Comments on: The Mother of All Housing Booms

By: Joe

Joe — Sat, 05 Jul 2008 04:49:14 +0000

I am a recent recruit to the Daily Reckoning having had it recommended to me by a colleague.
I appreciate the frank nature of the discussions and a clear attempt to peer through the fog of economic (mis)-information.
I believe we experienced the pricking of an asset bubble last year. I believe that all assets are being re-evaluated in the global economy, and just as in the U.S, U.K, and Europe, there will be a crisis in housing here in Australia too. It is inevitable as the valuation ratios to earnings are unsustainable. When it starts, it will accelerate rapidly, the reason being too many people are leveraged on property so much that with declining losses (to which negative gearing can no longer protect them), there will be fire sales driving prices down. My colleague has sensed this, and has sold two of his three rentals in recent months (we deduced the pending crash last year and he has been setting plans in motion to insulate his assets from a crash). The third was due for sale last month, but, the buyer has pulled out, and there is no prospect of a new buyer on the horizons. This is in a popular Melbourne suburb a typical catchment for lower value buyers. The market has already turned, and it is only going to worsen.
As for banking in Australia. I have shares in the top 4 banks and expect to lose more on these in the short term. I see them as long term buys/accumilates, but, I fully anticipate that their prices will slide more than they have todate. I plan to regularily accumilate down the slide to profit on the ride back.
Currently the banks are over-valued because they have little in the way of assets that are not also, already being written down. In essence they are so indebted they are now making money to service money, they are in effect money pipelines, where as previously they were money repositories.
I myself have not yet been in Australia 3 years, but, when my residency status is settled on a permanent basis, will be looking for the bottom in the housing market in order to buy in using negative gearing to pick up those buy to leters in the market looking to get out because they can not stand the losses. I expect this to be around the end of 2009 to mid 2010. Commercial Bank rates will peak around 12% next year if CPI can stay below 6% .. If not (and there is every possiblity it will not with price pressures abound everywhere) then I worry at where the peak will be.
The U.S is basically stuffed on all fronts. It has taken the off-shoring dividend reaped over the last 10 years and has spent it. Now there are no more price reducing affects on their economy so off-shore inflation now translates to on-shore inflation, and they are doomed. See the dollar dive, a push to using the Euro for Oil, and global panick as the driver of World demand takes a long over-due nap.

By: Robert

Robert — Fri, 04 Jul 2008 10:58:14 +0000

This is interesting stuff, and beyond my simple capabilites, real estate to me is supply and demand, and if you cant afford it you wont buy it especially with the credit card payments for petrol.
To the long term investor what about all the rural drought ridden properties, this little bundle looks like it is close to collapse.
Especially with the insipid rescue package for the murray darling. There will be a lot of walk offs me thinks over the next 12 months.
Add to that the margin calls on lower share prices and the tanking of real estate values, with underwater loans I am glad I am not a banker.

By: Ross

Ross — Fri, 04 Jul 2008 07:33:27 +0000

Hey Justin ... I will defer on the mechanisms and watch for other comments with interest.

The Reserve might tell us under Chatham House rules that they didn't have any choice but to do what they have done, the foreign RMBS hit term and the foreigners wouldn't recycle it, the Reserve are also getting ready for the foreign bank local branches to pull the pin on the hot money that the local corporates have been swathed in.

What you are on to however is the lie is that it won't have any affect and what I was contending is that it is trying to hold out the tide and will only make things far worse.

The Reserve knows that in this new economy built on urban discretionary services, real estate & finance that going backwards will be ugly and they fear being hung drawn and quartered on George St.

The kiwis are the one's I worry about as standing first in line but if you look at BIS comments on hot money provided by foreign local branches and work out that Australian banks stand behind most of the kiwi's bubble you shiver even more (the big european's appear to have well and truly pulled the pin on NZ).

By: justin

justin — Fri, 04 Jul 2008 06:24:34 +0000

Hey Ross, you seem to know a thing or two. What I'd like to know is how does the Reserve Bank lifting its target rate (selling securities) tighten credit conditions, when they are, it seems to me, loosening credit by the use of repo's, taking all these CD's, bank bills, RMBS's and whatever else as collateral for cash loans? As far as I can tell the Reserve's open market operations (targeting the cash rate) work in the same way as any of the 'special' loan facilities i.e. they buy, sell or loan securities. Furthermore, the only reason I can see that the Reserve Bank lifted its target rate was because it would have required massive injections of 'liquidity' to keep the cash rate at the target rate, a highly inflationary scenario? But doesn't that make the Reserve's control of interest rates superfluous? they are just following the cash rate.

By: Ross

Ross — Fri, 04 Jul 2008 05:10:54 +0000

Aust & NZ real estate is driven by asset inflationary expectations. Land supply restrictions (incl infrastructure taxes) & Howard discovered demand boosts (immigration) are just toppings. The bankers understand it, the state government stamp duty junkies understand it, and Joe average has until now reckoned rightly that the big end of town won't let him down.

Now that they can't pour the liquidity into the pot from foreign funny money you get all these desperado bankers trolling our reserve bank's reserves, future SWF fund and the latest is the ACTU & ANZ spruiking alliance to access regular super for RMBS after Swan finally has called time on the Fannie Mae proposals. This is an ACTU doing a Hawke style rod up to the bankers for them to suck on.

Our bank's gearing levels are double the OECD but our chief soviet Stephens still won't force the banks to seek new capital or cut dividends. What world does he and the wombat watcher live in?

The reserve bank & treasury are putting their fingers into a dyke of rational & inevitable asset deflation and when it cracks we are "freaking doomed".

40% of our exports is made up by just 5 items. Services and manufactures exports have been in deep decline for a long time while merchandise imports are still rising at 8-10% despite interest rates boosted so many times. All this before the future of our terms of trade is measured in likely real world terms rather than headline contract prices. After these turn the dollar will tank and imports prices will go through the roof to banana republic levels until demand and asset prices are smashed.