than it would otherwise do if the money was not a loan. On the other hand, the company’s fate is tied to its parent (of course), which will milk it dry and send it broke when convenient (or when it wants an Aussie government bailout). So that’s another way in which our stocks are affected by which multinationals have a presence in our economy.

    But also, the sheer size of the NYSE means we are affected, because many Australian investors/investing companies are involved there also – if they lose there, they cut losses by selling here, and vice versa.

    That’s my take on it anyway.

    Reply
  44. John Mazzarollo,

    Your onanistic comment suggests to me that you are a moron. Do you drive your car by looking in the rear-view mirror? Have a look at the lunacy in the Australian property market and tell me if it’s precedented. After you do that, look at US property price graphs – I’m sure you’ll argue that ‘Australia is different’. You appear to have a very simplistic view of the world. Let me enlighten you – we are not traveling backwards through time so history doesn’t necessarily inform us all that well. By the way, the people that contribute to this website are just having a go, mate. It’s a complex world and I doubt that your childish perspective and vitriol is welcome here.

    Reply
  45. Never thought I’d hear the term onanism used on an economics site.

    Reply
  46. All but the most intellectually challenged can see the Aussie property market is an overpriced bubble just waiting for a trigger to burst it.
    The only difference is some acknowledge the truth while others are in denial for a variety of self interest reasons.
    Either way the correction will occur.

    Reply
  47. You’re one up on me Dan – I had to look it up!

    Oz House Prices (the basics):

    1. They are high (VERY high even!)
    2. Returns aren’t great – As low as 3.5% net before tax maybe?
    3. Although a negatively geared investor does his sums differently I gather – Look into it by all means if you wish – I never warmed to it greatly – Which just might explain why I’m NOT rich???
    4. Investment in them is government backed – Please don’t argue! – Oz Houses crash = Oz Banks crash = Oz economy destroyed = Oz Tax payer has to pay. So might as well pay up front to prevent all the grief of a crash than afterwards to pay off the damage – Good commonsense Kev reckons? Although, Yes it isn’t fair! But then life isn’t fair!!! And as one bloke I know of said: That just could be good thing because not many people would REALLY want to be judged fairly – As opposed to mercifully … On’ya Tiger – The Grimm sister didn’t really push my buttons but each to their own eh? May ya missus be merciful my son!!! … :)
    5. In 10 years who’ll care … Inflation blah, blah, blah … Everything will go up lots because governments can make it. (My money in the bank will NOT be worth more in 10 years time than is now – How do I know that??? Well it is just the punt that I as an investor reckon I should take – And if you feel to take a different one then we either see our world differently or you are a smart trader who reckons he can catch the ups and downs as things turn I guess?)
    6. Might Oz house prices go down in the meantime? – Sure – 20% tops I’d guess? (Although less in all honesty now given Kev’s hair trigger responses nowadays – IMO.) So hang out for ya discount if ya want – Bearing in mind ya just mightn’t get it at all.
    7. Lifes a capital b “B” … And then ya die! :)
    8. Welcome tuit!!!

    Reply
  48. Hello Bargeass – Ya could be right. Or ya could be wrong. Time will tell. As for me, I’m just backing the boring old inflationist cant.

    Reply
  49. Nearly everyday, there is something in the media about house prices going up/steady/falling; vested interests, banks, brokers, builders, developers, r/e agents are all saying “now is the time to buy or invest”; govt is throwing billions of $$$’s into the building industry; mum & dad investors are talking investment properties, how much more their property is worth over the neighbourhood BBQ. Me thinks it can only mean the property bubble is about to burst. 2010 will be a very interesting year.

    Reply
  50. Look at South West Sydney for when house prices will fall. The fringe will suffer more than the core. Shops will close.

