Safe as Earth Quakes

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Tax-confiscating, power-mongering, pseudo-intellectual moralistic bullies are like terminator roaches. They never go away and they just seem to keep multiplying. We had hoped to return from our quick trip to Seattle to find that the resource super profits tax and been beaten into the submission and defeat which it so richly deserve.

But alas, through sheer stubbornness, ineptitude, or calculated determination, the government is persisting with a policy that’s already destroyed shareholder wealth, made Australia a less stable and desirable place for foreign capital, and clouded the future of both existing and profitable resource projects as well as future ones that may never get off the ground now.

We haven’t caught up on all the fake negotiations in the last week. And we’re just guessing…but our guess is that the government will just try and wait out the public. The public will lose interest. Or, if the government repeats often enough that this is an issue of tax fairness – instead of the wanton act of vandalism on the nation’s wealth producing assets that it is – the big lie will eventually stick as oft repeated big lies eventually do.

Anyway, we’ll get back to that story with more precision tomorrow. Today, we again note that an intrusive outside (much like our self) is calling for an Aussie house price crash. It’s Jeremy Grantham again, of global investment manager GMO. Granted, Mr. Grantham may not be aware that there is a secret force field that girds this land which makes its housing market immune to the same forces that have caused bubbles and busts in other countries.

But you have to give him credit for calling it as he sees it. And he says Aussie house prices would fall 42% were they to return to trend. You cannot possibly miss it,” he told the Australian. “The price of housing typically trades about 3.5 times of family income and in bubble it goes to 6 or . . . 7.5 (times)…Australia is having one now. You are at near 7.5 times family income . . . which suggests you are twice the size that you should be.”

Not everyone got the memo. But seriously, we can see that being daily assaulted by the forces of house price spruiking in Australia, it is easy to give up the good fight (stop using your common sense) and just go along with the group think. You begin to question your own sanity when everyone around you behaves insanely.

Grantham says Aussie house prices are a “time bomb.” The trouble with credit bombs is that they cannot be defused. They eventually blow in the form of falling asset prices (deflation). This is happening all over the world right now. You could say that continued excessive credit creation funnelled into an asset class is one way of defusing the bomb. But that’s really just credit carpet bombing.

In any event, the Reserve Bank of Australia, which is an Australian institution run by Australians, begs to differ with Mr. Grantham. In a speech earlier this week, RBA Governor Ric Battelino said that Australian households have taken advantage of a “structural” decline in interest rates to load up on debt. True, this higher household debt level exposes Aussie households to “shocks,” like higher interest rates. But Battelino says there ain’t no bubble.

Specifically, he rubbishes the price-to-income ratio Grantham quotes. The deputy Governor says, “The ratio of house prices to income that are published for Australia tend to focus mainly on prices in the cities, and they are quite elevated. But, if you look across the whole country, the ratio of house prices to income is not that different from most other countries.”

But with nearly 65% of the population living in Australia’s capital cities, according to ABS data, the fact that prices outside the cities are “not that different from other countries” is a hugely unuseful fact. The lending bubble has been concentrated in the capital cities, where most people live, and where price-to-income levels are most unsustainable.

Of course you might argue that the dense urbanisation of Australia’s population is exactly what supports higher structural house prices. People have to live somewhere. And if they are going to live in a capital city, it’s going to cost them. That’s fair enough, as long as they can afford it without going into ruinous debt.

The last and obvious point will make is that it’s pretty stupid to assume interest rates will remain structurally low from now on. Low interest rates are always trotted out as a justification for house prices. But if the world is in a credit depression, Aussie interest rates are not going to stay low. You will have had millions of people buy homes at the top of the price cycle and the bottom of the rate cycle.

How do you think that’s going to end? When thing are unsustainable, the end comes eventually. Flying from Seattle to Los Angeles on Monday, we saw what looked like fault lines all along the California coast. These are the places where huge forces collide and eventually one gives way sending waves of damage in all directions. Naturally, it made us think of the Aussie housing market, even if there are many in Australia who say it can’t happen here. Just wait.

Dan Denning
for The Daily Reckoning Australia

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

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Tim
Guest

I’m interested to know what’s up with the apology to Rismark and Christopher Joye in the subscription email?

Thanks,
Tim.

