Australians More Interested in Investing in Property than on Stock Market

Reddit

Greece is behind us (apparently) but a interest rate rise from the Reserve Bank of Australia is ahead of us (possibly). So what will Australian stocks do? And is the world still meandering its way to a systemic collapse?

You’ll pardon the sense of inevitability in today’s Daily Reckoning. After all it’s raining. But even so, with over $1 billion in Melbourne property clearing auctions this week (at a clearance rate of 86%) it definitely feels like Australians have found a way to hasten their own financial day of reckoning. Of course not everyone agrees.

“We have never reached a billion-dollar figure in a week, especially coming off a very quiet period,” says Real Estate Institute of Victoria executive Enzo Raimondo in today’s Adelaide Now. “The significance is that if it starts off like this it could be an indication the residential property market in Melbourne probably will be the same as in 2007 when we had some double-digit price growth.”

Ah yes. 2007. The year the global credit bubble began deflating. Maybe Mr. Raimondo is right. If he is, the great reflation from March 2009 could end in one big orgy of housing spending. Followed by?

President of the Real Estate Institute of Australia, David Airey told the same paper that the increases in sale prices and total properties listed reflected the “surging confidence” in the housing sector. He said that after the financial crisis, Australians were more interested in investing in property than on the stock market.

Airey says that, “This latest data shows buyer confidence in the sector, and particularly the auction system, has significantly increased clearance rates under the hammer…In every capital we’ve got strong sales and that says that the buyers – despite the likelihood of higher interest rates – are still wanting to invest in property.”

Is this a good sign? Despite rising – or perhaps because of them – you have people entering the market even when they know interest rates are rising. This is obviously a sign that investors are chasing short term capital gains. Of course, they may also think they will never get another chance to get on the property latter at these prices. But that also is the sign of a mania.

Airey reckons it’s just Australians showing a preference for property after being disappointed by stocks. “Australians have taken the lessons learned through the economic downturn and have decided this time round to put their money in property… it’s encouraging and it’s good news for buyers and sellers alike.”

It’s certainly good news for the real estate industry. Some in the industry, like Tim Fletcher of Fletchers Real Estate said that median home prices in Melbourne will “hit $650,000 in a few months and $1 million within six years….We have too many buyers chasing too few properties, and unless something drastic is done about urban consolidation and freeing up more land on the fringes it’s only going to get worse.”

It’s going to get worse. On that we can agree.

While Australians go barking mad for property, there is relief in financial markets that the can of Greek debt has been kicked down the road. European leaders, along with the IMF, arranged an aid package for Greece should it be unable to sell €15.5 billion at the end of May. Mind you, the Greeks are getting eaten alive by higher interest rates. According to Bloomberg, the yield on a 10-year Green bond is 6.19% compared to 3.04% on German securities of a similar duration.

Borrower beware! And let us not forget, Europe is filled with other sovereign nations that have equally problematic finances. They all have to borrow. And rates are going up. Who’s going to lend? And how long can the euro stay strong?

Perhaps the more important but less urgent question is how long the U.S. dollar rally can last. The Wall Street Journal is reporting that, “A sudden drop-off in investor demand for U.S. Treasury notes is raising questions about whether interest rates will finally begin a march higher – a climb that would jack up the government’s borrowing costs and spell trouble for the fragile housing market.”

“For months, investors have focused their attention on the debt crisis in Europe, but there are signs the spotlight is turning to the ability of the U.S. to finance its own budget deficit. This week, some investors turned up their noses at three big U.S. Treasury offerings. Demand was weak for a $44 billion 2-year-note auction on Tuesday, a $42 billion sale of 5-year debt on Wednesday and a $32 billion 7-year-note sale Thursday.”

If foreign central banks are losing their appetite for U.S. debt, the upward pressure on U.S. rates will be immense. We don’t think this makes the dollar more attractive on a yield basis, when you factor in how much annual deficit is growing (and how fast U.S. tax revenues are falling, and how social security payments now exceed payroll tax takings). The upward pressure on rates is going to make the Fed’s exit from the mortgage market that much more problematic.

