Where Debt Goes to Die

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While the new Prime Minister and the mining industry argue over the resource super profits tax, the Australian share market remains in a kind of politically induced coma. It can’t go higher or lower until the rest of us know if the miners are going to be super taxed and if so, at what rate.

Our prediction is that by the time the miners and the PM reach a deal, the underlying conditions in the global economy will have changed so much that the case for a tax will have evaporated. How? Glad you asked…

Today we take up where we left of yesterday. The problem is that there’s disagreement over what assets are in a bubble and whether we are headed for inflation or deflation. We’re going to take on the “gold-is-in-bubble” bandwagon tomorrow. It’s getting crowded, too!

But the meandering action in the markets has caused us to step back and assess where we are at in the whole scheme of things (other than level one of an office on Fitzroy Street in a wintery St Kilda, nibbling at a chicken and bacon sandwich). Financially and historically speaking, we’re into phase two of a global debt crisis brought about by the fraud that is fiat money.

In phase one, auto makers and banks and various other firms either went out of business or had their liabilities nationalised by governments in order to…er…protect the financial system from complete collapse (or badly needed adjustment). The core of the problem: many, many bad debts. But now, those debts – some of them anyway – have been transferred to the public sector balance sheet and investors are wary of the strain it has put on already demographically-strained public finances.

How bad are the numbers? According to analyst David Rosenberg, total public and private sector liabilities in OECD nations now add up to about US$225.5 trillion. That’s about 360% of global GDP. It is, in technical terms, a lot of debt. And on this pyramid of debt are asset prices supported (houses, stocks, bonds, and commodities).

Rosenberg argues that the extinguishing of this debt is inevitably deflationary. He is not alone in this argument. As credits are written down and debts repaid, you have households and business deleveraging and, in Europe anyway, governments actually borrowing less and spending less. Austerity.

Ironically – and to your editor this is really strange – there is a valid argument that the austerity measures in Europe and private sector deleveraging in the States (lower consumption and higher savings rates) will mean (gulp) sustained demand for U.S. Treasury notes and bonds. Yes…it’s bizarre that the demand for U.S. government debt would increase at the same time the supply is growing too.

But…if European nations are issuing fewer bonds to finance stimulus measures, or if they are serious about reducing the level of public sector debt relative to GDP, then you MIGHT get a case of more investor dollars chasing fewer AAA rated sovereign government bonds. Mind you, risk-taking investors might prefer corporate bonds.

Either way, though, this who line of thought challenges one of our basic arguments, namely that US government bonds are in a secular bear market and that bond yields in the States are headed higher over time. If American savers and global investors are willing to buy U.S. bonds even at anaemic yields, it means the U.S. can continue its over-spending ways for far longer than anyone suspected, and might even enjoy a stronger currency!

In a deflationary environment where debt is extinguished and asset values fall, you get a general contraction in credit and money supply. In that sort of market, the correct position is Steve Keen’s position of cash and short-term bonds. So is that our new position?

Definitely not!

Our view is that the policy moves to support asset prices and restore economic growth in the States have largely failed. House prices are falling. Employment is stagnant. And the new financial reform legislation is likely to tighten bank lending into the real economy even more – and that’s assuming a reversal in the long process of household and business de-leveraging.

The trouble for the Federal Reserve is that the collateral of the banking sector is heavily dependent on two types of assets, mortgage-backed bonds and Treasury bonds. Last year, the Fed committed $1.75 trillion to buying both classes of securities outright. This kept U.S. interest rates and mortgage rates low and prevented an even bigger implosion in the U.S. housing market.

But now…with U.S. growth at a standstill and threatened by further housing price falls (and the damage that will do to bank balance sheets), and with Europe seemingly committed to austerity (for now), Royal Bank of Scotland analyst Andrew Roberts says the Fed will have to engage in “monster” Quantitative Easing to avoid the deflation Ben Bernanke has always feared.

And here we have the dilemma we’ve come up to several times in the last few years: can central banks create new money faster than the markets can destroy value (or more correctly, reprice assets that were inflated in the credit boom)? We don’t know the answer.

But we know that Ben Bernanke will be certain to try something extraordinary to avoid the hated bogeyman of deflation. It’s unlikely anyone in the White House or the U.S. Congress will stop him if the Fed again makes the case that the viability of U.S. banks and the housing market is what’s at stake. The political independence of the Fed will not be exercised to defend the purchasing power of the U.S. dollar. Rather, the balance sheet of the Fed will be expanded to support and absorb the liabilities of the U.S. banking sector and the U.S. government and force the public to pay for them through inflation and years of lower real GDP growth.

So where does that leave us? Nearly out of time for today’s letter! But the real question is will another round of multi-trillion dollar quantitative easing be inflationary? Will it, in other words, lead to an even higher gold price? Michael Pascoe and Rory Robertson and David Bassanese say no.

