Widespread Asset Deflation

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If you can’t grow your way out of debt – and it looks increasingly likely that total debt in the Western world is growing faster than the economy – what else can you do? You’re left with only three choices: default on it, print money to pay for it (quantitative easing, or inflationism), or cut spending and raise taxes.

The task of today’s Daily Reckoning is to look at which scenario is most likely and what investments will benefit (or suffer) the most. But, as you’ll see in the note from our friend Dr. David Evans in the other featured article, we have entered unknown territory in the size of public sector debt creation. This can keep asset values inflated for longer than you might expect. But it can’t prevent their ultimate deflation.

That’s what you have to be worried about now: widespread asset deflation. Even gold – which set a record high USD terms overnight – will not be immune. In fact, any time you see something making record highs, a correction is not far away. With gold, investment demand (as a hedge against bad monetary policy) is pushing the price up.

Deflationist Robert Prechter says a genuine Europe debt crisis and technical momentum are setting up gold for a 40% fall from its highs. He cites the uber-bullishness of gold investors, with 98% being bullish. But then, you would be bullish if you were buying, wouldn’t you? Why else would you buy if you didn’t think the price was going up?

We mention Prechter’s prediction, though, because it’s prudent to do so. The bigger the debt bubble, the harder they fall. Ultimately, gold (physical gold anyway) is a kind of insurance policy against whole-sale value destruction in paper assets. Like most insurance, you hope you don’t have to use it because the world will be a lot less pleasant place if you have to.

And to the extent that investor sentiment ebbs and flows with the news cycle, gold is like any other asset in its volatility. But fundamentally, we’d say it will survive the coming credit write downs a lot better than credits. There is an advantage to not being anyone else’s promise to pay. Those promises are going to be hard to keep, even if bigger and bigger institutions are guaranteeing them.

As Bill noted last week, the current sovereign debt troubles in Europe (and America, and Japan, and the US) are a consequence of the collectivisation of irresponsibility. The risk of loss from bad lending (and borrowing) has been transferred to larger and larger entities…from the individual to the investor…from the investor to the money centre bank…and from the money centre bank to the nation state.

And now, bond traders are betting that in places like Greece, the most likely outcome is default, not austerity. According to a Bloomberg poll, 73% of traders think Greek debt is already zombie debt.

Pimco’s Anthony Crescenzi says we are at a “Keynesian endpoint.” Someone, by the way, should mention this to Wayne Swan, Kevin Rudd, the Coalition, and anyone who thinks spending money you don’t have improves your economy. It stimulates activity. But that is not the same thing as growing prosperity.

When you “bring forward demand” by giving away money or granting tax credits for the purchase of big ticket items like cars and houses, where you think that demand is coming from? The future, of course. That means it won’t be there when you get to the future. But the debt you took on to bring forward demand will be. How selfish and adolescent.

And worse, when you “bring forward demand” you bring it into the world prematurely. In a financial sense, this means homebuyers who, financially speaking, may not be ready to endure the hardships that come with rising interest rates and unemployment. They can only hope that things don’t happen. If they do, the demand brought forward could get crushed.

Standard and Poor’s credit analyst said as much in a report about the Australian housing market widely quoted in the press. She wrote that, “‘We believe the larger debts and higher leverage expose some Australian mortgage holders, especially those with less equity in their houses, to potentially greater financial shock if high unemployment and interest rates, alongside a collapse of residential property values, were to occur.”

To be fair, she went on to say that she thought the housing market fundamentals in Australia were strong. And you won’t have any shortage of real estate spruikers to tell you that unemployment won’t ever rise in Australia (can’t happen here mate) and neither will interest rates. This means not only will homeowners never go into negative equity, it means the collateral of Australian banks – over 50% residential housing – is, well, safe as houses.

They were saying the same thing about American mortgages in 2004.

But while Australia stews on what risk, if any, there is in having $774 billion in mortgage debt as a nation, Europe is dealing with the fact that you can’t spend money you don’t have and improve solvency issues. This is why Keynesianism is dead and why tax grabs are in vogue. When there’s no more money to redistribute (steal from one group to give to another) and the government can’t borrow, the only alternatives are outright inflationism (the farcical printing of money to buy government debt), default, or austerity.