So what’s Plan B? Can the Fed really exit the market just when rates are headed up? Is the U.S. headed for a de-facto devaluation? Do the U.S monetary and fiscal authorities – Fed Chairman Bernanke, Treasury Secretary Geithner, and President Obama – even have a plan? Or do they think things are all better? And do they think the world will keep lending to America?

Perhaps we’re over-caffeinated, but our sense is that trouble is coming. Big trouble. And soon. Party while you can. But you might think about preparing too.

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.
Reddit

Comments

  1. Besides Mark Webber arousing sentiment locally decrying the sham that is the nanny state there is a broader consensus developing on the stupidity of the liberal fascist Australian elite and our funny money funded economy http://www.zerohedge.com/article/us-china-australia-love-triangle

    Reply
  2. I don’t blame Webber. If you boil down practically every news headline we get in this country it comes to the same thing: “The government needs to do something about “.

    I really don’t blame them for what they do, history shows clearly the nature of government, they are more than happy to get bigger and bigger and more intrusive. We allow it in a thousand ways each day so why should we complain when it complies with our wishes? This doesn’t mean I am happy with it but I can understand why it happens and why it will continue to grow.

    Reply
  3. It’s not just that every Australian thinks property is, quite literally, “as safe as houses”, but if I want an loan from, for example, the ANZ Bank to buy property, they’ll give me pretty much 100%. If I want to borrow from them to buy shares in the ANZ, they’ll only give me 80% LVR. Let me repeat, the ANZ (and pretty much every other Aussie bank) will shower me with money to buy property, but will only lend me 80% to the value of their OWN BUSINESS!

    That to me, is as tangible an example of the inherent bias towards property in Australia as you could find! Bloody ridiculous.

    Reply
  4. Con I never thought about loans for property and shares in that way! So the banks are basically saying their own shares are riskier than housing, which is a bit odd since they can liquidate your shares once you don’t make the margin call and basically get their cash back straight away.

    On top of that, the interest rate to borrow to buy shares is generally higher than a home loan! A double whammy!

    As for getting a business loan, well you have to pay even more in interest for one of those and also basically put your head on the line as security.

    No wonder housing is so popular as an investment!

    Greg Atkinson
    April 5, 2010
    Reply
  5. Con: “That to me, is as tangible an example of the inherent bias towards property in Australia as you could find! Bloody ridiculous.”

    Bloody wonderful. Surprised you’re surprised, Greg. As I’ve pointed out several times on SW, the bank holds a _title_. Far less risk.

    But, before sobbing too loudly in one’s beer, Con, remember that Labor also stepped in to protect bank shareholders’ interests _rapidly._

    Safe as houses. Safe as banks. OK, bears, hit me: Ten ‘thumbs down’, plz.
    Make this one the record!~ :)

    Biker Pete
    April 5, 2010
    Reply
  6. Biker I know the bank has title over the property when you take out a mortgage, this is nothing new. What I did not think about before was the situation where the bank will lend more against a house than it’s own stock..that is an interesting twist.

    Anyway the banks know that holding the title over a property does not always save the day, they just must reckon that in Oz so far, the risks in residential property have been relatively low in regards to defaults on owner-occupier loans.

    Greg Atkinson
    April 5, 2010
    Reply
  7. Greg: “…the risks in residential property have been relatively low in regards to defaults on owner-occupier loans…”

    Nope, that CAN’T be it, Greg. Everything I read here says property is _very_ high risk… . ;)

    Biker Pete
    April 5, 2010
    Reply
  8. No surprise bank shares are riskier than the underlying physical asset – property. After all, equity is the most-at-risk part of bank capital – tier 1. However, banks deposits are less risky than property and banks will probably lend you 100% against your term deposit with another bank (however silly such a transaction may be). Nothing new.