Tomorrow, we’ll tell you while they’re all wrong. And not just about gold. But about housing, interest rates, red wine, football, and anything else we can think of. Until then…

Dan Denning
for The Daily Reckoning Australia

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

  1. I see deflation and inflation in the future.. there are arguments for and against for either happening before the other.. I can’t see deflation until capitulation sets in.. the false hope, in my opinion, will need a wake up call before deflation sets in.. I think the trillions of dollars out there will try and find a home and give us a bit of inflation first, but I have no doubt deflation will be upon us and not pretty.
    Looking forward to feedback on the debate with Rory….

    Stillgotshoeson
    June 29, 2010
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  2. As I see it, deleveraging starting in a corner that gets held to a prudent fiscal position that it can’t sustain, then deflation, then panic, and then inflation.

    Think deleveraging, think USD and the home of global leverage in commodities, derivatives, and risk assets. 2008 proved it at a time even when US domiciled asset valuations were the ones most under the pump globally, and you would think money would flow the opposite way, the money still ran home to Daddy on cue.

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  3. Well the markets are deflating (futures) Currently 4312 (ASX 200).

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  4. Gold is under attack from youknows. They want us to think gold will suffer deflation. I knew last week they would cap the price just below the previous high for a head and shoulders on the daily chart and there are divergences on volume and RSI. I reckon the gold bubble brigade will be out in force..its a conspiracy :) . This is their big effort to save themselves. I hope they do well because I want cheap gold but with the demand increasing rapidly with lower price I reckon they’ll be lucky to get the sort of kill they’re hoping for. Gold is doing what it was meant to do …take over from failed fiat in a climate of global deleveraging …maybe a bit of hyperinflation here and there where desperado govs go nuclear on money printing. Its all the same thing. Fiat capitulation.

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  5. It’s gotta be deflation and lots of it! All it needs to start an uncontrollable runaway process is for a shoe to drop somewhere like a major sovereign default, and there’s no shortage of candidates for that.
    Then the US Fed and other central banks will turn on the printing presses like there’s no tomorrow. The fact that QE just doesn’t work entirely escapes them but what else can a banker do? Debt destruction means fiat money destruction.
    No matter what you may think of Klugman’s economics, he’s right about this being the start of the third great depression. In this climate all assets will drop in price, including gold.
    It’s the sheer tidal wave of QE that will come to counter the deflation that worries me. The whole fiat debt money system looks like it’s got a use by date – I’d say 2012; maybe the Mayans got it right after all.

    David Bode
    June 29, 2010
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  6. Deflation is sending gold higher since its price is not supported by leverage. In fact its price is suppressed with leverage. Note the likes of JPM who created a bus load of sales last night but lost anyhow. Markets way down. Gold up. Exter got it right before anyone.

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  7. My pick is for a mixture of inflation and deflation too. True inflation (expansion of money supply M3) will not occur at least in the next few years as people lose their love affair with debt and the governments are unable to print it fast enough. However in the adjustment process we will see asset price deflation and consumer price inflation. This process will rebalance massive income differentials in most OECD countries and reduce assets prices back to sustainable levels.

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  8. Twiggy Forrest says the Rudd tabled RSPT would for the miners mean that “Australia would pay more than double Canada’s tax rates” (as reported by WA News).

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  9. Yeah, inflation and deflation for me, too…

    Just at different times in different sectors of the economy.

    Then everything inflates, then hyper-inflates.

    My 2c

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  10. The title of your article and the picture in the caption conveys quite a truth.

    The absolute greatest debt any of us owe is our sin debt before God. It’s literally like owing $billions and $trillions personally, an amount that none of us could ever possibly pay. It makes our present financial situation pale in comparison.

    Jesus Christ, the one shown hanging on the cross, paid that debt in full for anybody willing to put their trust in Him. All you have to do is ask! It’s the greatest debt forgiveness program ever instituted since the beginning of the universe, and it was all carried out without any central bankers whatsoever.

    One last point of correction, He’s no longer on that cross. He’s alive and lives forevermore!

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  11. Thanks for that Greg, a great well rounded, well thought out commentary on the subject of the article. I also like how you’ve hidden your own personal message in amongst the literary gems too : )

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  12. Looks like Greg beat you to that wearable sign caper Ned :( – too slow Joe!

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  13. What a pleasure Greg.S or is that Gregs’ plural. After 6-10000 years of human failure I will hope in God too and nothing else. And Jesus as a man I admire for his devotion to God in the face of tyranny. I believe he was Gods chosen sacrifice. Many believers have gone on to weigh down others with additional burdons however including churches. If I do good I do it for God but I cannot be perfect so my faith in Christ is a daily undertaking.

