Interest Rates and Inflation

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It was four years ago that the first house on my street sold for over a million dollars. It was a stunning moment but also a stunning house. It sold for $1.2 million and in the context of the times was pretty well worth what it cost to buy.

That same house sold again this April. Once again the entire neighbourhood went through the house to have a look and while it had been kept up, nothing extra had been added. It was the same, except that this time the property sold for $1.7 million. In four years property prices, at least so far as this particular property was concerned, had risen by forty percent.

There has subsequently been quite a bit of action in selling houses on our street but the most astonishing moment was last week. This was a house that had not been touched for fifty years. To say that it had “original features” only underscores what a derelict mess it was.

And the price: it went for over $1.4 million with four bidders going beyond the $1.2 million level and two going above 1.4.

That this totally astonished all of us in the street is to put our reaction as mildly as possible. That it depressed my son who was trying to think how he would ever be able to buy a house for himself was perfectly understandable. This is an economy with property prices gone mad.

The man who bought the house had just sold up in a more expensive suburb and was locating down, pocketing a net million along the way, although probably half of that will be sunk into renovations. The seller has netted for himself more than a million relative to the price he paid, and was for him on a property he had rented out and not lived in himself. This is, for him, all money in the bank.

And that’s the point. It is all money in the bank. There is, according to the press, a difference of opinion between Treasury and the Reserve Bank over interest rates and their proper direction. Treasury cannot see what the rush to raise rates is all about. The economy has barely touched bottom, assuming that it even has. So far as Treasury is concerned, it is madness to be raising rates already when recovery has not truly even begun.

But then there’s the RBA. What it sees are house prices rising again and an inflation already becoming entrenched. While the “headline” movement in the CPI was a quite moderate 1.3% across the year, the “underlying” rate the Bank relies on rose by 3.8%, well outside its band of 2-3% per annum over the course of the cycle. And even the headline measure showed an increase of 1.0% for the quarter which of itself is worry enough.

Inflation and What to Do About It

That the economy, particularly the private sector, is still generally moribund is likely. That there is a long way to go before we return to the kinds of momentum we would prefer seems about right. That raising rates right now will slow the economy and delay a return to stronger levels of private sector activity seems almost unanswerable. Yet, with all this liquidity sloshing around, what is a central bank to do?

What makes it worse is that the very aim of the government seems to be to push the private sector out of the way. This is not like an inadvertent error by the Prime Minister to have raised the level of public spending in a panic and therefore to have crowded the private sector out. This seems more deliberate than that, and is in keeping with the notions put forward by the PM in his economically challenged article published in The Monthly at the start of the year in February. At the time, he wrote:

“The magnitude of the crisis and its impact across the world means that minor tweakings of long-established orthodoxies will not do. Two unassailable truths have already been established: that financial markets are not always self-correcting or self-regulating, and that government (nationally and internationally) can never abdicate responsibility for maintaining economic stability. These two truths in themselves destroy new-liberalism’s claims to any continuing ideological legitimacy, because they remove the foundations on which the entire neo-liberal system is constructed.”

Neo-liberalism, you see, means leaving production decisions to the market to be made by profit-making firms which are trying to work out what consumers would like to buy. This the Prime Minister will not permit given these apparently “unassailable truths”. It is his judgement that is going to matter and come what may, he is determined to have the government absorb our national savings for his own purposes rather than for our own.

In a depressing assessment reported in The Australian this week we were told that “the nation’s key economic advisory body [the Productivity Commission] says the government has not ‘universally applied’ its own promise to subject all major infrastructure spending to detailed and transparent cost-benefit analysis.” Listed were $66 billion worth of projects that the government does not know, and apparently does not care, whether the money being spent will be repaid in revenues ultimately earned.

I therefore want the RBA to raise rates and keep on raising rates because that may be the only way we are finally going to convince the Prime Minister there are costs to the approach he is taking. Whether raising rates will prevent inflation from taking off is hard to say. It might put a brake on wage movements which are the main feedstock of the inflation process, but governments are the worst industrial relations negotiators so I wouldn’t count on them.

But what I am looking for is recognition within the government that they cannot keep pushing their own expenditures upward, crowd out the private sector, and hope to generate real growth. Is there no one within the Government who actually does understand how prosperity comes about? From how they have so far behaved, it really doesn’t look that way from here.

The Government is counting on your ignorance to get away with literally destroying billions of dollars of our wealth. If these projects do not repay their costs, they will just make us poorer.

But they will create jobs. And they will lead to a rise in the recorded level of GDP. That other jobs in the private sector will not be created, and that we will actually end up with a lower standard of living because of this tremendous level of public waste, is just how it is.

I now meet people all the time who tell me we had to do something about the Global Financial Crisis. OK I say. Pay the higher interest rates and taxes and be done with it. Such nobility I think! Such self sacrifice! Such idiocy!

These latest expenditures are not being done in the heat of a crisis. They are a matter of deliberate policy. That we let governments direct so much of our resource base to ends of their own choosing is unfortunate. But if we as a community do not know any better, that is just how it is going to be.

Dr. Steven Kates
for The Daily Reckoning Australia

Dr. Steven Kates

Dr. Steven Kates

Dr. Steve Kates is a Senior Lecturer at the School of Economics, Finance and Marketing, RMIT University. Dr. Kates spent a quarter century as the Chief Economist for the Australian Chamber of Commerce and Industry. Most of his research has been into macroeconomic policy, industrial relations and the history of economic thought. His most extensive area of expertise is in the classical propositions surrounding Say’s Law, on which he has written many papers as well as two books: Say’s Law and the Keynesian Revolution (1998) and Two Hundred Years of Say’s Law (2003) and, with John Cunningham Wood as the general editor, put together a five volume set, Critical Readings on Jean-Baptiste Say. The lead article in the March 2009 issue of Quadrant dealt with “The Dangerous Return of Keynesian Economics” which looks at the importance of Say’s Law in the development of coherent macroeconomic policies.
Dr. Steven Kates

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Comments

  1. All true words and observations from my viewpoint in the economy (BEcon). I happen to live in the treasurers electorate and have emailed him a number of times to let him know, not everyone agrees with using taxpayers funds to support the broken status quo. All I have received is policy statements and opinion. Unfortunately as the government in power dealing with an issue too complex for most people to understand, (let alone want to understand), they can get away with pretty much anything. The newspapers are too busy keeping their property and finance advertising revenue streams happy (their last crutch) to want to dig into something so controversial and the TV just serves up populous trash and self congratualtory feel good content to keep the mortgaged class (i.e. serfs) distracted and ignorant. Hoorah for the daily reckoning though, a beacon of clarity in a world gone ignorant. Have you thought about starting a polictical party? I’ll be in!