    Tom Tanning
    December 7, 2009
    Reply
  51. John Mazzarollo,

    Not surprisingly it’s difficult to find any decent house price data beyond the last 15 years. This is one from Shane Oliver who’s more in the bull camp if anything. See the graph on top RHS of first page, compiled over a year ago. An update would be interesting.

    http://docs.google.com/viewer?a=v&q=cache:BzV20Ct9q8UJ:www.jvafs.com.au/download.cfm%3FDownloadFile%3DE9025CFC-1372-5CE6-24E4E463BECAE824+shane+oliver+australian+house+prices+2008&hl=en&gl=au&pid=bl&srcid=ADGEESir5sjfi8kP0fj9VK7Fxxjl4OGu-EXYWeFpWGSvNDs3XwYfhUFNAqF3En8i-JL-CRLLx98ceKz5FbHI06BmZP7juXuym2Hl15DnDqnyYfBhSkVb14mw3d_u861160FdH-Z5Iw77&sig=AHIEtbRw57g42L4A7aRmHm9SkjPqAuOfQQ

    jimbo james
    December 7, 2009
    Reply
  52. Thanks for trying Jimbo but that link won’t open for me.
    As I suspected, nobody (despite Callum’s fiddling under the desk attempt) has come up with any evidence of a previous crash. Of course our past won’t always point to the future, but my point is, the Australian market is a different animal. Anybody who has lived overseas for any length of time understands Australians view property in different ways to say the Europeans and Chinese for argument’s sake. Tried buying your average sized Aussie style home in Amsterdam? How much do you think it would cost? In China?
    We Aussies expect to have our quarter acre block and our governments support this view and will always support the market.
    Prices seem to me at present to be affordable by just about any measure.
    A house costing 4-5 times income doesn’t seem to be overly expensive considering dual income capacity.
    Glen Stevens has continually said there is no price bubble and this week he said it again.
    The internet forums encourage rude bullying types like Callum to scurry to their dictionaries for shock value like naughty school boys, but it also encourages reasoned debate as it does heremostly. Trouble is, the doom sayers don’t provide any evidence. I don’t think there is any evidence that there is a crash awaiting; there hasn’t been one in my lifetime despite wars, share market collapses and rate hikes.
    Australia is different and into the future it’s as simple as Supply and Demand as far as I can see. High birth rate, exploding immigration and depressed supply. Throw in rising employment and all the doom talk doesn’t seem to hold much water.
    This time last year the whining from doomsayers was deafening and it was all wrong; very, very wrong.

    John Mazzarollo
    December 11, 2009
    Reply
  53. There’s no doubt the Aussie property market is in a bubble the only question is how messy the aftermath will be.

    Reply
  54. And so the argument goes round and round. Bargearse I’ll ask you to show me the money. How do you arrive at your conclusion that there is a property bubble? The RBA says there isn’t one and back it up with figures. You say there is one.

    I’m with the RBA. The cost of housing is stable and by stable I mean, it hasn’t changed much since 1980 if you compare house prices to household income as most economists do. House prices have largely remained at about 4-5 times income.

    My overseas analogy is a good one. Don’t count the USA whose system led to the sub prime crash, that system was a disaster waiting to happen. Australia’s hose prices are reasonable compared to European cities where most people can never afford to buy.

    We have strong employment figures: fact
    Rising birth rate: fact
    Continuing high immigration: fact
    Low default rates despite rising interest rates: fact
    Under supply of housing stock: fact

    Australia’s property market is a relatively stable beast compared to say, Hong Kong, where prices rise and fall in spectacular fashion.
    The house price crash advocates all have one thing in common; they don’t understand/have expertise in the market.

    Financial advisors mostly aren’t experts in property, but there are some.
    Economists certainly are not as Steve Keen and Gerard Minack continue to demonstrate. I reckon the best way to understand any topic is to talk to the people in the game. That is, talk to people that are involved.

    I wouldn’t expect a stamp collector to be able to advise on coins or a share trader to understand property investment.

    Again, I can’t see any EVIDENCE of a bubble when I look at the current figures but I’m happy to be corrected. Come on Callum (I can spot a bully a mile away)so show me the graphs please.

    John Mazzarollo
    December 13, 2009
    Reply
  55. The Australian property market is thoroughly corrupted no matter whether you look at the communist , nanny state land rationing policy, developer donations to their favorite political party, taxing the economy to fund bribes aimed at duping the least financialy secure, least financially literate members of society to get a piece of the overpriced property action.
    This will fail but just as with any bubble the exact timing extent and damage cannot be predicted in advance.
    Just as I can guarantee you will all die I cannot say when or how but regardless the outcome is 100% certain, inevitable and unavoidable.