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  14. It’s difficult to align your hope for a 50% property crash this year with a belief in the Almighty, Lachlan. He would rather you prayed for a Lotto win than see the poor evicted from their homes, don’t you think?!~ ;)

    If The Faithful are to be rewarded for their beliefs, don’t you think this kind of heavenly intervention is preferable to the chaos for which you pray?

    Now I guess you could argue that God will smite the wicked, but it seems to me that widespread collateral damage always occurs when that happens. It has always intrigued me that soldiers of both the axis and allies were certain God was on their side… .

    It’s said that God helps those who help themselves. I’ll buy that. Maybe in these days of online, public prayer, that old adage needs rephrasing to “God helps those who can locate a wishing well” or “God helps those who go the distance*… ”

    * 235km, at last count… . ;)

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  15. and there are those of us that are agnostic… or even atheist.. whom believe there is no fate but what we make for ourselves..

    Stillgotshoeson
    July 1, 2010
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  16. One of Tolstoy’s contemporaries is reputed to have remarked that after reading War and Peace for the 10th time he felt he’d gained an understanding of the meaning of life – I’m half way through my second reading and strongly suspect I’ll need at least 20! :)

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  17. “…who believe there is no fate but what we make for ourselves…”

    Well, it’s unlikely God will intervene to enrich one of us while torching our neighbours. Seems just a little ungodly to me, particularly given the Book of Job. ;)

    Belief systems are continually under the magnifying glass here. Why quarrel with believers, pantheists, agnostics or atheists; or goldbugs, traders, or savers? There will always be those who, despite or because of their beliefs, take comfort in a get-rich-quick proposition. And there will always be those who grasp for any tiny movements in marketS which herald a change in fortunes… . Imagine the potential mirth if a property bull posted daily falls in the All Ords… or a $17 drop in Gold…!

    I don’t imagine that God spends too much time worrying about markets.
    Have a feeling he’d kick _all_ our sorry arses out of the temple, atheists and agnostics included… . :)

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  18. No prayers for chaos or crashes here BP.
    They are only my predictions.
    More or less chaos is always with us. Since I believe in God I therefore believe he allows chaos.
    A cheaper house is likely to be little consolation for material losses transpiring.

    To measure myself by what I (think I) own (assetts,family,friends) is to sell myself and my God out. I reject that thought.

    Nothing said here will stop anything from happening which wasn’t already inevitable.

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  19. Well, you haven’t a prayer for a 50% reduction in property values this year, Lachlan!~ :)

    As Ned suggests, any reduction in ‘values’ may be around the 10% mark… ; and, in my view, _if_ it happens it will hit our two largest cities. I’m not really sure what would cause that to happen. A double-dip-recession is more likely to see properties withdrawn from sale across Australia. When that happens it tends to create a(n) (incorrect) perception of shortage of supply.

    I’ll concede that some Black Swan event might shake the property market about. We’d have to imagine the share market in utter free-fall should that be the case… . I’ve often wondered why Keen ignored that likeliest of propositions when he was prophesying a 40% property crash, 0% interest rates and 10% unemployment. Perhaps the cash from his house sale went into shares(?) Nahhhh… ! ;) But consider that he could actually have scored one-out-of-four had he added “… and the Oz share market will fall over 54%!!~” :)

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  20. I can see “things” changing easily enough over the next 15 or 20 years – In fact it’s almost impossible to see them NOT changing. And within that context re Oz housing, if I had to take a punt, I’d be backing a call for it to be lower multiples of household income. BUT, by then lots of our housing will be 1 and 2 bedroom apartments. Or detached 1, 2 and 3 bedroom dwellings on small blocks of land. With other changes like fast rail links from far flung ‘burbs to city centres. And revamped regional centres maybe. So it won’t really be a comparison of apples with apples. As to whether our housing overall then will represent better value in real terms than it does now? My suspicion is Yes. But that is only a suspicion.

    As to the more immediate term (barring a black swan), a correction certainly seems like a possibilty again. But given the ability to tweak interest rates and stimulate, punting on a genuine short term crash of 20% plus in an asset class our banks are up to their necks in is definitely not a bet I’d make.

    As to a genuine black swan – Well it isn’t genuinely going to make too many people genuinely happy. With the average bloke finding it difficult enough to prosper in good times let alone bad ones. My punt in those circumstances would be for lower rates of home ownership. And that isn’t an attempt to say “Buy now or you’ll miss out”. Because in those circumstances some tenants could well be saying they are glad they aren’t owners. Individual circumstances aside, a lot of it will come back to whether any such event was inflationary or deflationary I imagine.

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  21. Hey neighbour Ned!! Where I am in the Pine Rivers there is no subdivision and I am just outside the urban footprint. So no apartments around me thank goodness. Protects the bushland which is one reason I bought there. How about you?

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  22. I tend to buy with an eye on future “potential” Annie. And quite intentionally bought within 500m of rail in the vague hope some nice developer might want to bulldoze my joint in 10 or 20 years … :) But the possums and koalas and your veggie patch sound great!