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  2. One possible future scenario is that house prices will never correct downwards, but that the shortage of houses for _sale_ will become such that people are forced to rent for longer and longer periods before being able to buy. The reason for this would be because of financial institutions entering the housing market and not leaving it. They are already deeply in it, of course, through mortgages, but they may decide to collect rent forever and never hand over title – in a more formal sense. There is an opportunity for them to muscle in and charge any rip off rate they desire. This might be the way “forward” for banks, making for tidy profits and healthy looking statistics. Are we all becoming serfs again?

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  3. Nice comment, Dan. I’ve watched the price of Australian housing rise and rise since the middle of the 1990s. I’ve seen – as I’m sure you have – housing prices increase by 600% in 12 years in some Melburnian suburbs. And I’ve looked at all the logical economic explanations for this momentous and protracted economic aberration. Every single piece of knowledge – logic – I have tells me that there will be a crash. ‘There simply has to be a fundamental correction’, my internal monologue exclaims.

    But you know what, my intuition – that pulsating rhythm of truth that never wavers – disagrees with my logical conclusions about the Australian housing market. I can’t explain it, but there’s something telling me that prices will not fall. Like Dr. Kates’ son, I too would like to buy a home (just one is all I desire) of my very own. So I wish – I pray – that prices would sink like a brick. But I don’t feel (not think) they will. And so I wonder whether your theory is correct; I wonder whether the banks will become the new omnipotent landlords in Australia. I also wonder whether wealthy international residential property investors (thank you Prime Minister) will make up the new Australian property elite. I hope not, but something tells me that no matter how much I hope, housing prices really have reached an artificial plateau. And the whole bloody thing brings genuine tears to my eyes.

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  4. Feel a bit the same way Paul. Logically house prices should fall, but the penchant Australians have for endenturing themselves to banks is limitless it seems. All logic points to a decline in prices; stagnant wages, tax increases, interest rate rises, decrease in the first home owners grant etc. But will it happen? There’s still some crap to flow through the system and I think things are still pretty shaky. This recovery could be based on false premises and the whole lot could fall like a house of cards. Don’t know if it will…….wish I did.

    I am going country. After living overseas I know this is still a pretty good place to live. Not going to borrow any money and just get a rural property in a regional area. Breed some ducks and chooks, grow the veges and work part-time to pay the rego and rates. No serfdom for me!!!

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  5. Wow. You can tell a market is going to turn when even the bears are giving up reasonable logic for the flawed logic of the mainstream.

    Dan: (not Denning)

    I very much appreciate your capacity for thinking laterally.
    However, banks aren’t in the real-estate business. But, I take your point that they could reconsider this position.

    Let’s think about it from their perspective – what would they get from it?

    Banks need to make profits. How much of a rental yield would be a profit?

    Assuming that most of a bank’s money is in fact sourced elsewhere/borrowed, that means they will have to pay interest on that money.

    Therefore, rents yields must be greater than interest costs + other costs.

    Let’s think about those other costs first:
    – insurance costs (for the house, the bank is the mortgagee now)
    – house maintenance costs
    – rental management costs (could be arranged internally, but will still cost money)
    – rates and water costs

    It is believed by some that these kind of costs warrant about 2.5% of a house’s yield. For arguments sake lets say 2%.

    If the interest a bank pays is at the rate of say 4% (for arguments sake), that means the total costs are about 6%. So any net rental yield above the 6% mark could possibly be considered profit.

    **Note that this does not factor in inflation. It is ‘assumed’ that interest rates will factor in inflation, but we all know that the reported levels of inflation are bogus. The banks know this. Therefore they might figure that inflation is also a hidden cost**

    Now, let’s have a look at current rental yields:

    For arguments sake, lets say a $400K home rented out at $400p/w. That is a rental yield of a smidge over 5%. The banks would be losing 1% p/a on this.

    Now, before I go on, I must mention that rent prices are related to WAGE levels. Not ability to borrow. You don’t borrow money to pay rent. If wage levels don’t increase, rents cannot sustainably increase because people won’t be able to pay them. Landlords who increase rents without this consideration are left with no tenants.

    Okay, so what kind of yield on the 400K home would the bank need to a) break even, or b) make a profit?

    a) about $65 p/w increase in rent (at 6% yield = 0% profit)
    b) about $200 p/w increase in rent (at 9% yield = 3% profit)

    I find b) interesting because that means an approximate 50% increase in rent p/w for banks to get a 3% profit.

    Now, consider some major variables:
    – interest rates are variable
    – if these loans are not being paid off, banks credit portfolios will only be able to grow. Lenders may see them as risky and not be willing to lend capital at low rates. Banks will still need to maintain adequate reserves…where will they get them from? The 3% profit? Can’t pay dividends from 3% profit.
    – rental yields may be variable (unemployment, company bankruptcies, retail issues, etc)
    – would banks renovate a house to make it yield better rents? Or would they just do basic maintenance?
    – etc

    Personally I doubt banks are interested in renting houses. Renting houses is just so much different to the standard accounting and business models that banks use. Banks expect decent profits and to be able to return significant dividends to shareholders.