    But I get the feeling that some mark-to-market rules for banks make them perpetuate any asset bubble. Say I ran an Australian bank which has some business loans and some home loans. Assuming even that all borrowers only pay interest, if I see that homes prices are rising I would conclude that my home loan portfolio is becoming safer – its LVR reducing. I would then want to lend more to this sector, and less to the riskier business sector; I may even be compelled to do so by prudential regulators or internal risk management committee.
    If all banks behave the same way with respect to these risk management rules, you will see simultaneous increase in lending to the same sector, so the prices rise further and the loans are deemed even more secure, continuing the cycle. And yes, people who struggle with repayments can always sell so default rate is low.
    So, lead by mark-to-market rules and regulations which were meant to limit the risks, all the banks would continue to lend for the same asset class even if their CEOs/CFOs believe this is imprudent, until the default rate rise, or they get some other clear signal.
    Could this be the case with the current housing situation?

    Reply
  9. Yep all is well in la la land…

    http://www.heraldsun.com.au/money/money-matters/debt-stress-on-the-rise-again-survey/story-fn312ws8-1225850204852

    I mean this could not possibly have impact on people.. even if rates go up, I mean everyone has spare cash in_offsets_ so the coming rate rises won’t matter….

    Stillgotshoeson
    April 6, 2010
    Reply
  10. from the heraldsun..

    Even after today’s rate rise, home buyers are still saving about $500 a month on repayments compared to September 2008.

    So expect rises of at least enough to bring it back to the same level and I think most likely higher… in the order of $700 per month more on the “average” 300k mortgage that they like to quote. Higher than the average mortgage owners look at monthly payments increasing by $1000+ a month over the next 18 months…

    and BP.. that’s another rate rise. still 8 months left to get my 4 or 5 for the year ;-)

    Offset accounts will save them from the rate rises…. if they have spare cash/capacity.

    Raise the rental fee.. $200pw.. good luck with that. Investors still have to make the payments during the year before than can claim the loss…

    Rates on consumer credit funds are going up as well.. It is not just mortgages many are paying off.

    Stillgotshoeson
    April 6, 2010
    Reply
  11. SV: “…banks will probably lend you 100% against your term deposit…”
    And much moreso if your offset is with their own bank… .

    Possession is nine-tenths of the law… the banks hold title… they effectively possess the property. Con’s example cited the ANZ, whose shares fell to around $12.40 during the stockmarket crash. Compare that to the very temporary fall in property values Australia-wide… . ;)

    Shoes: “everyone has spare cash in_offsets_ so the coming rate rises won’t matter…. ”

    You’re right, Shoes. Today’s rise will see property fall by 40%… and Steve Keen will be spared his humiliating ‘you-can’t-read-my-T-shirt’-trek from Canberra to Kosciuscko! That’s a shame, as we were keen to follow that day-by-day sporting event… . And, as landlords’ costs have risen, rents will fall. It’s a bear’s dream come true… . :)

    Biker Pete
    April 6, 2010
    Reply
  12. Mortgage rates peaked at an average of 9.36 per cent in September 2008 and had reached 8.57 per cent when the Coalition left office in late 2007.

    The good times are back… WA is booming on high priced resources to our Asian friends.. the GFC put a dent in it last time.. the world is recovering all is good, it can only mean we are on the up and up.. let the good times roll and the interest rates rise because of it…

    or

    the exact opposite happens and our Asian neighbours stop buying our expensive resources again.. because they fall over and have their own little AFC… Won’t that be a bit of a bummer for some people big on WA real estate.. and the flow on effect to the eastern side of Australia and the Governments tax revenues..

    I see a camel with a lot of straw on it’s back.. just a little bit more should break it…

    Stillgotshoeson
    April 7, 2010
    Reply
  13. SV,

    you are making the incorrect assumption that australian banks have to mark to market.

    They don’t.

    There are many ways to avoid a correct M2M and the banks use them very well….especially when the asset values fall.

    Reply
  14. A little quiz for my fellow Reckoners. How high do y’all think that interest rates will rise to when the brown stuff hits the fan? My guess is 20%. What do you all think?

    Reply
  15. I think interest rates will rise but not that high Chris, probably around 12-14%. The government will no doubt start to throw money at this problem via the FHOG and other devices which will just result in more government debt which will put further pressure on rates.

    Anyway, regardless of interest rates it will be unemployment (or underemployment) where the real pain will be felt and as the US is finding, there is not a lot you can do (apart from creating useless jobs, digging holes and filling them again) to push that up in a meaningful way when things are shagged.