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  23. Comment by Ned S on 2 July 2010:

    As to the more immediate term (barring a black swan), a correction certainly seems like a possibilty again. But given the ability to tweak interest rates and stimulate, punting on a genuine short term crash of 20% plus in an asset class our banks are up to their necks in is definitely not a bet I’d make.

    Interest rates at near zero in the USA (mortgage rates around 5% fixed) Billions and Billions in stimulus and the housing market is still going under over there.. When the tide turns and I expect it will, government intervention will not stop it happening here now. The catalyst for it will be from abroad so out of our governments control. 20% may well be the nation average decline in property values, some areas may well hit the 50% that others have been saying.
    If the overseas catalyst is China then Bikers assumption that any correction will be confined to the 2 major cities will be wrong.. WA may be hit even harder than Sydney and Melbourne in that event.. Will it happen? Better than 50/50 chance now I think.

    Stillgotshoeson
    July 2, 2010
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  24. Yes that’s good thinking Ned. I’m only 5 minutes from Petrie rail but far enough away from neighbours. The way the area is growing, I’m sure those developers will be knocking down your door sooner rather than later! People would much rather catch the train than face the bruce highway in the morning.

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  25. “Better than 50/50 chance now I think.”

    HaHa… still a gambler, obsessed with property. First poker, now two-up. :)

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  26. I’ve noticed the prices on acreage blocks out past what I assume is the Petrie roundabout Annie. Yep, things have definitely been hopping along over the last few years. You just don’t get that many acreage lots within a short drive of rail anymore I guess.

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  27. “20% may well be the nation average decline in property values, some areas may well hit the 50% that others have been saying” – Shoes, you are basically predicting a depression and assigning a “Better than 50/50 chance” to it???

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  28. Comment by Biker on 2 July 2010:

    “obsessed with property.”

    Obsessed, no.. observant yes.. it is a barometer of our economy… As an investor I would be a foolish not to pay the property market any attention..

    We were due the property market correction in 07/08 government intervention has delayed said correction, also made said correction more likely than not worse than it other wise would have been.. we have more people more indebted than then.

    Stillgotshoeson
    July 2, 2010
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  29. Comment by Ned S on 2 July 2010:

    “20% may well be the nation average decline in property values, some areas may well hit the 50% that others have been saying” – Shoes, you are basically predicting a depression and assigning a “Better than 50/50 chance” to it???

    Unemployment rate will be the decider on recession vs depression..
    Melbourne and Sydney are the cities with the greatest population and a high number of suburbs and high number of high priced homes.. a decline in those cities will effect the national average simply by the number of higher priced homes that would most likely drop.

    If China falls over. 50% is not an unlikely amount for properties in WA to decline, especially ones rented out to mining industry employees. No jobs, can’t pay the rent.. many are skilled tradesman or other skills, they will move and try and find work elsewhere. Rents will be lowered to retain tenants just to help pay the mortgages. Lower yeilds and forced sales by the overcommited will bring those properties down.. IF CHINA FALLS.. If China does not fall over then the damage will be more confined to the eastern states…

    Stillgotshoeson
    July 2, 2010
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  30. Biker, I hope it clears up for you but judging from the last few weeks (and today) it has been consistently overcast and raining in Cairns. The rain is not too heavy but just annoying! Anyway I trust that your plans include “in case of rain” options :)

    Certainly the wettest “dry” season I have encountered up here.

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  31. Good luck with that, Shoes. You probably need another decade or so here before you realise that we’re not Americans… and we don’t chuck in the towel all that easily.

    Next time you emigrate, invest in a better quality compass. :)

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  32. Comment by Biker on 2 July 2010:

    Good luck with that, Shoes. You probably need another decade or so here before you realise that we’re not Americans… and we don’t chuck in the towel all that easily.

    Next time you emigrate, invest in a better quality compass. :)

    As a gambling man, should have posted that you would come back with the “were not America” “Australia is different” argument.. I say to you, good luck with that. ;) :)

    Stillgotshoeson
    July 2, 2010
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  33. I doubt China is going to “fall over” as such – I looks like they are quite intentionally slowing their growth a bit; And other Asian countries will presumably begin to feature more prominently. Unless there is a modern day Smoot-Hawley perhaps? But that would seem extremely improbable.

    Could Oz shoot itself in the foot regardless? Hopefully not – I suspect a few people have learned a few lessons from the recent super tax effort.

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  34. Don, it’s _freezing_ cold here, at the moment. We have three of our four fireplaces going 24/7. Coldest snap in decades.

    A lot of our time will be spent diving. We’re both FAUI… and looking forward to warmer weather… and water… . Most of our time will be spent in Port Douglas, anyway.