    However, I am very much open to discussion on this topic, it is quite interesting. Also if anyone thinks my maths is flawed, please let me know, i’m only human :)

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  6. Not flawed, Pete – and yes it’s a brainstorm type idea. But consider a housing crash – a proper one – in Australia. Foreclosures galore and house after house falling into the banking sector’s hands with no prospect for resale in the immediate term. Banks do manage real estate on a smaller scale. Usually houses they repossessed and then rent on to employees who move around. I was just thinking they could be left holding the baby, and it might be better to lose a percent or so per annum (though not necessarily so) for one of the Big Four than to close down the bank altogether.

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  7. Err.. flawed logic of mainstream is indeed flawed logic. But your maths seems about right.

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  8. In this scenario, the bank hasn’t paid $400,000 to acquire the house.
    It has cost them the outstanding amount of the loan.
    That could be $200,000 or $300,000 or less. That should give a fatter profit margin

    Also the house is would no longer worth $400,000 if the property market has crashed so bad that its not worthwhile to sell the house. Best to calculate from the cost of acquiring it.

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  9. You are right Richo.

    Conversely, banks could also be left with even more owing on them.

    Also, perhaps some houses will not be able to be rented without work done on them (for safety purposes?)

    Other properties may not yield the such high rents.

    I take yours and Dan’s point that realising a loss of say $100K is excessive compared to realising a loss of maybe $10K per annum on rent.

    However, what is not guaranteed is that prices will significantly recover (in real terms at least). Perhaps the bank would never be able to sell the house at a profit or break-even price (again, in real terms). This means that even in the long-term, the bank will be making a revenue loss on the house (in real terms), whereby:
    – they still have the debt
    – they are still subject to interest rates changes
    – they still require some level of “reserve” to back the house (although perhaps the equity value of the house is sufficient?)
    – they rely on an increase in rent yields (typically an increase in wages) to have profit growth (again, must be in real terms)

    However, I think I may have missed something.

    The way I see banks is that they are sellers of debt. They take assets as collatarel for mortgages and larger debts, and often have no collatarel for smaller debts (except for the ability to repo your stuff). On their books they like to be in the positive, whereby their assets outweigh their liabilities. This is one reason that when assets lose value they have to some of the debt.

    I would think that if the banks decided to go into the rental business they would need to spawn a child company that could take these “assets” and their “liability” and be continually in the red. Whether anyone would insure that is another question.

    Having underperforming/negative assets goes completely against banking principles. But, I do concede that it is possible they might set up an alternative arrangement if it means the difference between survival or bankruptcy.

    A side note: consider what would happen to the rental market if there were so many extra rentals available? I guess if there was a crash there would be a lot of renters too. But potential higher unemployment could affect yields in that sense, if it came to that.

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  10. The issues that seem to be missed in my humble opinion on Australian real estate are, firstly, it’s not 1 market, but thousands, and prices rise and fall in varying degrees, based largely on what’s available to buy. Jump on realestate.com.au and the difference between suburbs of available houses for sale will show this quite clearly, particularly suburbs within 10kms of the city vs 20 kms and more out from CBD.
    Secondly, unless Aussie unemployment goes through the roof, or interest rates go through the roof, why would people need to sell and create a price crash scenario.
    Unemployment would not appear to be as gloomy a prospect as a few months ago, and can anybody see variable home loan rates of 9 to 10% in the next 2 years? I can remember 17% and prices went up.
    In years to come, when baby boomers start to flock to retirement, and don’t need the negative geared property portfolio anymore to save on tax, perhaps we will see an increase in properties for sale.
    Prices are determined by the available market, and generalising that we’ll see across the board drops of any percentage, be it 5 or 40 have proven to be wrong and will continue to be wrong.
    We may very well see 40% or more drops in some areas, but I equate it to the US myth, that when it hits the fan, investors look for save havens, and some suburbs, for any number of reasons will be seen as a save haven compared to others.
    The tricky part is determining which ones are safer.

    David (Brisvegas)
    November 5, 2009
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  11. Ralph said: “The consequence is that the government has now designated an asset class that is a rolled gold protected species…” You mean the Big Four banks, Ralph?

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  12. Couldn’t really expect much else if one had really exercised their grey matter a bit more I guess eh? So I am feeling a bit silly for not having placed nearly as much weight on it as I should have – Sheepish grin. Nevermind – I hedged my bets and the game goes on!

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  13. David,

    I’d like to respond to your post by saying that I think your perspective on the whole situation (housing prices) is naive, simplistic and, sadly, entrenched in the generalised myopic stupor that caused – and continues to propel – the housing (un)affordability crisis. First of all, of course prices differ from one suburb to the other – that kind of price differential is natural and quite typical in all economic markets. But it doesn’t mean that the Australian market is not one single market – milk prices differ significantly, but it doesn’t mean that milk, is milk, is milk. There are many common factors (e.g., government(s), taxes, culture) that help congeal the Australian property market into one huge, ugly monster.

    Second, where did you come up with the comment, ”unemployment [does] not appear to be [a] gloomy… prospect [anymore]’. You’ve been watching Today Tonight haven’t you. Look at the ABS labour market statistics carefully and check underemployment. Underemployment was almost 8% in the last quarter. That’s compared to 5.6% in 2001 (September Quarter). And have a look at the plain old unemployment rate. The seasonally adjusted unemployment rate rose from 4.4% in the 2008 September quarter to almost 6% in the previous quarter. But let’s not focus o minute, quarterly changes. The current upswing in unemployment – which began at the beginning of 2008 – is already the third-largest rise in unemployment since 1978. Only the 1987 crash and the high unemployment rate of the early 1980s was greater. Go and check it out for yourself (http://www.abs.gov.au/AUSSTATS/abs@.nsf/DetailsPage/6202.0Sep%202009?OpenDocument). The difference, however, between the last two big upswings in unemployment and these days is that today, there are no savings – just debt. Big debt. Then again, international investors (thank you, Mr. Prime Minister) may clean up the asset crumbs left over by scurrying first home buyers ruing the day they were suckered into the FHOG (ponzi scheme).