    All of these factors will push the share market down savaging superannuation to the point where the government will step in, pronounce in a large voice what an incompetent bunch of plonkers and thieves the super funds are and offer people a nice alternative of scooping up all those accounts and substituting them for a larger government pension, all the while assuring them that this will eliminate a large chunk of government debt which will in turn drop interest rates. Problem solved!

    Reply
  16. Chris: “A little quiz for my fellow Reckoners. How high do y’all think that interest rates will rise to when the brown stuff hits the fan? My guess is 20%. What do you all think?”

    Well, let’s see what that noted economist and navel-gazer Mr Steven Keen predicted they’d be… . Now, was it 22%, 20%, 18%, or 16%? ;)

    Biker Pete
    April 7, 2010
    Reply
  17. Shoes: “I see a camel with a lot of straw on it’s back.. just a little bit more should break it… ”

    Yes, I’ve gotta admit everything else you’ve foreseen has come to pass, Shoes. (Quick, hide that camel… !!~ :) )

    Biker Pete
    April 7, 2010
    Reply
  18. How high do I think interest rates will go… mortgage or Reserve Rate?

    Mortgage rates.. we will start to see an increase in houses for sale and a decrease in auction clearance rates above 10% on the mortgage rates..
    If our northern hemisphere brothers go into double dip recession we will get a small reprieve, however expect higher rates on the other side of that.. maybe 15%.. I don’t think 20%..

    We can not just go by our domestic economy… we are in a global market and global influences will effect were we go..

    I have posted before that I am expecting 13.5%.. time frame, less than 5 years

    Stillgotshoeson
    April 7, 2010
    Reply
  19. Don, they have in mind mandating annuities and using “4 pillars logic”.

    But lets cut to the chase rather than muck around with the instruments. Some sad little liberal fascist creature plucked the “4 pillars” nom de plume as a take on “The Four Horsemen” of the Apocalypse. Those that are cast as the forces of man’s destruction in chapter 5 of the Book of Revelation. (where are you when we need you watcher 7 as our worst sorts stake claims to having been anointed by God).

    Australian media & bankster economists are now so conditioned to Paul Keating’s “levers” that this ruinous product of socialist logic is proliferating even deeper into the backbone of our wobbly state. And when you rise to eyeball them they play the “economies are all a pantomine anyway” card and give you a little lecture of how services economies playing penny lane tunes to create discretionary markets of purchases and services are the only way to sustain near full employment and “meaningfull work”. Never mind the debt fuel while there are inflationist central bankers or asset rich mugs with too few guns still supplying it.

    Playing “4 pillars logic” means them laying plans for a consolidated super industry consisting of a cabal of a few industry funds and private lackey’s (that will undoubtably scratch the masters backs by providing ex treasury and reserve banker officials golden parachute board seats). You see the beginnings in the industry computer platform idea for super where surely they will be able to push one button to “mark to fantasy” all the assets across the industry. Then when asset values hit the fan they intend to do just what they did with the 4 pillar banks and play extend and pretend until fake impetus starts the party again and reinflation deals with the problem.

    The problem is that the logic has the same flaws as all socialist economic models. It remains a closed loop construct that ignores externals and risk pricing (access to & price of foreign debt). So in response Australia hitches itself to the anglo bankster world because the little Aussie bleeder Fabian society think that their world government institutions and global bankster hegemony will always look after their little mates because we have leverage over China and India and we have a claim (albeit spurious) to a geostrategic regional base. So Australia is “4 pillars safe” and employs our gangster run regulatory & accounting agencies to the single cause. We have an economy that they believe can b/s it’s way through any asset crisis and doesn’t have to adjust. But when they get the big external debt call they’ve got nothing. There is no plan B with ticket clipping gangster socialism and no recovery.

    But on a current account deficit basis the collateral calls are happening all the time now …. its called foreign investment over predominantly export earning assets. The money raised from offshore bond markets in the first 4 months dropped from $50b to $20b year over year despite the sovereign guarantees which have now expired. And this money is not a lump of cash from which the beneficiary is required to simply pay interest and principal until settled. It has to be settled at each intermediate term and replaced with new borrowing. And even that smaller amount of money we are getting to support local asset prices has terms that have shortened from 7-8 years av down to 3 point something last time I checked.