    We were interested to see that Cairns was the fastest growing city in Australia last year: 4%. We just missed an MRD Seminar in Cairns. Not all that disappointed, as we think their profit estimates are highly speculative.
    We’ll be interested to see how Cairns prices compare with Perth… .

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  35. Comment by Biker on 2 July 2010:

    We’ll be interested to see how Cairns prices compare with Perth… .

    Hard to say which will have the greater fall :)

    China is the variable

    Stillgotshoeson
    July 2, 2010
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  36. Ned: “I doubt China is going to “fall over” as such – I looks like they are quite intentionally slowing their growth a bit…”

    In fact their government is implementing most of the initiatives DR claims the US should have undertaken. As Twiggy Forrest remarked recently: “They’re the new capitalists… .”

    Lateline carried a report on just one of their motorcycle manufacturing companies the other night: 1.4 million bikes produced annually, mainly for domestic use; with a stimulus grant in the nature of a 13% discount to rural Chinese.

    Waiting for DR to acknowledge that the Trade of the Decade is China, rather than Japan. Their recent US articles appear to signal that shift…

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  37. You don’t have to worry about the temperature that is for sure – shorts and t-shirt with thongs just for good measure :), even that gets a bit sweaty after a while :)

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  38. Biker, we wonder if the Chinese may choose by way of economic stimulus and to increase the velocity of rural agrarian consolidation / productivity rise to soften the stance on the one child policy in those urban areas where many westerners have been calling that they have been overbuilding white elephant infrastructure.

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  39. “…white elephant infrastructure…”

    Maybe they saw the film, Ross!

    I guess if you have a 100-Year-Plan, you start assembling the bits-and-pieces well before you need them. DR’s analysis of increased rail infrastructure in China leads me to believe that the Chinese concept of a ‘helicopter view’ may differ slightly from Bernanke’s.

    I’ve convinced my FA that a look at these mysterious WEIs is worth doing in 2011, once she retires. Are the Chinese simply moving the deckchairs about, or is there method to their madness? DR has unquestionably shifted from a position of the former to the latter… .

    Must finish packing… .

    Enjoyed the refererence to ‘increased rural velocity’, by the way. :)

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  40. Hey fellow Aussies,
    I’m just an observer and that is all. I’ve been living here in Sydney in Surry Hills with my Aussie wife. I’m from Los Angeles. I was in LA when everything was booming. A property wouldn’t be on the market for no more than a couple of hours before it was sold. There was money to be made. People that had bought their first home in 2004 saw it go up by at least one third by early 2007. Those people were leveraging the equity in their first home to buy a second and even third home. Buyers were borrowing up to 80 percent of a homes value. It seemed seemed as if this would go on forever. People that could barely afford rent an apartment were bitten by the “I must own a home” bug. ‘Everyone is buying, I must too’. New homeowners would fix up their homes extravagently too. New floors, re-do the bathroom, kitchen…its a good investment… they would say. Quirky boutique shops of every kind were opening up everywhere too. Everyone had a business idea. Times were good. Then small cracks started showing up on the surface. Homes reached a peak that the banks were not willing to finance and people weren’t willing to pay. The person that had bought the home with the pretense of holding it for one year and making a killer profit were slowly being suffocated, unable to sell. They had too mortgages to support. Lavish spending stopped. The banker that was unable to close loans stopped going to his favorite restaurant. The waiter that waited on the banker had her hours reduced by the restaurant. The waiter stopped going to the movies with her boyfriend. The movie theater had to let go of several of their employees. The kid that use to work at the movie theater stopped buying video games at the game store. The store went out of business….You get my drift. It is a delicate domino effect but once the dominoes start falling, its hard to stop. My wife purchased her city views apartment here Surry Hills for 405,000 AU this past November. Her downstairs neighbor just sold a smaller apartment with no views for 476,000 this past week. I have this eerie feeling that I’ve seen this before. My wife’s girlfriend is in the process of purchasing her 4th property in 6 years. She owes about 65% on each property but they are all rented out. I hope Australia doesn’t go through what the US went through, but I caution on the magnitude that properties have appreciated within just 5 years.

    Joseph Gontier
    July 2, 2010
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  41. Too bad we can’t get you there earlier Biker. Now I did see a TV show on a New Yorker who took his Harley to China some years ago. Maybe you can track that down.

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  42. Nice to hear from you Joseph.

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  43. It is all about the “greater fool,” says Shedlock. Just like the stock market, people are buying houses now because they think they’ll sell them for more later—hopefully a lot more. But inevitably, “the pool of greater fools runs out.” There is no one left willing to pay an even higher price in the speculation that prices will keep rising.