    Reply
  56. Ha,ha…. brilliant logic. That’s it. Because we’re gonna all die, property will fall. Steve Keen should have used that bone-pointing logic…! :)

    Reply
  57. Pete it sure saddens me to see a self professed property guru like yourself fail to understand or misrepresent my posts all the time. Are you feeing insecure?
    You sure come over especially desperate and clutching at straws by trying to counter my posts by looking for spelling, typing or grammatical errors
    Property is in in a bubble no matter who you look at it and we all know what follows a bubble.

    Reply
  58. You’ve convinced me you’re right, Bargearse. You’re obviously a multi-millionaire travelling the world, who managed to become wealthy without investing in property. So HOW _did_ ya do it, son?! Enlighten us! ;) (Mate, you cannot rain on my parade. Every day out here, enjoying our fabulous planet confirms that your arse is full of it! Barge on….. ! :) )

    Reply
  59. Pete if you are so rich why are you on here commenting instead of living it up. I think you’re a fraud and bargeass is right

    Reply
  60. Pete, if he is rich, is “new rich” not “old rich”, and there’s a lot to be said about understanding the difference.

    Reply
  61. John Maz is right I have a post tax salary of 84 K ,(on 135k pre tax). That should mean, the right price of house for me is 336000. I live in Melbourne and I can safely tell readers with that amount its a joke to try and get a two bedroom unit within 20 – 22k(of city) to East , South East or South of Melbourne. You will have to try the North , West, North West after 15 k outside the city.

    What it means is anything drivable or anything with amenities decent high schools , hospitals or train lines is in the 420K plus range for two bedroom units. If you are looking at 3 bedder it is definitely 600 plus. That is way out of my league.

    When people say that housing is affordable in Australia(like 4 – 5 times) , what they probably mean is get lost to the fringes or to regional where the median fits your income. In Sydney I assume the distances are much larger.

    Be quick guys, what I have noticed is that even the fringes rapidly have capital appreciation and move to the 450 plus mark for 3 bedders ( they start at 350K anyway) and then the fringe moves further where the new 350K starts. With trains costing around 20 million a unit and with east to west spread of 80 kilometers , I dont think the state government will find any incentive to expand the train network. Thank God for the car and cheap petrol , how else?

    Reply
  62. I live about 25 km from the Bisbane CBD. (But very rarely need to go there.) When I heard the population increase projections a few months back I thought Bugger, I really hate driving in lots of traffic – I might have to move further out in another 5 or 10 years. I had cause to drive “further out” a few weeks later – about 20 km in fact – There’s new bloody houses everywhere!

    Reply
  63. Having said what is, the future plan for Brissy such as I’ve made of it from a bit of a quick look through is an increased empathsis on higher density living and infill. Clusters of apartment blocks. Clusters of small dwellings crammed together with small yards.

    Government doesn’t reckon the sums re providing services to urban sprawl and extracting taxes from same stack up as well as they do against the higher density options I imagine. And I assume we’ll be told this stuff is what is being built for us because it is what we need/want/can afford.

    Reply
  64. I am in Sydney and looking to buy my first property. I am looking at buying a 2 bed apartment and will look at 475 – 575 depending on whether it is renovated or needs renovating, as I can do some of this myself.

    I just cant see houses in affluent area’s like the Eastern suburbs or Northern Beaches going down? Many who have bought in these areas are responsible with their borrowing. (an assumption.) The areas have so mush demand, especially from wealthy mainly European immigrants…

    When the GFC occured house prices did fall in Oz – up in the top end of town and people have picked up bargains compared to a few years back. they have.

    Oz is very well poised for continued growth because India and China are consuming and we have the resources = employed citizens.

    In the -$750k market in affluent pockets of major hubs like Sydney where the population is predicted to grow and grow I just cant see prices going down anytime soon.

    Don’t get me wrong – Dan’s article is very logical and oozes enormous amounts of fact. Supply and demand is what builds growth and I cant see a shortage of demand for a 2 bed apartment in areas where there is not anymore land to develop…

    I was sitting on the fence for the last year and a half and prices have only gone up?