    And if many of you think China has saved us, why not try to explain your logic to us in terms of the trade surplus or the current account surplus? But I will save you the trouble and call that you can’t.

    Your logic’s only hope is the wishfull forward combination of terms of trade and volume projections. On the matter of price terms the western press says the forward negotiated, and now short term ore contracts, of the majors are moving toward a bull steepening spot market (it too in trash Chinese excess USD paper reserve terms) but they can equally be read as the majors not being able to lock in at top of the market prices. I won’t labour where I am taking a pasting for closing long positions on ores but it is only 0-30 your way in the first game.

    Reply
  20. Don, Shoes: in your view, why would the mortgage interest rate will peak at around 13% level? Why not lower/higher?
    Prozak: as I learned today from Greg Hoffman’s article at SMH, banks don’t M2M loans; my assumption was incorrect. Apparently the home loans are deemed safer, because historically they were and the banks only need to have 30-50% of the reserves for home loans comparing to business; gives them higher return on shareholder capital. Still basing the risk assessment purely on history does not seem prudent.

    Reply
  21. SV I think around 13% is as high as the domestic property market can handle based on
    consumer credit and mortgage commitments. I expect more people to start to go under after 10% but we will need to see a few more % on that before over commited investors and home buyers capitulate.. rates will then come down.

    I don’t forsee a period of hyper inflation in the near term, not out of the question.. I just see it as less of a threat than the corrections in the stock markets and real estate markets that are due. China, overseas borrowings banks need to refinance (at higher levels) will keep upward pressure on the local interest rates for a bit longer yet.

    Stillgotshoeson
    April 7, 2010
    Reply
  22. But what would drive them to 10%+ in the first place?

    Reply
  23. Q: “Well, let’s see what that noted economist and navel-gazer Mr Steven Keen predicted they’d be… . Now, was it 22%, 20%, 18%, or 16%?”

    A: Publicly forecasting disaster for the Australian property market, Steve Keen predicted interest rates of 0%.

    Amusing then, to see our fellow eekonomists, above, predicting 10 – 20% in the case of an Australian property crash. Heavens!~ Could Keen be _wrong_?!! Nah! ;)

    Biker Pete
    April 7, 2010
    Reply
  24. Comment by SV on 7 April 2010:

    But what would drive them to 10%+ in the first place?

    Comment by Stillgotshoeson on 7 April 2010:

    China, overseas borrowings banks need to refinance (at higher levels) will keep upward pressure on the local interest rates for a
    bit longer yet.

    Think that covered it…

    Comment by Biker Pete on 7 April 2010:

    Q: “Well, let’s see what that noted economist and navel-gazer Mr Steven Keen predicted they’d be… . Now, was it 22%, 20%, 18%, or 16%?”

    A: Publicly forecasting disaster for the Australian property market, Steve Keen predicted interest rates of 0%.

    Amusing then, to see our fellow eekonomists, above, predicting 10 – 20% in the case of an Australian property crash. Heavens!~ Could Keen be _wrong_?!! Nah! ;)

    That comes AFTER…. ;)

    Stillgotshoeson
    April 7, 2010
    Reply
  25. 20% are YOU SERIOUS????

    Reply
  26. Comment by chris on 7 April 2010:

    A little quiz for my fellow Reckoners. How high do y’all think that interest rates will rise to when the brown stuff hits the fan? My guess is 20%. What do you all think?

    Biker Pete
    April 7, 2010
    Reply
  27. Shoes: “SV I think around 13% is as high as the domestic property market can handle based on consumer credit and mortgage commitments. I expect more people to start to go under after 10%… rates will then come down….”

    …to 0%… ?

    Loonytoons! :)

    Biker Pete
    April 7, 2010
    Reply
  28. I don’t think we will see 0% mortgage rates… even if Reserve sets it’s rates at 0 mortgage rates will still be around 5%..