    And by the way, it is true that housing prices rose in the early 1990s despite high interest rates. I think that it occurred (in part) because the house-price-to-income multiple was very attainable for most Australian’s – there was room for upward movement in housing prices despite relatively high interest rates. And rising housing prices was a sure bet after the late 1980s stock marker crash. But the current house-price-to-income multiple is unprecedented; the smallest change (upwards) in interest rates could have people in big trouble. I’d love to see (accurate) historic mortgage default rates in Australia (one can only dream). Anyway, you go off and ‘determine which [housing markets] are safer’ and find that save [sic] haven that you’ve been prattling on about.

    Martin

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  14. Indeed, Martin. It was the foreign investors buying into Australian housing (not necessarily ageing dog-boxes in industrial suburbia, but apartments and whatever else is generic and has a predictable maintenance cycle) that made me think that if housing turns to having faceless owners in far away places, then it might represent a shift from occupiers owning their dwellings to being forever renters and not even having access to credit any more. See, it doesn’t matter how you pay someone, as long as you pay them. It can be $2000 a month in house repayments (for an ordinary house), or $500 a week in rent – it’s the same deal – title basically remains in the hands of the creditor/investor, and the renter more or less can be slugged with any or all of the fees – water rates, etc. It’s just like saying “instead of buying the house back slowly as you make repayments, only to default, lets assume you’re going to default – so just make payments and forget about the principal.”

    I know, Pete, that I’m probably hallucinating and having another one of my tangential moments (so what, it’s just a thought experiment), but in a way, banks might not have a choice – if they are forced to write off the loans of the FHBG defaulter-generation (who, because of the housing shortages, have nowhere to move), by not selling the houses they can keep the property market buoyed and thus still look like there is some kind of capital base to back up their liabilities … and perhaps make a more graceful restructuring, thus lumping the bank’s stupid mistakes on some other sucker. The trick of course is that if you can manipulate a market to remain inflated, then you (as a bank) can look rich – as long as there’s no run on the bank, or a run on the housing market. Banks are better at due diligence with housing than most individuals. They have a good knowledge of which houses are worth keeping and which are worth bulldozing … so in this scenario if you wanted to buy a house, you’d need to pay top dollar for rubbish.

    The rental market won’t necessarily become more competitive, because an equal number of people are evicted (or converted to renting the same property) as the number of dwellings converted to rentals. You can be sure they would charge what it’s worth – costs plus profit margin … and that’s a LOT more than many rents, even now.

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  15. Ralph said? Who the hell is Ralph? I don’t see a Ralph.

    Biker, stop playing silly buggers and using my name. You just seem more and more like a child every day.

    (this is regular Pete speaking about the last ‘Pete’ comment)

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  16. Dan – Hallucinating is allowed. There isn’t much that could be said about Oz property I haven’t heard said I think – So a new thought that hovers within the bounds of rationality is extremely welcome.

    The thing I keep banging my forehead against the post with the nail in it with the Steve Keen brigade is that they seem fixated on the facts that house prices are high and it is a bubble and bubbles crash so they’ll get cheap houses one day – To which I say Yeh it could pan out that way but I can see a few other possibilities and value home ownership enough that I wouldn’t risk it.

    Leastways not given that Rudd and the banks and the entire building industry and all the allied industries and state and local governments and every current Oz home owner/cum voter isn’t hoping for the same thing as you. Just my thoughts for which I fully imagine I’ll be yelled at. I must like being loathed? Hmmm … Hit me! Hit me! Harder please Master … Oh that feels SOOOO GOOD!!! :)

    And I’m a property “cub” who definitely allows for the possibility of a moderate little fall one day – There’s just no keeping them full-on Klondike tear the guts out of Oz property type grizzlies happy it would seem?

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  17. I like your response Martin.

    Dan, I also like your response. You make a good point about mortgagee’s then becoming home ‘renters’ from the bank. It would save the bank some hassle. But, it is essentially the same as those mortgage ‘holidays’ that people are taking from the banks right now. The banks seem quite unwilling to forego long-term profits, but rather letting people off the hook for paying in the short-term. The interest still adds on to the principle.

    I do think you are onto something, and perhaps this could be an extension or modification of these mortgage holidays.
    One issue being that that banks won’t be making the tidy profits they used to. But that is for them to decide and if things got bad enough, maybe it would be an option.

    A few side issues I can see though:
    – unemployment…eg, why are people behind on their repayments in the first place? Can they even pay rent? What about their other debts like credit cards, etc.

    – what happens to all the negative gearing ‘investors’ who get underwater? They won’t want to play the game anymore, because they won’t be benefiting. So the banks would have to take on those mortgages.

    – perhaps some people won’t want to rent the house they are trying to ‘buy’. For instance, lets say you bought a house in the sticks, so that you could afford it. But you’d rather live in the city. After the crash, you get the option of renting out in the sticks without actually contributing to owning the house. Wouldn’t you rather rent in the city if you are going to rent anyway?

    I’m not trying to contradict your idea, just throw in my thoughts of a few potentially opposing forces. I guess we’ll just have to wait and see what the banks actually do :)

    One final thing regarding: “The rental market won’t necessarily become more competitive, because an equal number of people are evicted…”

    My thoughts on this are that the potential for density per dwelling to change increases as people move from mortgagees to renters (assuming that some economic troubles also exist). People typically do not go 50/50 on a mortgage, but I think would be more willing to do so on a rental if it is convenient. I figure this could contribute to a minor surplus in rentals (but ultimately I am just having a guess at that).

    Regular Pete
    November 5, 2009
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  18. Hi Ned as I commented elsewhere Steve Keen has conceded he was wrong. So I suspect the Steve Keen fan club will need to regroup.