Pimco’s Crescenzi writes that, “Time, devaluations, and debt restructurings might be the only way out for many nations…Debt-fuelled spending programs aimed at combating the global financial crisis of 2008 are among policy tools now being seen as a magic elixir that has morphed into poison.”

And if you think we’re just picking on Europe, think again. Ratings agency Fitch stuck it to David Cameron in the UK and said his deficit reduction plans aren’t good enough. And in our homeland, the debt-to-GDP ratio is fixing to exceed 100%. The only reason no one is panicked is that the US dollar, for all its grotesque deformities, is not the Euro.

All of this raises serious issues for emerging market nations. Do they continue to invest in the sovereign bonds of Western Welfare states? And if not, what will they invest in? And if their primary export markets embrace slower growth and austerity, will emerging market nations face slower growth themselves, with smaller trade surpluses and less capital available to finance other people’s debts?

Hmm. This is a lot to think about. Your editor is on a plane to Seattle early tomorrow morning and will be out of touch for the next five business days. But thinking will be done. And writing. In the meantime, you’ll hear an entirely different perspective from our trader colleague Murray Dawes.

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. austerity, ahh, that;s what I suggest if global warming is a serious issue which requires a cut back in (fossil) energy use, until alternatives are in place. not a bad thing if done properly. requires fencing in and regulation of the common grounds paddock though. (external costs need to be internalised.). let’s not go there though, it would spoil a good free market theory huh?
    on the other hand trust governments? not one iota these days!

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  2. That is my horse. When you see deflation you become a trader out of necessity in everyday life.

    If it does eventuate, and if you own real estate, it must be that which generates a net return after finance costs in that depressed economy. If you go into a depression owning highly leveraged shelter and expect to take a slice of personal income that a depressed economy can’t generate, you would be done for. The bank or the state takes the asset and does away with the leveraged landlord middle man.

    In commercial property that’s what the Frank Lowy’s worry about too.

    Sorry BP nothing personal and mind the “if”.

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  3. “When you see deflation you become a trader out of necessity in everyday life” – Sounds similar to very high inflation then. Stuff of real value to trade is good in both I guess. And in very high inflation I also gather that speculation becomes rampant – Amongst those who still have/can come by, anything to speculate with. As opposed to hunkering down in devaluing cash.

    Leverage has been a funny one to date – There just haven’t been many steps taken by any major policy makers anywhere to do anything other than prevent their highly leveraged anybodies taking a whack. (With them not liking the Lehman lesson maybe?)

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  4. Ross I agree my life experience tells me we are probably heading for a deflationary correction. How this affects some of Australia’s overpriced and over leveraged assets will depend on credit availability.

    Interesting to note that ANZ have refused funding for Aussie home loans.
    http://www.heraldsun.com.au/business/anz-request-scuttled-as-aussie-loan-sales-dive-20-per-cent/story-e6frfh4f-1225877291703

    Also of interest is the number of articles on risk assessment appearing on one of my favourite “banking websites”. http://www.risk.net/type/news

    Common definition:
    Supply = number of dwellings available for occupation
    Demand = total population

    Economic definition:
    Supply = number houses available for sale
    Demand = number of buyers willing to transact at today’s prices

    So fundamental, yet so hard for many to understand.

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  5. I did some winter cleaning over the weekend and as I did read parts of the Fin Review published post tax day. Interesting as an historical document, it all hinged on the new tax didnt it ? But re-reading it , the budget was also putting in place a whole lot of new APS to collect ,process and then hand back the royalty component. If anyone else has not noticed, there are now a whole lot more APS in place with Rudd in power.

    And APS == more people in Canberra. I saw an article talking about when the ACT reaches 1 million people, it was not proposing anything different ie like industry. We really need to reduce the size of Canberra or if not decentralize the running of the country, the current 100 year + experiment has not worked well for the margins. The current structure governs Australia for the benefit of the ACT.

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  6. Ross: “…and if you own real estate, it must be that which generates a net return after finance costs in that depressed economy. If you go into a depression owning highly leveraged shelter and expect to take a slice of personal income that a depressed economy can’t generate, you would be done for. Sorry BP nothing personal and mind the “if”.”