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  44. “Just like the stock market, people are buying houses now because they think they’ll sell them for more later…”

    People buy houses for many reasons, Steven. Most Aussies buy homes for shelter. A mere 14% buy them as investments. This seventh of Aussie buyers are generally better-insulated from debt than many other groups, including the group _you’ll_ join when houses plunge 33.3%: the First Home Buyers. Just imagine your excitement when you become part of that group of homebuyers you’ve reviled for the last couple of years… !~ :)

    We _build_ houses because it costs us less. We do the finishing-off ourselves… and pay no stamp duty, other than on the land. Then kind folk much, much smarter than us _rent_ the homes from us, paying them off for us; providing us with a comfortable living; and permitting us to travel for months each year.

    Yes, _we’re_ the greater fools, Steven. ;)

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  45. Comment by Biker on 2 July 2010:

    Most Aussies buy homes for shelter. A mere 14% buy them as investments. This seventh of Aussie buyers are generally better-insulated from debt than many other groups

    See this is where you are wrong.

    1 in 7 may be property investors with 1 or more investment properties, however many buyers of homes have been buying under the spruikers “buy now before you priced out of the market”, “property can only go up”, “you can’t lose with property” mantra…
    These people are about to learn that property can indeed stop going up and not only can it stop going up it can also fall in value. The rise in value and perceived wealth that comes with that is about to be proven false.

    Some of those 1 in 7 property investors feel the same, they can’t go worng.. property can only go up, let’s leverage to the hilt.. they too are going to learn that prices can steady or indeed decline, tenants can go back to living with mum and dad or sharing accomodation.
    I will agree that some, indeed most investors are in a better position than the majority of the recent first home buyers (last 2 years or so)
    However with some of those investors and first home buyers and other over commited persons having to sell at the same time is going to do wonders for the house prices in those areas.
    Also Australia is different just like you say, when those people sell for a loss, they will then be paying of the loan for something they no longer have.. unlike the non recourse borrowers in the US of A that could send the jingle mail to the bank.

    Stillgotshoeson
    July 2, 2010
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  46. “Biker”
    Oh but Shoe_son you have got it all wrong the government will do whatever it can to protect the housing market.. they will put more stimulus into the economy to keep it ticking over and that will stop the correction from happening and all will be good….

    Oh really Biker… maybe have a read of this and let me know how well stimulus measures work….

    http://www.nytimes.com/2010/07/03/business/economy/03jobs.html?hp

    Stillgotshoeson
    July 3, 2010
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  47. Thanks for the heads-up Steven, and I hope you enjoy Australia. Your concerns sure strike a chord with me. Perhaps some of the buy to let sector, or build to let if you want to get pedantic about it, might also be hearing similar music and not gazing so gleefully at The Big Banana on their travels. Or is it The Big Pineapple? Whatever, I’m sure you get the drift…otherwise, why the need to incessantly build yourself up?

    bearamundi
    July 3, 2010
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  48. Sounds like we are about to see some real world hypothesis testing in action … Haven’t had this much fun since me last visit to the casino! :)

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  49. Comment by bearamundi on 3 July 2010;
    “The Big Banana on their travels. Or is it The Big Pineapple?”

    Oh yeah, there’s The Big Banana and The Big Pineapple and then there’s The Big Merino and The Big Shrimp and The Big Pie and then there’s The Big Wombat and The Black Stump then Tucker Box a few other big’ns and by the time you finish visiting them you may lucky enough to experience the spectacle of quite a few ossies getting The Big Shaft to add to their collection. Not sure which city, town or highway will have the honour of hosting The Big Shaft. None the less should make a great memorial. Of course, there could be more Than_One_Big_Shaft to go ’round to appease all.

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  50. “Sounds like we are about to see some real world hypothesis testing in action … Haven’t had this much fun since me last visit to the casino! :)”

    HaHa, I doubt it, Ned. :) You and I have been reading this kind of stuff here, year after year. Other than Keen’s walk to visit The Big Mountain, what has changed? The same noise, different names, but no change of any consequence.

    You have to admire the sheer persistence of the sad bears. Daily posts flagging a crash, all their guru’s predictions on property, unemployment and interest rates woefully wrong… and they still bleat his same tired arguments, make the same silly comparisons, see a 30% crash in any tiny 2% shift in sales. Gotta laugh… . ;)

    Reply
  51. for years and years they did not even realise they were wounded, then they started wrapping bandages around the wound, now they have run out of bandages and the wound is still there… the infection is spreading.

    Stillgotshoeson
    July 3, 2010
    Reply
  52. “Australia is different just like you say, when those people sell for a loss, they will then be paying of the loan for something they no longer have.. unlike the non recourse borrowers in the US of A that could send the jingle mail to the bank.”

    You got _that_ one right, Shoes, but you haven’t sufficient grey matter to see that this very difference is compounding US housing problems. US laws give their citizens the right to quit and let _others_ carry their debt. Aussies in trouble will stand and fight for their homes. Many FHBs probably are doing so now.

    You’re probably from a different mould, son. We don’t run from our problems… .