    I must admit I am worried about buying because I can see what Dan and many people are saying in their comments. I, however am going to have to take the plunge. i suppose if I can plunge into a place that I like, needs a little bit of TLC, which I can offer – hopefully I wont be too hard hit if the market does correct?

    Does anyone have any comments on this?

    Reply
  65. It may actually be a clever way to underpin the property market if government thought that needed doing I guess – Force lots of more affordable little dungers onto the market as the entry level type dwelling – As opposed to the historical 3 bedroom detached type dwelling I knew and loved. (I do notice that Mr Rudd fancies himself as a budding town planner: http://www.brisbanetimes.com.au/national/rudd-touts-plan-for-better-cities-20091028-hjc8.html )

    Tricked if I know; Maybe it’s already happened. Would be interesting to know just what types of dwellings FHBs have been buying where.

    Reply
  66. it would appear that biker pete has returned in all his obnoxious glory.

    Reply
  67. Try to play nicely with the other children Prozak – You haven’t always displayed your most charming side here either. And Ditto for me so far as that goes.

    Reply
  68. What makes the Aussie property bubble so unpredictable is you never know what wacky economics the green dependent communists will come up with.
    When you see the commies taxing the productivity out the economy to provide bribe money to encourage societie’s most economically illiterate and marginal to buy overpriced property.

    Reply
  69. Bargeass – One of “our” failings as investors (if I can be so bold as to suggest it?) is that we have clung to a fundamental belief in THE free market – When it is horse poo. Government intervention/manipulation whatever we want to call it is what really counts. At least until government folds. And the resource rich/backed Oz government would seem to be a long, long, long way from folding. With the challenge for “us” being to figure how to make the best of that. IMO?

    Reply
  70. What’s going on in the UK Prozak? Nasty inflation looming for anywhere up to a decade is my best guess???

    Reply
  71. Ned,
    depends on what you base your best guess.

    Easy to say nasty inflation. Please give reasons.

    Reply
  72. Steven Keen seems to have a very plausible explanantion of the housing ‘blubble’ here:
    http://www.debtdeflation.com/blogs/2009/11/04/its-the-leverage-stupid/

    Bottom line…fed checks money out there for first home buyers, people sell their home to them and upgrade to a newer bigger home, overall debt grows exponentially

    Reply
  73. Bargeass – good commentary except…
    Green dependant Communists? Communism has historically been environmentally destructuve characterised extreme pollution an lack of conservation in the former Soviet Union and China.
    China may be trying to do something about it now though (it could just be spin though).

    Reply
  74. Richo Australia has adopted the Eouro-Commie-nanny state model where the government tries to takeover the economy by enslaving the populace.
    Enslavement is achieved by a combination of employing you in the public sector, making you welfare dependent or if you’re a ‘private business’ then making you dependent on government contracts and regulation for your very existence.
    This dystopian model is the latest in modern enslavement and control and is working especially well in Australia where the population has been well domesticated and lost any sense of personal freedom.

    Reply
  75. Wow! Sugar’s making some big moves!! Up 5% just yesterday, there’s your inflation.

    Reply
  76. This will seem as academically ignorant as lets say, anything George Buah has ever muttered but why are house prices not included in the inflationary statistics??

    Surely if the RBA counted these then we would be in a massive need of interest rate rises. I became curious after reading an article based around the last board meeting minutes where Glen Stevens stated that the economy was borderline in relation to rate rises but aired on the side of caution and made the decision to raise .25 base points. The article then twottled on to mention that house prices were not included, seems to be madness, they are items/consumables that can be brought and sold and one which is slowly reuining our great country, why would it not be inluded???

    Little confused
    December 15, 2009
    Reply
  77. John Mazzarollo, i am tipping you are one of these people who are in property and can’t for the life of you understand why smucks like me don’t want to go and leverage themselves to the hilt based on figures that seem good today but can all be contradictory tomorrow. What if Mr Rudd in his infinite wisdom decides immigration should be scaled back, and banks decide that the RBA are not going t control monetary policy and they will take the reigns and raise rates accordingly.