    Travelling, so I missed this one, Ross!~

    Which ‘if’? Only the first applies. Nothing highly-leveraged. And, as my wife pointed out recently, we’d still be very comfortable if over half our rentals were empty. Because we equip homes with many cost-saving features and numerous unexpected extras, we figure our tenants stay longer than most. The request we decline most is for a two-year lease. Our agent wants us to review rents six-monthly, but an annual agreement remains a 12-month agreement. We’ve treated tenants fairly for decades and believe it doesn’t cost… it pays~ :)

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  7. BP, I don’t disagree with any of your thinking unless there is a new normal, that is the IF.

    I am questionning whether there will be well heeled tennants available in a depression. If they stay well heeled they will have lots of choices. And the ratio of the cost of money vs yesterday’s asset price in a stagflation scenario, one that doesn’t build asset prices like in the 70’s, but rather pops the bubble and marks them to market in terms of depression levels of income.

    In the 70’s we had wages inflation and asset inflation and poor growth, in the late 80’s we had wages stagnation (against CPI) and asset inflation and growth. In the 90’s after Keating we had wages inflation and asset inflation and growth.

    The next one for mine : wages deflation (against CPI), asset deflation, negative growth.

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  8. The next one for mine : wages deflation (against CPI), asset deflation, negative growth.

    Wages deflation.. Have to agree. Coming inflationary pressures will see wages go backwards in real terms. I signed 15% for 3 years last year. 5+5+5 in September 2009, 2010 and 2011. That might be a break even scenario for me Post 2012 I see inflation running high.. higher than wages will cope with.

    Asset deflation. In both real terms and adjusted against coming inflation will see the fall of many assets, some will be harder hit than others.. property, some areas will be harder hit than other areas. Shares the same, some will thrive in that enviroment.. gold should do well in this period too.. first sign of decent stability and gold will drop 30% very quickly.. how high first, anyones guess.

    I am tending to think stagnation of growth rather than actual decline, a long period of stagnation.. ala Japans lost decades…

    Stillgotshoeson
    June 11, 2010
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  9. “The next one for mine : wages deflation (against CPI), asset deflation, negative growth.”

    Well, not everyone has that take on it, Ross.

    Our rents are the _cheapest_ in a very expensive (up)market.
    We’re continually advised to raise ’em… or revise them six-monthly.
    We’ve simply no need to me$$ with our great tenants… .

    Interesting item in the Economist (5th – 11th June) recently: The Deflation Dilemma; p.16. Predicts deflation primarily for the US, Euro zone and Japan. (Nothing new there).

    The view that gold needs _inflation_ to make the stellar leaps predicted by DRA seems to persist…

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  10. “The next one for mine : wages deflation (against CPI), asset deflation, negative growth.”

    Doesn’t this mean they will decrease interest rates? Then the cost of the servicing the debt for the asset will decline anyway? Or am I off the mark?

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  11. Annie, you’re right ON the mark. I just made this very comment on another site, in fact, reassuring a concerned FHB. :)

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  12. Unstable currency makes hard assetts popular. Inflation and deflation are symptoms. Expect both. Expect anything but a sudden return to smooth sailing. Avoid the most leveraged assetts.

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  13. Annie and Biker
    You would be right in saying the interest rates would fall in such a scenario however a point to bear in mind is that Australia is a net importer of capital and therefore a premium must be paid above the going rate of other economies to attract foreign investment.
    Therefore a floor exists for our interest rates which are set by the RBA and the rates set by the banks etc whom are largely funded by overseas sources. The issue will arise when the loans have to be refinanced (hence the higher interest rates on deposits) and at what rate the funds can be secured.

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  14. Annie, the cost of money “in real terms” is to go up no matter which ‘flation direction we go. Even Glenn Stevens is public with that liklihood.

    Money has been too cheap for decades and that is what is shaking the whole thing down globally. We get ours from offshore so we lose the sovereign call on nominating the rate in a deflationary credit crunch … the RBA rate setting becomes a pantomine.

    In a severe deflationary episode risk commands a higher interest price due higher borrower defaults and a downward spiral in collateral value. The AUD normally drops compounded by lack of commodity exports and poor prices. Existing AUD bonds become big losses to offshore investors, rolling USD/EUR bonds create big price hikes to Australian bank wholesale funds which are passed on to borrowers on variable terms.