    But Keen did manage to make himself fairly well known and set up a website to sell his wares, perhaps this might help ease the pain of selling his home too early :)

    Greg Atkinson
    November 5, 2009
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  19. I like your response Martin.

    Dan, I also like your response. You make a good point about mortgagee’s then becoming home ‘renters’ from the bank. It would save the bank some hassle. But, it is essentially the same as those mortgage ‘holidays’ that people are taking from the banks right now. The banks seem quite unwilling to forego long-term profits, but rather letting people off the hook for paying in the short-term. The interest still adds on to the principle.

    I do think you are onto something, and perhaps this could be an extension or modification of these mortgage holidays.
    One issue being that that banks won’t be making the tidy profits they used to. But that is for them to decide and if things got bad enough, maybe it would be an option.

    A few side issues I can see though:
    – unemployment…eg, why are people behind on their repayments in the first place? Can they even pay rent? What about their other debts like credit cards, etc.

    – what happens to all the negative gearing ‘investors’ who get underwater? They won’t want to play the game anymore, because they won’t be benefiting. So the banks would have to take on those mortgages.

    – perhaps some people won’t want to rent the house they are trying to ‘buy’. For instance, lets say you bought a house in the sticks, so that you could afford it. But you’d rather live in the city. After the crash, you get the option of renting out in the sticks without actually contributing to owning the house. Wouldn’t you rather rent in the city if you are going to rent anyway?

    I’m not trying to contradict your idea, just throw in my thoughts of a few potentially opposing forces. I guess we’ll just have to wait and see what the banks actually do :)

    One final thing regarding: “The rental market won’t necessarily become more competitive, because an equal number of people are evicted…”

    My thoughts on this are that the potential for density per dwelling to change increases as people move from mortgagees to renters (assuming that some economic troubles also exist). People typically do not go 50/50 on a mortgage, but I think would be more willing to do so on a rental if it is convenient. I figure this could contribute to a minor surplus in rentals (but ultimately I am just having a guess at that).

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  20. Thanks Greg – Full credit to Keen then. At least he can take it on the chin when he is wrong. As most of us were to one degree or another – Good for you Biker!!!

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  21. Nothing wrong with Steve Keen except that he was naive enough to put a specific time limit on his prediction. He didn’t give himself much room on that one.

    But that is because he believed in markets. The Gov. is distorting markets. Think that’s not a bad thing? High house prices causes pain to some groups, but also takes capital (credit) away from other areas of the economy. Like small business. Like corporate real estate. Like entrepreneurs. Like innovators. Like education. Like anything that is actually ‘productive’ in the economy.

    And it encourages rampant (and blind) speculation.

    For those of us who have to live in this country and support children who will want to buy their own houses – this is really bad news. But it is great news for short-sighted people who want to cash in on the misfortunes of those born after 1990.

    Maybe we could start speculating in drug dealing. “Oh no, but it is hurting the youth!”…”That’s okay, we’re making so much money!”.
    Social responsibility begone.

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  22. I think the big danger is debt, not owning a house, Ned. So I agree with you there. People owning their house(s) with no debts needn’t worry, in my opinion – it’s a bit like gold – a long term play, except you can actually pay your bills from rental income.

    What I foresee is a transfer of wealth away from people with big mortgages and unreliable employment (that’s obvious), as per your usual economic downturn (except I think it’ll be bigger and longer than most people like to imagine). That might make for ripe pickings for house-vultures, but that actually would mean banks lose … and banks can’t afford to lose right now – the big four rely on healthy house prices for their accounting. Government works for banks, as we know, which is why the stimuli and FHBG and all that, but when government withdraws stimuli (as per instructions from a higher master), then banks will need another way to take profits in the downturn (after all, a loan is a bet by the bank against the mortgagee, and the bank hopes they fold 10 minutes prior to closing the loan). To maximize their profits in a mass of foreclosures, they will be tempted to hold properties and sell them gradually (or not at all, if holding them and renting out turns out to be successful). There.

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  23. Hey Pete – You’ve got trading skills … Capitalize on those I reckon. I don’t … Some day maybe? [But probably not.] To be dead honest I’m not as motivated as I was a couple of decades back. So I’m sitting back waiting to see just how much effort Ken Henry reckons I’m going to have to exert to make things happen for me in Oz. And if he dishes out any little pointers as to other investments government might like to see us in – I’m not the fighter I once was I guess?

    Reply
  24. Definitely, Pete. Philosophically/ideologically I don’t hide the fact that I hate usury, usurers, the defrauding of workers of their wages, the murder of innocents, the neglect of social obligations towards the poor, sick and dying, and the blatant lies, damned lies and statistics coming from government and the media. This is what’s wrong with the way the government manages our economy, allows banks to go rampant, fights unjust wars and over-taxes unwitting workers.

    Some call it Karma, but I call it the Universal Justice System. They can’t get away with it forever.

    Reply
  25. Pete “the markets” are influenced by government actions and Keen should have factored that into his thinking. The biggest error he made was confusing theory with reality. He simply isn’t what I would call streetwise. There are some things you only learn by getting your hands dirty and you just don’t get that experience crunching numbers at a university all day.

    Greg Atkinson
    November 5, 2009
    Reply
  26. And “wise old mamma” would have never recommended selling one’s home because house prices might go down one day Greg. But such is life said my namesake before they hanged him … ! :)

    Reply
  27. We’ll see who is right or wrong in time, but the one certainty is that nobody really knows. No, I don’t watch Today Tonight or any of those shows, as Bloomberg is my preferred viewing. Sensationalist “economists” like Steve Keen should be held truly accountable for their self serving rantings, designed to give him some notoriety, make him money so maybe he can now afford a penthouse unit on Australia’s highest peak. Let’s hope he stays there. An unemployment rate of 6% means 94% with a job, who can continue to fund their way into the various levels of the market.
    Debt is not an issue for many Australians, and yes thanks, I’ve found my safe haven suburb.
    Comments can be made without being rude Martin.