    Reply
  53. For many it is a problem of their own making, overcommited themselves.. wanted the McMansion, the New Car and a house full of nice new furniture and electrical goods all purchased with easy credit.. Don’t run from problems?.. more like they can’t run from them…

    As for a different mould.. yes sir got me on that, I try not to give myself the problems to start with, Why I choose not to be indebted..

    Stillgotshoeson
    July 3, 2010
    Reply
  54. Priceless nv; “The Big Shaft”!! I laughed for a good 5 minutes and will never look at that Poppet Head in ‘my’ Newcastle in quite the same way again!!
    I think part of the reason these Cultural Monuments make you cringe is that over and above their function of improving market visibility, they suggest a minimalist Public perspectice. We can seem preoccupied with our own interior feelings and needs while remaining wilfully ignorant of the bigger democratic and moral picture. Perhaps that is why the recent political assassination is probably of dubious value.
    I mean, just look at DR. Some people love the smell of cordite in the morning don’t they? Perhaps instead of the endless sniping among ‘competitors’ we could smell that latte instead?

    bearamundi
    July 3, 2010
    Reply
  55. Aussies in trouble will stand and fight for their homes. Many FHBs probably are doing so now.

    Yes Biker that is true, as we know they are now living on a staple diet of
    RICE

    Reply
  56. Mum makes you something else most nights, Steve? :)

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  57. Once again not staying on the subject Biker
    So predictable!!!

    Reply
  58. Bad-mouthing FHBs again, Steven?

    “So predictable!!!”

    :)

    Reply
  59. No Biker just stating Facts thats all

    Reply
  60. There’s some reasonable safety nets in place for home owners – They can even access their super to prevent foreclosure if my take on the release provisions is correct?

    My perception of the game has changed a lot in the last two years. Back then I was thinking in terms of Australia having an issue with housing affordability. Whereas it’s now obvious that the focus is way more on ensuring house prices don’t crash – And if along the way we can come up with some ways to improve affordability, then that’ll be a bonus.

    Reply
  61. Melbourne Auction Results
    Weekly Auction & Sales Results, Market Overview

    Saturday July 3rd 2010

    There were 521 auctions reported today with a total of 347 selling and 174 being passed in, 95 of those on a vendors bid. The clearance rate from today’s auctions is 67 per cent. This weekend last year saw 292 auctions reported and a clearance rate of 82 per cent. Next weekend the REIV expects 550 auctions.

    Enzo Raimondo

    CEO REIV

    Near as damn it to a third passed in… 1/3 not achieving the price they had hoped for… No denying, demand is softening for property here in Melbourne.

    As for super access Ned, I believe you can do it once every 12 months under hardship conditions.. Max payment is $10000, a few hoops to jump first to get it though.

    Stillgotshoeson
    July 3, 2010
    Reply
  62. “As for super access Ned, I believe you can do it once every 12 months under hardship conditions.. Max payment is $10000, a few hoops to jump first to get it though” – Thanks Shoes.

    Reply
  63. Tax rates dropped, minimum wage up, no interest rate rises predicted for twelve months. (Sorry to be the bearer of such bad news for those who prefer cordite to caffeine in the morning… .)

    Discussion with a miner renting one of our homes indicates there’s so much work here that he can pick-and-choose his locations. He claims nothing changed here during the mining tax debacle. It’s all go. His views may support the claim that WA’s unemployment rate will fall below 3% next year.

    Emergency access to Super probably needs more publicity. Grateful to those who have clarified the situation on behalf of those who are subsisting on just rice, their staple diet. This is apparently a Fact. ;)

    Reply
  64. “if along the way we can come up with some ways to improve affordability, then that’ll be a bonus.”

    The removal of penalties for changing banks must help, Ned. Already Members Equity is surveying randomly across Australia in an attempt to gauge whether this might affect their bottom line.

    The ANZ introduced No Penalty loans some years ago. Along with a half-percent-lower deal for good customers, this initiative indicates a great deal of foresight. Free Visa is another bonus. Once removal of penalties for changing banks is in place, we may see more such incentives introduced… .

    Reply
  65. Comment by Biker on 4 July 2010:

    “no interest rate rises predicted for twelve months”

    If China’s demand for our resources remains even constant, expect more interest rate
    rises from the RBA.. Sovereign debt issues become more of an issue, expect the banks to add to mortgage rate independant of the RBA moves.

    Over the next 12 months, both these are likely.. expect higher MORTGAGE rates now than current. RBA rates may drop, don’t see mortgage rates dropping.. Election is in a couple of months most likely.. Banks will have 3 years of free reign

    Probably after 12 months we will start to see a decline in mortgage rates and a rise in defaults on mortgages, increased unemployment.

    Survey in yesterdays Herald Sun.. 66% of those surveyed think property values in Melbourne will drop at least 10% in the next year.
    That’s a big change of sentiment….