    Remember too that in the 70’s stagflation our loan rates for housing were fixed by government mandate and now they are floating. That “fixed” lending nature agaainst a variable cost of funds hurt the economy big time and by the early 80’s the banks had no funding for business and the economy flatlined.

    These are all ifs …. my opinion only. From my opinions I make personal choices and post them here for interest as do others. Until recently I had intermittent middle distance trading positions but right now I am mainly in cash and not trading in stock or currency aside from holding a few long stocks. I would be trading if real interest rates were heading up fast or our currency was diving (rather than sliding), so what I have suggested is going to happen plainly hasn’t emerged in my own mind on the ground as reflected in my own book.

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  15. “… deflation is debt’s worst enemy” (Michael Shedlock, Inflation Monster Captured, globaleconomicanalysis.blogspot.com. December 19, 2005).

    “… monetary inflation distorts relative prices and prompts excessive investment in some parts of the economy. The initial effect is a boom in the parts of the economy that receive the excessive investment, but after a while – due, perhaps, to a reduction in the rate of monetary “stimulus” – it becomes apparent that many of the boom-time investments do not mesh with the desires or financial capabilities of consumers. We therefore don’t end up with general “over-production”; we end up with an imbalanced economy where production is not well matched with consumption.

    “There have been many great examples of the above over the past few years. Of particular note, the inflationary policies of banks and governments prompted excessive (to put it mildly) investment in residential and commercial real estate, resulting in economies that were structured to build, fit-out, finance and market a lot more properties than were required to fulfill sustainable consumer demand.

    “After the structure of an economy has been altered based on an illusion created by monetary inflation, it must undergo a painful adjustment to get itself back into line with reality” (Steve Saville, Popular Misconceptions, 321gold.com, October 20, 2009).

    “While paper wealth vanished, money borrowed on the fantasy of spiralling asset prices had to be repaid in an economy brought back to reality. Debt remained, contractual and binding” (Peter Hartcher, The Ministry, (Sydney: HarperCollinsPublishers, 1997), p.84).

    “A severe and unexpected deflation at any time can have serious consequences, but the consequences will be worse for an economy that has adapted to inflation. What could happen in practice if prices suddenly fell by (say) 10 per cent next year?

    “Deflation would mean that financial obligations of individuals, governments and businesses would rise in real terms (ie, in purchasing power terms). For example, if an employer expected to pay a salary of £100, the purchasing power of that £100 would rise to £110.

    “Prices have fallen, so a given sum of money is worth more. This is a bonus for the employee, but a disaster for the employer who is selling goods and services at lower prices and still facing the same wage bill.

    “Unless wages adjust rapidly, the cost of employment rises and people are laid off – this was one of the reasons for the unemployment of the Great Depression.

    “The story does not end here. Tax revenues will fall…

    “The real value of debts also rises, so individuals and companies find it more difficult to service and repay their debts, especially if interest rates on those debts were fixed at high levels before the period of deflation began.

    “If deflation does not cripple companies because of its effects on the level of their debts, then their pension liabilities will probably cripple them instead. Many pensions are linked to rising prices but not to falling prices…

    “Pensioners will also suffer from falling interest rates. A bout of deflation probably means a period of zero interest rates. This is not an enticing prospect for those relying on their savings to provide them with an income, though at least the purchasing power of their capital will rise” (Philip Booth, Interest rate cuts: Deflation harms everyone, telegraph.co.uk, December 5, 2008).

    The past for the future:

    The Australian sharemarket rose 196.1% from December 1916 to February 1929. It then fell 46.3% from February 1929 to August 1931. The sharemarket recovered its 1929 high in October 1934 (Brian Taylor, Could this decade be the next 1930s? gold-eagle.com, December 13, 2002).

    “The world depression found Australia unable to meet her repayments, and the boom was rapidly translated into a disastrous slump. The average price of a house in Sydney fell from the 1925 level of £959 to £668 in 1935, but this was a bonus only to those who had money… for the years 1931 to 1934, building in Sydney came to a virtual standstill” (M.T. Daly, Sydney Boom Sydney Bust, (Sydney, George Allen & Unwin, 1982), p.169).

    So according to Daly, over the ten years, from 1925 to 1935, average Sydney housing prices fell 30.3 per cent.