    David (Brisvegas)
    November 6, 2009
    Reply
  28. David:

    “Sensationalist “economists” like Steve Keen should be held truly accountable for their self serving rantings, designed to give him some notoriety, make him money so maybe he can now afford a penthouse unit on Australia’s highest peak.”

    What the?

    I am open-mouth-gaping surprised at that comment. Shouldn’t this instead be said of Mr Joye, all of the banks, and perhaps half of the worlds economists? Steve isn’t raking in the dough like they are. Steve’s bias sits with his logic, not his income stream or mainstream pandering.

    My main point isn’t so much to defend Steve but to wonder how anyone could say such a thing when it is so very clear that there are others that are so much worse than what you accuse Steve of.

    It’s like suggesting that Ron Paul is a political spin doctor. He might be to some extent, but you don’t have to look far to find people that are far worse, just look at Obama.

    Reply
  29. Where is Biker Pete in his moment of glory? Biker Pete 1- Steve Keen 0.

    Greg Atkinson
    November 6, 2009
    Reply
  30. Biker should wish he had half the brains that Steve Keen has. In fact I think most of us should.

    He made a bet that was wrong, but he made it for the right reasons. Many people like Biker have made the right bet for all the wrong reasons.

    If this is what people have become – people who praise speculation and good fortune, whilst deriding reasoning and moral accountability – then a Depression is exactly what we need.

    Unfortunately there are plenty of people who are not like that. And in a Depression they will suffer too. Hopefully not quite as much as the others.

    Reply
  31. Pete – Steve Keen was “speculating” about a 40% drop in house prices. Not sure how that makes him any different from those who speculate about prices going the other way.

    Anyway, let’s be honest, if Keen had won the bet you would be amongst the first to give Biker Pete a hard time. So let’s not rain on Biker Pete’s parade where ever he is.

    Greg Atkinson
    November 6, 2009
    Reply
  32. I wish I had half the commonsense that Biker has.

    And in amongst it all, who actually noticed under what circumstances and when he reckoned that Oz house prices were liable to take a whack? (I sure did and concur fully!)

    Speculation – For mine Buffet is a predatory “old” speculator – From whom most people who’ve ever heard the word “investing” have hoped to learn something – Then there is Mr G Soros of course. Plus Yeh, the love of money is firmly entrenched in “civilized” humanity – When such “civilized” governments want to effect societal change they do it with bribes and financial penalties; Rather than appealing to our “civilized” moral sensibilities.

    With some (NOT Pete!) feeling the need to tell a bloke he’s got a small whanger and his missus is a slut when house prices go up when they might have preferred them to go down. So Yes, there are some strange bits of work floating around.

    And so the world goes on …

    Reply
  33. Greg:
    “…if Keen had won the bet you would be amongst the first to give Biker Pete a hard time. So let’s not rain on Biker Pete’s parade where ever he is.”

    Why would I give him a hard time? I wouldn’t need to.

    He’d still be out there saying that property is the best asset anyway. Confidence and stubborness don’t equal intelligence.

    Ned:
    I know you might choose to not notice Biker dishing out his insults instead of debating the point, but it certainly wasn’t a one-way street. He has insulted more people on this site that anyone has since I have been here.

    Reply
  34. And why he keeps being brought up anymore is beyond me.

    Reply
  35. It can only be love, Pete, pure and simple.

    Reply
  36. Actually Dan it is because I know I would get a bite by mentioning B.P ;) BTW if he ever finds his way back online it will kill him that he missed all this! Anyway my constant theme about economic forecasts is that they are simply well thought out guesses at best, so you are a bit of a mug making a bet over one.

    Reply
  37. Ned,
    you are full of yourself.

    “With some (NOT Pete!) feeling the need to tell a bloke he’s got a small whanger and his missus is a slut when house prices go up….”

    Is that really how you remember it? Better go see a doctor. Alzheimers has finally taken hold.

    If you weren’t s far up BP’s arse you might have noticed why everyone else took an instant disliking to him.

    Reply
  38. prozak, didn’t your mother teach you any manners as a child?

    Reply
  39. Dan,
    wow you got me.
    So Clever. So witty.
    Spend less time getting involved in arguments that are not yours and you might for once make a useful comment on here.

    Reply
  40. I don’t think I have anything to say that you’d find useful either Sir. So I’ll allow your remark “If you weren’t s far up BP’s …”, speak for itself.

    Reply
  41. Ned,

    What a weak character you must be. Your digger and aussie battler forebears would be ashamed.

    Making comments laced with lies just to get a reaction and then not having any sort of character to either argue your case or back down from your lies.

    Reply
  42. Sensationalist “economists” like Steve Keen should be held truly accountable for their self serving rantings, designed to give him some notoriety, make him money so maybe he can now afford a penthouse unit on Australia’s highest peak. Yep! Suck it up, son…

    Regular Pete
    November 7, 2009
    Reply
  43. Yep.High fibre diets’l do dat for ya. Good stuff Pete.

    Lachlan Scanlan
    November 7, 2009
    Reply
  44. It’s obviously Biker saying that stuff.

    Shows how pathetic he is that he needs to impersonate others.

    Reply
  45. Ha,Ha, Regular Pete! We’re both ‘regular’ blokes, mate. The difference is I don’t air my bowel movements online.
    Remember, you fellas started the tag theft… and, it ‘backfired’, literally on you. So I’ll post as Pete whenever I want, mate. Try to be a good loser. Some suggestions for a new tag: Special K Pete; Hi-Fibber Pete; Renter Pete…. (?) Loved Kates’ piece, BTW. The icing-on-the-gingerbread… Gotta go and remind Sixty Minutes about the sequel to their first King of the Property Bears’ show. Think I’ll fly over for the Big Walk. (I’m the Kiwi bloke in the cowboy hat… !!! :)

    Reply
  46. So typical of you to stoop this low to steal someone else’s name Biker.

    For others it is a pretty obvious difference between when I am saying something and when you are anyway. Because you can’t comment on the topics, only your pathetic opinions of people.