    US economy is shot, US housing market is shot.. US interest Fed rates are.25% mortgage rates are on average…. 5.5%

    There is a minimum and 0 is not it…

    Stillgotshoeson
    April 7, 2010
    Reply
  29. Comment by Steve on 7 April 2010:

    20% are YOU SERIOUS????

    less than a decade after the crash in the 70’s US had interest rates of 18%… we got them here after that… many blame Keating, but that tsunami swept across the pacific too..

    I don’t wish too see that, I don’t think we will see that but don’t think for a minute that it is not possible to happen again or worse…

    By all means buy a house now if you are going to live in it for 30 years.. the message is and always has been.. do not over commit on debt..
    People that bought houses and or property in 1970 have gone through “corrections”
    If they were not over commited and did not panic they have done OK.
    Buy a house or stocks tomorrow and there is another correction or 3 in the next 40 years, if your not over commited and don’t panic you will probably do ok as well.. If circumstances mean you can not service your debts and you need to sell in a correction that is when you lose..
    A 700k share portfolio loses 50% tomorrow and on paper is worth 350k.. is still nothing lost until it is sold and the losses go from paper to fact.. 700k portfolio that drops to 350k tomorrow and is held because financial situation meant it was needed to be sold could be worth 2.8 million in 40 years… swap share portfolio for property and the same argument can be used.. it is the debt and over commitment that is the problem not the correction.. the growth we have had has been fueled by debt… an overcommitment to debt first in the private sector and now the government.

    Stillgotshoeson
    April 7, 2010
    Reply
  30. Hello my feathered friends. It sure is fascinating trying to figure out whether interest rates will go up to 10- 20% or down to zero.

    Here is a cool graph that I found that shows what interest rates in Australia have been since 1959 til 2009:

    http://www.loansense.com.au/historical-rates.html

    My main question is: if interest rates went up to 17% in te 1990’s when it wasn’t even a global financial crisis, but just a little bitty downturn, then dont y’all think that it’s quite reasonable to assume that in a full blown worldwide financial crisis, it could go up a tiny 2% more than that (which would make it 20%) What do y’all think?

    Reply
  31. Chris,

    You need to examine the reasons for the 17% rates in the 90’s.

    I don’t think interest rates will get anywhere near 20%…… unless we are running at 15% inflation.

    Without considerable inflation a further 5% will stop the property market dead…….

    of course the rascally government will do anything to trick the common Joe that everything is ok….including massive debasement of currency (inflation) to support nominal asset values…….

    Reply
  32. Yes that is true what you said- the reasons that rates went to 17% in the 190s must be examined. What were the reasons that it got to 17% in the 1990’s anyway? I was only a teenager back then so I didn’t study that stuff back then like I do now. Thank you for your time

    Reply
  33. My understanding the reasons were massive deficits run by the Keating government for a number of years. Keating wanted to follow the lead of US, Singapore etc and create a “smart nation”. Did not work (does this mean we are hopeless?).

    This created huge inflation as the government borrowed heavily to finance its programs, but there was no result – stagflation, to be precise. So the RBA had to put up rates.

    To all who are confused about 18% and 0% – what can happen is that rates will continue to climb to curb business borrowing, up to a point where they crush housing. Then the RBA will be forced to drop them to zero. Looks implausible, but stranger things indeed have happened.

    Reply
  34. Chris, following your graph you might note how interest rates were suppressed vs inflation in the 70’s via state control. That only dried up credit supply for business and worsened already protectionism created poor productivity. At the same time the wage price spiral fire was lit by a combination of Whitlam public servant salary largess, big government, and the oil shock.

    In the US they had Mr Burns (every bit as nasty as Greenspan) and the Vietnam war debt and the oil shock and they made yank tanks that noone else in the world wanted. Interest rates were also artificially suppressed vs inflation until Volcker did his thing but they also decided to do the Reagan trickle down economy led by the idea that feeding your GOP military industrial mates massive buckets of money would create a trickle down services economy that would mask what you had to do in killing off the productivity challenged and irreparable brown belt economy. They had a few totems like that which saved Iacoca’s Chrysler so the killing of the US owned auto industry could be put off for another day and another bail out. At the end of it and the Guld War the US was under a massive sovereign debt load (then along came Clinton/Ruben/Summers with massive private funny money debt that dwarfed the sovereign debt and allowed them to ticket clip taxes suffiocient to get the sovereign debt back under control whenever USD “risk currency creationism / imperialism” wasn’t blowing up asset markets in Mexico, Latin America, Russia or whereever they could run their hot money games.