Deo
Guest
Judging from more frequent and louder news pieces re: housing bubble in Australia, both from the party suggesting and denying it, it seems that the “tipping point” is not far ahead for the idea to sink-in for general population, especially potential buyers. Once the tipping point reached like described by Malcolm Gladwell book, then we shall see sudden price deflation and probably actual burst to the bubble (finger-crossed). The idea is if majority of potential home buyers refuse to participate in the greatest ponzi-scheme of Aussie home market and wait until price level is back to reasonable, then there is… Read more »
Ned S
Guest

Here you go Deo – Here’s some reasonably rabid “I hate baby boomers” stuff masquerading as financial analysis – As I can only assume you’ll thoroughly enjoy same. And, by and large, I like to see people enjoying themselves:

http://www.marketoracle.co.uk/Article20272.html

Yeh, I’m gunna add baby boomers to my list of pet peeves as well. Right up there with Jewry for causing WWII in fact! :) :) :)

Ned S
Guest
Dan Denning above: “That’s fair enough, as long as they can afford it without going into ruinous debt” – I really haven’t seen many bears here who genuinely can’t afford it? With the extremely rare exception, they just happen to think prices will come down and they could do considerably better by waiting. Which is all good. With them simply choosing to exercise their choice to cruise along as landlord subsidised tenants while they wait for their expectations to come to fruition – With those same landlords being subsidised by taxpayers – With many of those self same tenants being… Read more »
Ned S
Guest
Is it “fair” that the world has changed over the last 30 or 40 years? Well, I must admit that’s a question that is so far divorced from the way my poor tired simple old brain functions that I can’t comprehend it! Let alone hope to answer it??? Is it “good” then? Yeh, I can get my head around that … For some yes and for others considerably less so perhaps? I did read a thought once that Aussies aren’t great at coping with change? – With the supposition being that as we aren’t especially accustomed to having our homes… Read more »
Deo
Guest
Not really Ned S, I actually do not try to apply wonton blame to bb generation as the only reason of housing bubble…just pointing out that majority of political circle currently are bb generation and of course they will try to favor their own interest over the next generation’s. Not only in terms of favorable tax treatment on housing e.g. negative gearing but also in terms of increased pensions, generous medicares and related senior card privileges, tax rip-off in super rule for over 55 (transition to retirement). That not to mention the risk of next generations not having the same… Read more »
Deo
Guest
Dan Denning above: “That’s fair enough, as long as they can afford it without going into ruinous debt” – I really haven’t seen many bears here who genuinely can’t afford it? With the extremely rare exception, they just happen to think prices will come down and they could do considerably better by waiting. This is too simplistic IMHO. Affordability is relative. I must say that I may be able to buy a unit / townhouse in Sydney suburbs, especially the ones that may take you 1 hour or more to go to your work at CBD by public transport or… Read more »
Keith
Guest
While I have adhered to the bubble bursting paradigm for some five years now, I think the bust will be delayed a little while longer. Philip Lasker on ABC news indicated that Oz government debt is low compared to other countries. His thesis is that this gives the government further ability to go into debt (yes, he really said that), and therefore the government could support housing. Things can only be delayed so long – just like elections, that chickenlittle Rudd seems to want to put off until next year at the moment. Delaying the bust doesn’t prevent it. Dan,… Read more »
Biker
Guest
Not surprised to read DD’s flight description, ‘looking down’ on America and recognising its faults… . It is, after all, a long-maintained view… and one we can empathise with. DD’s over-and-out call: “Just wait” is a regular theme, too. I guess a gold salesman _must_ retain that call. Why must property fall for gold to rise to the clouds, Dan? Is property the other tangible asset which needs to crash-to-earth for the heavy metal to really fly? There’s an unusual air of desperation in ‘Safe as Earth Quakes’. Are you running out of patience with the resilience of our imperfect… Read more »
shaun
Guest
Hi, I think that it is obvious housing prices are too high. I am an aussie mortgagee but I travel alot with my family. Maybe that gives me common sense. I’m also a kiwi expat and sometimes the grating aussie attitude can seem like that of the aussie cricket team. Smug when everything is just dandy, but watch out when things don’t go according to plan. Don’t get me wrong, or mis-construe my comments, but from my perspective as a frequent traveller, and a person whose work can take him out of the country, it is so obvious the bears… Read more »
Macca
Guest

Shaun
Got to agree with you 100%. Have spent 6 of the last 12 years out of Australia and travel regularly. I find it interesting that older family members tell me how to invest and be successful like them….although 20 years ago at the same stage in their lives they were pretty average Joes… maybe they want me to prop up their ponzi profits. They were lucky to be at the right place right time, would hate to see how they would suffer if their luck turned out otherwise…smug baby boomers!

Biker
Guest

“…older family members tell me how to invest and be successful… maybe they want me to prop up their ponzi profits.”

Matthew 7:9: “Or what man is there of you, whom if his son ask bread, will he give him a stone?”