    Leeches like yourself don’t even deserve responses.

    Reply
  47. But you responded. ;) Get over your disappointment at losing the opportunity to steal another man’s home, son. Remember, just because you backed a loser, it doesn’t mean you must remain one. Find a large Sydney icon… and get over it… . :)

    Reply
  48. Welcome back Biker. Uncle Dan reckons stay out of debt. Cousin Greg’s staked out a Yammy shop for when you pop in. Cousin Ross reckons deflation is the go. But CA doesn’t sound convinced? I hear on the grapevine Pete’s still a bit miffed at you – Something about something of his you borrowed? That bloke who’ll be visiting from the big smoke – You know, the one with all the learning? – He asked if you could recommend a comfy brand of walkers. And whether you know if hats with corks really do keep the drop bears away? Oh, some good news … That nice young bloke on the farm next door – His gold went up! Young Prozak sends his repects as always of course. And me fish are doing well – Cheers eh! Ned.

    Reply
  49. Yah know fellas………….I feel whacked as a guy who thought that a look at this column might yield some intellect. And…….indeed it did!
    But as usual…..fleetingly and sure to end within a brief time.
    As with most of my 45yrs of experience in Aust, since exiting the UK in search of wider fields (but ending up listening to what I can only describe as Ozzie “pretenders to intellectual capacity”.) I can truthfully say that none of you can hold on to intelligent conversation long enough to even qualify as an entrant into what I used to enjoy(in 1960’s London)that we so took for granted as normal intelligent conversation person to person. That even included highly entertaining “Punsmanship” as a bonus in most instances. Hence the wonderful BBC comedic series you have had shipped to your shores for the last fifty years. I doubt much of that would even make any sense whatsoever to the current plethora of Aussie brain deads.
    When, and if ever, Australians can learn to refrain from referencing things below the navel either in normal conversation or to be cherished as the main attraction about the performance of any so-called “Comedian”, then maybe….just maybe….you will earn the right to my undivided attention and that of others who can’t help but see you as a bunch of imbecilic little prats that belong somewhere on the docks of Liverpool with a bunch of Saturday night drunks.
    How sad it is that this country could have had such a different culture full of intellectual greatness with real intelligence as the fundamental function of the average brain but chose booze and fart-jokes and one on one insult in conversation instead.
    God help Australia…….God Save the Queen !

    Reply
  50. G’day mate! Yes, Regular Pete is a little miffed, but I bet you ten bucks he will get over it _really_ soon. An apology would clear the air of course, but you know how some of these bears are, Ned. That young bloke got over his overdose, did he? Dangerous stuff, that fluoxetine. After I read one of his recent posts, I looked it up… and sure enough: diarrhea; talking, feeling, and acting with excitement and activity you cannot control; confusion and difficulty concentrating.

    Walkers? You can’t beat Merrells. Keen to pass on the tip to Sixty Minutes.

    Deflation, I wish… ! Yammy? An old TDM or Super Tenere would do, thanks, Greg.

    Latest house is nearly complete. Didn’t see it start… and it will be virtually finished when we get back. Photos look good. I’ll walk you around our projects when you get over to WA, mate. We’ve learned a lot more about the financial machinations of property, in the last decade. The bears have clearly missed the important stuff.
    Look after your fish. Bloody otters played havoc with the trout this avo… !

    Reply
  51. As a matter of fact I am prepared to apologise, Biker Pete. Some of my posts have been offensive and I withdraw them unreservedly. I never intended to ‘steal another man’s home’, as you’ve implied. I was misled by a convincingly articulate economist, whose convictions were matched by his actions: he sold his own home to demonstrate his beliefs. These beliefs were entirely reasonable, given the situation in the US and UK.

    Reply
  52. Pete, I accept your apology. I apologise for inferring that you are a loser… and hope and trust we will never again have to revisit past grievances.

    Reply
  53. Biker, that was quick! You were correct. Isn’t the internet amazing?!

    Reply
  54. I’m tempted to run a book on how many pairs of walkers Steve Keen gets in his PO Box this Chrissy? Nevermind – At least he accepted it. (As have I – eventually :) )
    Yeh, I find it hard to imagine deflation being our fate. The concept of central banks allowing my money to buy more over time is just TOO alien to me perhaps?
    Wouldn’t hurt to pop over to WA one day I guess! Ta.

    Reply
  55. Wait a bit, Prozak… I mean Anthony… you can’t bail on me now that Keen has capitulated. This is no time to leave the vessel. Doesn’t family mean anything?!

    Reply
  56. Guess I was wrong about Pete, mate. It takes guts to apologise and move on. Maybe I was wrong about him…

    Reply
  57. What the hell was that about the Queen saving Australia?! I know Rudd is playing up a bit, but are we going to revisit the Whitlam era?

    Regular Pete
    November 7, 2009
    Reply
  58. No, you intellectual ignoramus. God is saving the Queen. Screw Australia!!!! I’m off. Elvis has left the building.

    Reply
  59. I think I’ll leave youse tuit – A bottle of plonk beckons! :)

    Reply
  60. Y’know Ned, I think he foresaw where this was going. He’ll be back, don’t worry. He’ll drop all the silly stuff like his Masters from the London School of Economics *giggle* ; bloggers being up other peoples’ backsides, or their wives; you know, all ‘cultured intellectual’ verbiage. But ya just can’t keep a good man down, Ned! :)

    Reply
  61. Yes, me too, mate. Nice that everyone is on friendly terms again, eh?!

    Regular Pete
    November 7, 2009
    Reply
  62. I hope you guys are genuine about it, because it’d be nice to just talk and get on for a change. Brought my own plonk if anyone wants some. Cheers.

    Reply
  63. Ya gotta know when to hold em; And know when to fold em … I’ve always enjoyed a snort in 24 periods that have the letters A, Y and D in them – Down the neck of a native Dan!