    But back to your question. World price of credit and US sovereign debt abuse was a big part of the interest rate spike in the 80’s. You can rate Noam Chomsky lowly like me but still read his facts and figures in Year 501 to revisit the failed process that was the Reagan 80’s.

    Reply
  35. Hello, and thanks heaps to y’all for expalining to me why interest rates got t0 17% in the 1990’s, I really appreciate it. I think then that we all should prepare ourselves so that we are right no matter which way interest goes: up to 10- 20& or down to zero. As they say in the boy scouts “Be prepared!” Or another good saying I’ve heard: “Failing to prepare is preparing to fail”

    Reply
  36. In addition we also used to care about our currency and felt it needed protecting.

    I do recall little johnny Howard taunting keating about the Aussie going down to 70c……. of course he had no such taunts when in his reign it fell to 48c

    Reply
  37. Prozac, God forbid that I should say anything that might be read to defend the lazy little Johnny but Keating’s banana republic rate actually hit 60 in the 80’s and it was only to bring it down to the TWI, same as under Howard it only hit 0.48 to touch the TWI line that it should be tracking too. All the rest of the above the TWI line is leverage engineering / carry. The 1990’s being the Japanese housewives during their no interest local savings deflation, the norties for mine was Wall St augmented.

    The RBA analysed the 2008 exchange drop and variously blamed Japanese housewives on the AUD-Yen cross and AU balance sheet owners of foreign assets that unwound hedging positions. This says the RBA is either stupid or is frightened to publicly admit that US originated USD hyper leverage and risk to us of deleverage. All we need do is look when the deleverage event hit in the US and what immediately happened to the AUD it doesn’t matter whether it is hedges called or US punters trading in the AUD-YEN cross. This remains the largest ‘flationary threat to our economy (pick which one by how we react). Note how much more RBA intervention we had been doing but note too how they limit the info on what we have done).

    I won’t URL them but here is the title of two RBA docs of interest

    1. The Exchange Rate and the Reserve Bank’s Role in the Foreign Exchange Market

    2. Reserve Bank Bulletin – May 2009
    Fundamentals, Portfolio Adjustments and the Australian Dollar1

    I will URL a read below that can be related to the AUD and housing and the Yuan/RMB. It needs to be read for its deficiencies as well as its strengths. This guy sees currency only through the prism of debt and ignores any basis of savings (outside recycling of Chinese reserves) as a fundamental alongside trade weighted measurements. Being written in 2007 adds to the ability to read it more usefully today.

    http://www.docstoc.com/docs/30602953/The-Forex-Trading-Course-A-Self-Stud/

    Now we have Timmy getting an exchange rate deal with the Chinese there will be many repercussions. Commodity fixed price deals already done mean repercussions. With Chinese trade 60% in Asia means repercussions (especially in light of China now running as a whole a trade deficit and more especially in their region where partner currencies are also fixed to the USD but recently being allowed to semi float against the Yuan). Traditional logic would have me read any significant RMB appreciation as a plus to the AUD-USD (as indicated in this paper) but I am not so sure …. This USD-Yuan-RMB deal has complex ramifications and like the paper says the assymmetry in the availability of information makes trading a gamble. I keep being drawn back to thinking about those commodity re-exports to Japan, the depreciation of the Chinese USD reserves and USTs, the commodity price-inflation ramifications, and whether Timmy is just making a re-inflationary trigger he can blame on someone else.

    So I have no trading position here, just a certain foreboding because they always screw up.

    Reply
  38. http://www.theage.com.au/business/property/property-boom-spurs-spending-spree-20100408-rv3i.html

    “After taking out bigger loans against their property for much of the past decade, US home owners were badly caught out in the belief that house prices would continue rising.
    However, the collapse of the housing market there left many with mortgages that were substantially higher than the value of their homes.
    Rather than paying down debt when interest rates were low, households have been taking on more debt.”