If you really believe they’re attempting to mislead you, Macca, you should hide all the kitchen knives and consider hiring a food taster. It’s termed post-natal birth control… and in some states, considered non-punishable.

Those smug baby boomers will empty your pockets while you sleep, son… ;)

shaun
Guest
I know exactly what you mean Macca, who wants the baby-boomers definition of wealth anyways? You are joking about the ponzi scheme profits though I know, but laughing at their attitude. I have met some of the older ‘True-Blue’ aussies and have nothing but admiration for them. They call it straight. But the new rich, who do they think they are? Furthermore, these sharks can be down-right dangerous if you start to think outside their paradigm. which is what you are alluding to. Kind of threatening to me, but I don’t think it is worth it to process information in… Read more »
Justin
Guest

“I’m interested to know what’s up with the apology to Rismark and Christopher Joye in the subscription email? Thanks, Tim.”

Me too, especially after I see on [B]usiness [S]pectator today;

Macquarie grabs 53% stake in Rismark
Investment bank strikes deal with real estate investment and research group for undisclosed price. 1:57 PM

The JoyeBoy must be crowing.

Leith
Guest

G’day Dan. Good post as always. I have recently published a detailed examination of the impact of negative gearing on Australia’s housing market (i.e. house prices, rents and rental availability) on my website: http://www.unconventionaleconomist.com. Anyway, I hope you and your readers find it enlightening.

Ned S
Guest
Deo – Free uni education for boomers probably wasn’t a big drain on the national purse – I’m on the tail end of the boomer generation and the very great majority of us still went into the workforce at the end of Year 10 and of those who went on to Year 12, a lot never went to uni, and uni attrition rates were pretty high anyway. As to pollies favouring their own interests over the next generation’s – I suspect pollies favour their own interests period – Which just means they’ll take votes whereever they figure they might be… Read more »
Jon Bain
Guest

There is certainly a notion that the baby boomers have,
that they had it all planned in advance for them,
but they do not need to plan for the next generation.

Socialism for us, say the BB,
but the rear-end of capitalism is what generation X gets.

The BB do not know how good they got it,
and they do not care for the sacrafices made for them
by the WW2 generation.

They are just spoiolt brats who take it all, and
in exchange generation x gets a trickle.

Biker
Guest
Jon, blaming a large bulge in the population for the undoubted effects on politics, finance and demographics is as foolish as me commenting that the problem is really that the BBs failed to reproduce sufficiently to guarantee you the same voting and buying power. BBs are a very large group. We’ll persist two to three more decades, at least. Government interventions, to buy our votes, will prevent some of the dramas you predict. There’s little point ranting about that… it’s how politics works… . Values in Montreal have not plummeted because the birthrate fell dramatically in the mid-eighties. Developers simply… Read more »
Ross
Guest

Now this is what you call way too quiet. Look at the broadsheets and see the vaccuum. http://www.nytimes.com/reuters/2010/06/20/news/news-us-australia-china.html?_r=1&hp Call that a report? Spin doctoring absence means gravity in the event and not necessarily on the RSPT topic either.

wasabu
Guest
Housing is the most treasured of commodities, cynically turned into a casino for the unwashed masses, dressed up as a clever way to get rich by white collar criminals, and, swallowed hook, line and sinker by those who should be smithing materials into fine products, cultivating healthy foods, treasuring their housewives and visiting family on Sundays. A wave of properties came onto the Melbourne market this weekend, with the lowest clearance rate for some time. The Euro and USD hang in the balance, as the shrills of denial get louder. The US Military tests it’s latest crowd control weapon which… Read more »
Ross
Guest

Don’t worry about earthquakes, try this one http://www.presstv.ir/detail.aspx?id=131308&sectionid=3510208 . In the age of profit in selling catastrophic fear I’m sure they will make a Y2K out of this one. Sell candles in NYC, go into NYC futures in baby accessories, potentials a plenty. How about an STS (solar trading scheme) if we all bought mirrors and concentrated them on Mars we could bounce the problems off onto the new colony.

Biker
Guest

“If affordability doesn’t pop the petty little Aussie bubble, something else will!”

Probably that hot air blowing from the deserts west of Sumer… .

Ned S
Guest

“they do not need to plan for the next generation” – George Bush and Alan Greenspan seem to have thought they had a plan. It went along the lines of “a rising tide lifts all boats” as I recall? But yes, now that it has come to peoples attentions that their plan may have had a few little flaws in it, it seems the new planners are continuing to consider alternative possibilities. With the G20 obviously being a bit divided over the merits of the proposed alternatives.

annie
Guest

Ross that was very funny and gave me a good giggle. Thanks I needed that!!

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