    Reply
  64. ???
    Dan, that wasn’t me. I was out living a life whilst Biker is being a royal knob-end.

    Character assassination online is pretty pathetic. Shame I don’t know the real Biker, because to try this in person wouldn’t work out so nice.

    But alas, DR has no controls over this so I am not going to bother posting anymore for a while. Any post by anyone under my name is not me. Plus I rarely see the need to use smiley emoticons.

    This will be good for all those who think they knew it all 20 years ago and still believe that… and bad for people who like to hear others opinions and like to think about different possibilities.

    Pathetic old dudes who have talk garbage and have far too much time on their hands 1, diversity and cognition 0.

    Reply
  65. Oh and incidentally, I wouldn’t apologise to Biker ever, for what that’s worth. He can make up all sorts of reasons for whatever he is talking about, but it is garbage as usual.

    Ironically Ned, you talk about diversity yet you egg Biker on and so are complicit in an act against diversity. Hypocrisy huh?

    Anyhow, this is my last post. You can’t hijack this one Biker like you did the 20 or so in this article.

    To everyone who has provided me with good discussions and insight, thank you. To those who think they know it all, you’ll find that shareswatch.com.au is a great place to hang out.

    Reply
  66. Fully suspected the same Dan – Thus my “leave youse tuit” and “hold em/fold em” comments. Housing’s an emotive issue. And leopards don’t change their spots as me ole granny used to say. (To which I thought [as a foolish young man] “But people aren’t leopards.” – Dumb, Dumber and Dumbest – Plus a slow learner – That’s me! :) Hmmm … )

    Reply
  67. Don’t recall talking about diversity Pete??? But I’m sure you’ll explain it to me elsewhere if you are in the mood.

    Reply
  68. EPILOGUE: Mr Denning strode into the office, stepped gingerly around a shred of cerebral cortex, over a lump of amygdala, and exclaimed” Oh my God… what happened here?”
    “We think it was a virus…. Ox Flu perhaps… we figure it came in with Biker Pete on his motorcycle… ”
    “Ox Flu?!!”
    “We applied Fluoxetine immediately, in large overdoses, but… there was this almighty bang… and bits of human detritus went everywhere… ”
    “From the fibrous matter, I’d say this was Regular Pete!”
    “Could be the Giant Economy size?!”
    “Far too small. Anyone else hurt?”
    “Too early to tell. We expect a little whimpering, but… ”
    “Relatives?”
    ” Just one. Expect we’ll hear from him, in time.”
    “And that infernal Biker Pete?”
    “Jumped his motorcycle out of the window, shouting ‘Hi Ho Silver’ …. or maybe ‘Buy low silver!’… and disappeared!”
    “Good. Couldn’t have survived a 29-storey fall. I expect that’s the last we’ll hear of him. Call the Fire Department. Clean all this mess up. Don’t let anyone else step in it. Thank God it was all over so quickly.
    What a mess… and Saturday night, too…!”
    “God save America!”
    “Don’t think anyone else can, son… ”

    And that’s where we leave you, listeners. We apologise for this brief interlude, a mere blip-in-time.
    Now here’s some relaxing music from The Usual Crew…. .

    Reply
  69. Well, at least it was funny.

    Reply
  70. ” I rarely see the need to use smiley emoticons.” :(

    Reply
  71. This is why moderators are needed in a public forum such as this.

    Reply
  72. Australia’s overvalued property is on borrowed time as the socialist, nanny state, land rationing policy will eventually be dumped and the artificially high property prices will plunge. Even the socialists attempt to flood the country with migrants by opening the floodgates won’t help.

    Reply
  73. Hello Bargeass! My sister-in-law is a migrant. And so is my fiancee. And over the next 35 years there are 25 million more of the slanty eyed little gook and wog buggers heading your way – So brace yourself for some REAL competition – The tired old boomers sitting on their overpriced properties are the least of your problems! IMO :)

    Reply
  74. Ned S’s muliply on this site I see. I would have thought one was enough of them myself? But there you have it – What’s in a handle? When we’re all mates here! :)

    Reply
  75. This is the sort of stuff sites that publish controversy have to put up with. It’s a credit to the place that someone considers the place worthy of such mischief. None the less, it’s about time there was some kind of moderation exercised here – from the point of view not allowing two Ned S’s, or two Pete’s and so forth.

    Till then I think I’ll go back to just reading the articles and posting elsewhere.

    Reply
  76. It’s surreal … Like trading trading stocks and currencies and cow bells! Which is why silly old buggers like me prefer useful land.

    Reply
  77. I get marked down when I say I like useful land … Why might I ask? Do youse mob actually like owning BHP and Telstra and Lihir and Barrick stocks? And some other currencies (plus more useful stuff like cow bells to hedge your bets.) – I’ve gotta be missing the message surely??? Tell me the lesson again plz …

    Reply
  78. What a sad couple of old men.
    Biker Pete you are truly pathetic.
    Ned your true colours are coming through for all to see.
    Truly embarrassing behaviour at your age.(both of you)

    Reply
  79. I didn’t mark you down, Ned.

    Gold can go to $5000 USD an ounce by some calculations (if a new worldwide currency went to a gold standard), so it’s a fair hedge but wouldn’t put my house on it, and shares? As I said before they are a gamble – laugh and deride me, but in the end it will be proven true – you’ll get caught if you expose too much.

    You’re right, Ned. There is something sneaky going on with money – people en masse are being ripped off and having the rug pulled out from under them, through quantitative easing, stealthy inflation, the derivative bubble and governments prostituting themselves out through stimulus policy. The ones who will get most burnt will be those with debts or their nest eggs in artificial investments (you know, like super and whatever) or non-essential jobs. Own some decent turf, live on it, and do a little bit of this and that to make some spare cash, and you are set. The economy that exists when you remove the money factor is what will remain ten years from now. Between then and now, there will be a financial hurricane worldwide, with winners (temporary) and losers (temporary) and bodies (permanent).

    Reply

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