    No this can’t possibly happen here in Australia.. we are different….. Houses here will never drop in value.. We Australians have not taken on more debt
    while interest rates were low.. 50% of your take home pay to service a loan does not impose financial stress on first home buyers, they all have offsets with lots of cash just sitting there
    so the coming rate rises don’t effect them.. clever first home buyers.. what was I thinking all this time..

    @Ross.. Interest rates in the US start to rise our dollar against the USD will fall.. I think it will stay higher than the historical average of 75/77 but will fall from it’s 90’s+ position maybe 80 +/- 2 (initial drop may see a sub 70 dollar but it would recover.. unless China falls over then gloves are off on our dollar)
    A lot of money that is parked here for the higher rates will disappear from the country pretty quickly though.. hope our financial instituions have the liquidity for that sudden call.

    Stillgotshoeson
    April 9, 2010
    Reply
  39. Shoes, off a 1970 start line the reversion to a 1:1 with the TWI would now be 0.72 to the USD. This is the same line that the bottoms under Keating and Howard touched but remembering too that the TWI goes to hell & back on the variable being the terms of trade.

    Look on the TWI AUD graph here and compare Oct 08 to Keating’s 86 banana republic.

    http://www.rba.gov.au/mkt-operations/foreign-exchg-mkt.html

    I reckon any major deleveraging event would see us touch that bottom almost immediately like Oct 08. But interest rate and currency swaps then become little bombs and wall st and our banks has yet another insolvency problem.

    Reply
  40. Shoes: “Rather than paying down debt when interest rates were low, households have been taking on more debt.”

    Yes, you’ve already related one such case in intimate detail, Shoes.

    I’m certain that there are Aussies using their homes as ATMs. It’s not being promoted by banks to the same extent as it was/still is in the UK. When you see billboards in England and Scotland pushing this idiocy to folk whose homes are ludicrously overpriced, you stop feeling any empathy for anyone gullible enough to mortgage themselves into oblivion; or for bankers stuck with the results.

    DR contends that the same practices we observed first-hand in the UK in 2005 and 2009 were rife in the US. Combine that with low-doc / no-doc /no job no income liar loans, you have a recipe for disaster. We can’t see the same ‘intitutionalised’ practices being flogged here.

    I suspect a better predictor for mortgage stress here would be credit card abuse and Aussies’ need to ‘own’ the latest model you-beaut-gee-whizz vehicle. Easier to finance the latter independently than remortgage… but there are some smarties who would argue that lower home lending rates are the way to go… .

    Reply
  41. Ross,

    although I did take a little dig at little johnny howard, my point was that howard actually did the right thing….

    He let the currency do what it wanted…. it wanted to go to 48c.

    it’s just that he only woke up to this fact after taunting keating.

    Back in the keating era there was a desire to protect the AUD.

    I dunno whether the RBA was doing anything recently – i know they “provided liquidity”….

    Reply
  42. That was a great article shoes, when I went and read the article in the age, I freaked out that Aussies are still using their houses as ATM’s. At first I thought that the article must have been an old article from 2007 or something when I read it. I nearly choked on my tea when I saw the date at the top of the article- that it is in fact a currant article from now. When oh when will the masses learn not to borrow and spend against their houses!

    Reply
  43. Q.When oh when will the masses learn not to borrow and spend against their houses!
    A. After they have suffered a negative consequence of spending money they dont have eg economic slavery. And then later their descendents who haven’t that experience will make the same mistake. Which is why a free market despite the desireability of one will never exist in the current paradigm. People have pride which is not a problem but the way they serve their pride can be (ie keeping up with Jones’). So we claim victim status under the tyranny of banks and govs however we give them their power in many ways through our own poor choices.

    Reply
  44. Exactly!

    Reply
  45. Great comment Lachlan

    Reply

Leave a Reply

Letters will be edited for clarity, punctuation, spelling and length. Abusive or off-topic comments will not be posted. We will not post all comments.
If you would prefer to email the editor, you can do so by sending an email to letters@dailyreckoning.com.au