    They are all hypotheticals but they can happen just as easily as you or can blink and then 50% of your flawless arguement dissappears. and i don’t know what planet you are on but the average wage in Australia is $53,000 and the average house price over Sydney,Brisbane, Melbourne, Perth is around the $496,000 mark that is just under 9 times the average wage and completley and utterly unaffordable.

    You are a perpetuator of the pyramid scheme, stand at the top and hell down to the minyans below. “You must get in or you’lkl miss out” and in reality in your head you are saying “you must get in so i can get out with my share?!!!!

    Little confused
    December 15, 2009
    Reply
  78. Little confused, you are coming from the idea that the RBA actually knows what it is doing re. monetary policy, rather than as I have seen it described “groping along in a fog of uncertainty”.

    Reply
  79. Well be that as it may, if things are foggy then we all have to operate in a fog but I have not seen anyone posting on this site who I would select to make decisions in their area of responsibility ahead of the RBA. It is a body with some collective integrity.

    Reply
  80. Rubbish Gerry, a banker’s paper is as good as the assets that back it. the RBA seems to have forgotten this or is it actually the government? I’ve forgotten.

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  81. My general thought is that it has a stagflationary smell to it Prozak:
    http://moneyterms.co.uk/stagflation/
    As opposed to an out and out deflationary depression. The QE seems to mitigate that possibilty.

    Reply
  82. Ned,
    Yes.

    But my question is why do you beleive there will be high inflation?

    (here follows where all the monetarist on this site give me 1 star and try and tell me its all about money supply)

    QE did nothing for japanes deflation.
    QE is sawpping one form of national debt for another (currency for bonds) and therefore should in itself have little impact on inflation or deflation – however it would increase the speed of inflation if there was an inflationary environment (outlined below) as the BoE has increase the liquidity of the national debt.

    The inflation is caused by an increase in national debt in the first place.
    National Debt = currency+bonds.
    Currency = zero coupon bond.

    So for all the monetarist who haven’t caught on yet. Money supply is a small piece of national debt.

    Now if the BoE was just printing money and giving it out. Yes this is inflationary BECAUSE it increases in total the national debt. If gov creates a lot of BONDS then this too is obviously inflationary.

    However, even high national debt does not guarantee high inflation IF investors are willing to buy the increased supply. Inflation is caused by people simultaneously:
    1. not wishing to hold government paper (currency+bonds)
    2. buying physical assets and anything else not national debt related.

    So at the moment – I see the potential for high inflation but at present it is not coming through as there is enough demand for gov. paper and whilst there is some clear shift toward physical assets it is not YET a total shunning of government paper. That may happen still but I doubt it.

    So your reasons?

    Reply
  83. I can’t give reasons based on an understanding of economics Prozak – Don’t have the training/knowledge.

    My reasons are more along the lines of a real broad brush “feel” for what policy makers are likely to do:

    * Deflation is still a worry (QE hasn’t “worked” yet)
    * I’m guessing here, but do suspect that sufficiently motivated policy makers really can force inflation versus deflation (although they may have to do other things as well as QE to achieve it – Largely to do with getting the money to consumers I suspect – Either as credit via the banks (where they haven’t had a lot of success to date) or through wage increases and/or higher employment – In that regard I note that Obama seems to be becoming hot to trot on jobs.
    * Why didn’t QE “work” in Japan? Another way to look at it is to ask Why wasn’t Japan sufficiently motivated? In answer to that, the thought has crossed my mind that if Japan had a lot of savers (and savers get wiped out by high inflation) then the political motivation for making QE work was probably a lot lower than it is in the heavily indebted Western nations now.
    * So my gut suspicion is that policy makers will get their inflation in the heavily indebted Western democracies – Eventually and somehow.

    Reply
  84. Any asset class that needs a socialist government to pay people to buy it is something any smart investor wouldn’t touch with a bargepole.

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  85. One could make a similar observation about our super going into stocks. And the guarantee that makes people feel better about lending their money to our banks.
    Got to admit that none of it excites me a whole lot right now.

    Reply
  86. This is a few months old now but still well worth watching;

    http://www.youtube.com/watch?v=7ubJp6rmUYM

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  87. Ned,
    the issue is there are limits on what a western government can do.