    Stillgotshoeson
    July 4, 2010
    Reply
  66. Comment by Biker on 4 July 2010:

    “if along the way we can come up with some ways to improve affordability, then that’ll be a bonus.”

    Let market forces dictate the value of property and the affordability issue will fix itself.

    Stillgotshoeson
    July 4, 2010
    Reply
  67. “Let market forces dictate” – We’ve all seen what countries economies look like after property crashes Shoes – Japan and more recently Ireland and Spain; And even after significant property corrections – The US and the UK. I’ve got a bit invested in this economy; And so have my various family members – Housing; Cash; Even a few stocks in super for some of them – And it’s pretty much all been built up since the 1950’s. Because before then, the working class had bugger all. Maybe if you could give me some assurances that market forces dictating aren’t just going to favour the genuinely and independantly wealthy, and a few skilled traders, or give a few others who’s mobs have been here just as long but still have bugger all, the opportunity to gloat and say Ha Ha, now your lot has bugger all too, then I might see a bit in favour of letting market forces rip. But at this point, despite Dan Denning’s assurances that if I have lots of bullion and baked beans and bullets, me and mine should be just fine, I’ve still a few quiet doubts.

    Reply
  68. “nibbling at a chicken and bacon sandwich” – Hmmmm … Doesn’t sound like the sort of sanga I used to pack at home when I was working – Must be DD’s special treat day for the week I guess? ‘Course I always settled for a plain burger as me special weekly treat. So can only assume that blokes who advise others to buy bullion and baked beans and bullets are better recompensed than I was … :)

    Reply
  69. “Let market forces dictate the value of property and the affordability issue will fix itself.”

    Or just chuck the keys to someone significant and say: “Here, pay _this_ off!”

    (Then talk property down. They’re just a _little_ sick in the US, eh?! ;) )

    Reply
  70. It is extraordinarily strange to a chap like me who basically feels one should be accountable for the debts he’s signed up for Biker. But that’s septic tanks for ya I guess … They do their own things by their own rules.

    Reply
  71. “…feel one should be accountable for the debts he’s signed up for…”

    Moi aussi, Ned. Imagine a situation in which one bought a car, drove it for several years, then threw the dealer the keys… and walked away! How silly are those US banks? :)

    But I knew a fella in Oz once who did that with his pretty ordinary house. He took all the Super and chucked her the house keys. Then he told everyone the house was infested with termites… he ‘white-anted’ her, hoping she’d lose equity. There are some _sickos_ out there, Ned.

    Reply
  72. Yeh, could kinda make a bloke think in terms of Nah, I don’t do that credit stuff no more – Come back in a decade or three when you’ve saved up a genuine deposit! :)

    Reply
  73. On super- you can get up to $10,000 in financial hardship (need a centredlink letter though) or an APRA determined amount under compassionate ground. Compassionate grounds include arrears on mortgage payments, and the bank HAS to have issued foreclosure letters, so it is a race to get the APRA approval and the release of funds from the fund. APRA will authorise 3 months of payments + 12 months interest from memory. Back in 2007 banks and credit unions were handing their delinquent mortgage holders the forms to apply to APRA, rather than letting them find out elsewhere.
    Can only apply once every 12 months for a particular circumstance and you get taxed somewhere between 21.5% and 31.5%.
    I haven’t heard of any significant increase in such applications, which implies that either the homeowners have burned through all their super, or it has not gotten bad yet. In 2007 we saw a number of such applications, which flagged problems long before the RBA picked it up. From the indicators in the super side of things, people aren’t as stressed as they were in 07 and 08, both in terms of harship claims and in complaints about processes.
    If you have an SMSF and think you can dodgy round the rules – good luck, as that can earn you 50% tax rates on everything in the fund.

    Reply
  74. “From the indicators in the super side of things, people aren’t as stressed as they were in 07 and 08, both in terms of hardship claims and in complaints about processes.”

    Remember that interest rates have fallen appreciably since 07-08. We were happily paying 9.45% in 2008… and we’re paying 6.71% now…. a 2.74% saving… .

    I see The Barefoot Investor is now actively advocating offset accounts for folk our age; and Noel Whittaker recently claimed that those eligible for the FHSAS can pull 21.25%, after tax, on their savings. Why wouldn’t you whack some spare cash into that little winner?!~

    Reply
  75. aahhh! Nothing like being a homeowner!

    Apologies, meant homedebtor.

    Reply
  76. It may bring you some comfort to know that our major properties are all owned _outright_, nv. Our Super covers the debt on all the others.
    Our offset accounts are our additional insurance.

    That was the plan. The plan worked. :)

    If you’re happily renting, we can’t argue with your plan. It works for us.
    (You do _have_ a plan, I hope. Our plan was pretty simple. It took over three decades… and it has been a lot of fun. Why not share your plan here, so we can see where we got it so wrong, son?~ )

    Reply

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