    Besides – the conservatives are about to win power in the UK. The conservatives over here are proper small government types (although they try and cover this up at present)

    They are already leading the call for debt reduction. If they win the election you can guarantee massive spending cuts in 2/3 years. They’ve got at least 5 years of being able to blame labour for the recession they will cause by cutting spending.

    High and persistant inflation may only happen if Labour stays in power.

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  88. Socialism has such a strong grip in Australia that even the wealthiest have been bought into the welfare fold.

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  89. Just read the Age online and a big heading telling us that the median house price in elbounre has risen to %525,000 suggests one thing. Either the average person is earning $200,000pa or we are heading into the biggest “sub-prime” copycat scenario since the US went belly up.

    No amount of immigration stats, employment growth or land shortage can justify this stupidity.

    People have lost the plot, my mate scared out of his mind about being left behind in this market just borrowed $502,000 all up (including fee, surveyor etc). He earns $85,000pa had a $50k deposit and needs a new bathroom, kitchen before its liveable. Oh yeah and its an apartment, 2 bedrooms but sheesh it certainly not capable of raising a family in.

    He;s got 30 years of $590pw repayments and thats if rates stay where they are. SCARY!!!!

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  90. I sold a house in Melbourne in July… to Chinese. A friend sold two investment properties in Melbourne… Chinese. My wife’s friend sold her house too… yep you guessed it!
    Who is buying our iron ore and copper? …yep!
    It all comes down to China, like it or not.

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  91. The Economist Magazine has lost the plot again – Australia 50% over-valued?

    http://www.economist.com/businessfinance/displayStory.cfm?story_id=15179388

    Remember this is what The Economist Magazine said in 2004 about the Australian Housing Market, 20-30% price falls were predicted. Quote from

    http://www.smh.com.au/articles/2004/04/02/1080544694223.html?from=storyrhs

    “The Economist magazine said this week that Australia’s housing boom looks suspiciously like America’s tech bubble just before it burst, pushing the US economy into recession in 2001. It described Australia as “America’s ugly sister” with soaring house prices, rising household debt, consumer spending outpacing incomes and a glut of apartments – all telltale signs of an impending economic disaster”.

    There may be some small correction, but there will be no predicted huge crash.

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  92. There’s no reason why the state of things can’t continue into the near future – I’m talking another 10 – 20 years, maybe a bit longer.

    All it requires is a sniff of wage inflation to keep people reaching for that carrot, and wage inflation’s easy these days as I found out recently – wages are debt. Just borrow more to pay your employees. They’ll spend the debt money and create more demand. Wasn’t that the premise of the recent stimulus?

    I found out the other day that my wages are pure debt. The company I work for announced that they had to borrow to make up the payroll.

    But that’s not as bad as it sounds because companies that bought our product in the past probably needed to borrow the money to pay for it because it is quite expensive, and if they didn’t borrow the money, their customers did and then paid them with the borrowed money for their products and services. That then gets paid to us and our company hires more employees and so on. So the company borrowing the payroll is no issue, its just a case of at what point the debt money enters the system and ends up in my bank account. My job is as safe as houses.

    The economy is a big ball of debt at the moment creating false debt demand and feeding off itself. It can quite happily continue until INTEREST on the debt = 100% of all wages, profits and national productivity. That’s just the interest payments, not paying down the principal, but that hardly matters these days when assets just continue to rise and rise in value for no apparent reason, and we can just flip them to someone else easily for a tidy profit, paid for with even more debt money. Its a marvellous system. Paying principal is for people who didn’t choose the right asset class in the right location.

    But the beauty of it is: I can take my debt paycheck and go to the bank and leverage 10 times of it in new more debt. I could then use that debt to buy groceries.

    But with that thought, I will toddle down to the pub this afternoon with my debt paycheck and buy beers with the debt money, the pub will order more beer because of my custom, the brewery hires more staff to make the extra beer I consume. Everyone is happy.

    And in the end we are all dead.

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  93. “And in the end we are all dead.” There it is, folks. Just like the man said. Cheers! :)

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  94. Its all ok Helo Kity you just keep on living in your “DEBT” fairyland, and Everything will be just fine
    Amen to that :D

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  95. Helo Kity – 2050 Ken Henry reckons … So 10 to 20 years sounds a bit lean – More like 40 minimum? :)

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  96. Got me registered plan today Biker – The measurements are marked out in links. Hmmm … No rest for wicked old capitalist “Cs” – I should lodge me house drawings in chains ‘n rods ‘n links – Just ta see what today’s kiddies thinks. :)

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  97. Whatcha reckon about cins medium to long term Biker? (My gut guess is that every little drone in the joint will want its own “big room” – Equipped with goodies?)
    I recall the not too distant past when all Aussies wanted a formal dining room – Leading out onto the patio – For their flash family orientated type mates ta visit ‘n enjoy a fang – ‘Til they figured out their flash family orientated type mates either didn’t exist, or if they did, had way better things ta do than visit them.

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  98. What’s wrong with this one Steve? Nice and close to where you work. Pleny of room for a single bloke. Cheap as chips at $260k??? Especially given the size of your thumping great deposit. (And congrats on that as always!)
    But Jeez, what are you doing sniffing after $850k homes in Ryde … I can only hope a nice idealistic young 24 yo like you isn’t entertaining thoughts of making a profit on such a basic human need as accommodation? I’d be extremely dissappointed given all your oft reiterated principals re same … :)

    http://www.realestate.com.au/cgi-bin/rsearch?a=o&id=106100716&f=0&p=10&t=res&ty=&fmt=&header=&cc=&c=79561970&s=nsw&snf=rbs&tm=1262777995

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  99. Home cinemas: Hard to tell, Ned. Six of our rentals have them… and where they’re integrated well, they appear to work. Astonished at a recent event. We ‘overbuilt’ the second last house. Really let the missus and the architect la$h out. I knew the block was a stunner and needed a nice home, but as a rental it’s _not_ paying its way, yet. Anyway, the home cinema is pretty impressive… and so is the tech provision, including high speed optic fibre… and $1500 worth of free Telstra/Foxtel. No sooner do the new tenants move in, than we’re requested to fit tele connection in the lounge room, for a large screen there, which we agreed to if they paid for it… and so it happened. Youngish couple, no kids yet. It does make sense to have tele access in all lounge rooms… and maybe master bedrooms… but we’ve also reviewed our target audience. While cinemas may be great for teens, few of our tenants _have_ teens. The next two home plans have no cinemas.

    Technology can beat ya every time. Our 2000 – 2004 rentals had internet (Cat 5 or Cat 8), phone and TV access in virtually every room. Wireless comes along and leapfrogs your equipment, making it redundant! :)
    Imagine how the telcos must feel about Skype and other VOIP, now that wireless is so persistent right across the planet. We haven’t had to pay for internet access, mobile phone or landline calls since we left home six months ago, other than our minimal monthly ISP charge back home… !!!~

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  100. I know a very easy way to predict the future – maths. I know how compound interest is calculated. I know my landlord is only earning about 3.5% rental returns. I know the ABS website shows approvals for free standing homes are down 40% on 1983 levels when our population is about 34% bigger. Its all deck chairs and shuffling my friends. Its gonna sink – big time.

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  101. Thank you for this website and comments. Every time I panic about maybe buying a residential property and hear how it’s all just gone up X%, I read blogs like this and I feel better…..

    Many of my friends have just bought houses. People are saying it’s now or never, as the median will be $1M soon. It’s a very stressful time with so much misinformation out there.

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  102. I knew the block was a big success and wanted a nice home, but as a rental it’s _not_ paying its way, until now. Anyway, the home cinema is pretty inspiring… and so is the tech provision, including high speed optic fibre… and $1500 worth of free Telstra/Foxtel. No sooner do the new tenants move in, than we’re requested to fit tele link in the lounge room, for a great screen there, which we agreed to if they paid for it… and so it happened. Youngish couple, no kids yet.

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  103. Don’t you love these flashbacks?! There’s Ned, who has found Steve a Sydney unit for $260K (which is probably valued at $300K+ now… and our young couple have had a baby… and they’re looking after that rental well… .

    It’s one of our ‘less productive’ rentals; but on the other hand its capital appreciation is second-highest of our homes in that area. It’s doing at least 4% better than a neighbouring block we recently sold for 20% gain over two years…. . :D

    Reply

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