    In the 1890s great depression, which is more relevant for the future, than the 1930s, we have:

    “The crash began in 1891. Land values fell to levels around one half their boom levels. In addition … data on individual suburbs are available. In Prahran, prices peaked at an average of over £1,000 per property in 1888 and fell to £520 by 1898. Similarly, in Brighton, average property values peaked at around £950 in 1888 and then fell to around £400 in 1893 and £300 in 1898. A comparison of these data to the accounts in Cannon (1966) suggests that the picture is fairly accurate but may understate the speed of the bust. For example, Cannon writes that, ‘by the end of 1891 the bottom had completely dropped out of the land market … In Collins Street, sites for which £2,000 a foot had been rejected a short time before, were now being offered for £600 a foot – and could not find buyers even at that price’ (Cannon 1966, p. 18)” (John Simon, Three Australian Asset-price Bubbles, rba.gov.au, 2003, pp.22-23).

    “The large overseas borrowings (… predominantly by governments [read banks today]) in the late 1920’s meant that interest payments increased substantially in the face of generally falling export prices. Export earnings collapsed in 1929/30. As a ratio of exports, interest payments jumped from 14 per cent in the early 1920’s to almost 30 per cent in 1930/21.

    “… the fall in wages… This came about primarily through our peculiar method of adjusting wages to prices. The 10 per cent additional cut imposed by the Federal Court affected perhaps half the field of wages, but was offset by the slowness of some of the States, particularly New South Wales, to allow wages to be adjusted to lower prices. The net effect over all Australian wages has [sic] been a reduction almost exactly equal to the fall of prices. Wages in the three years 1930 to 1932 fell 21 per cent, and retail prices 22 per cent…

    “From a peak in 1926/27, total unemployment decline by almost 300,000 persons of 13 per cent over the next five years. The job losses was recovered within three years…

    “The drop in unemployment in the late 20s commenced when manufacturing employment turned down in 1927/28. Employment in construction turned down in the following year. For both sectors, the big shake-out came in 1929/30 and 1930/31 – manufacturing employment declined by 7 per cent and 18 per cent respectively while employment in construction declined by 21 per cent and 28 per cent in these years.

    “In the five years to 1931/32, manufacturing employment suffered the largest absolute decline of 131,00 persons or 26 per cent. In relative terms, however, employment in construction, which was cut almost in half, fared much worse. The other main loss of employment occurred in commerce. These three industries accounted for 97 per cent of the drop in employment. During the upturn to the mid-30s, thee industries were also the major areas of growth in employment.

    “… in New South Wales in 1933, when unemployment was around 25 per cent, only a slight majority of the unemployed received either sustenance or sustenance work…

    “The “Rent Problem” was a vexatious issue of the 1930s. Most States only supplied food rations to the unemployed and so there was no cash to pay the rent. Even in States where cash was granted the cost of housing was much larger. The situation led to the “Happy Valleys” of the Great Depression.

    “To alleviate the situation the Lang Government legislated to allow tenants to secure Court orders indefinitely postponing eviction. There was also some financial assistance … and the Unemployment Housing Fund provided shelter for some. Victoria supplied accommodation at 8/- a week to evicted tenants. Government camps supplied accommodation to men in Western Australia and Queensland. In Queensland workers in the Intermittent Relief Scheme who were evicted from private accommodation were entitled to a hut valued at £10” (P.D. Jonson & G.R. Stevens, The 1930’s and the 1980’s: Some Facts, Reserve Bank of Australia, Research Discussion Paper 8303, September 1983).

    “How did Australians manage to work their way out of the difficulties? They traded their way out of trouble. That’s the modern, glamorous way of expressing it, but in fact they sweated their way out of it. They reduced their imports and increased their exports…

    “… we will not be able, in a future debt crisis, to fight our way to solvency with such ruthless cuts in imports.

    “Nor are we certain to ease a future debt crisis by the kind of speedy recovery in export prices seen in the past…” (Geoffrey Blainey, Our extended Australian family: Over-extended or third time lucky, The Australian, March 2, 1990).

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  16. Any revisions in your timing or ‘flation expectations watcher?

    Our banks prices that were rebuilt on hot money are finding some bears offshore in recent days.

    http://www.zerohedge.com/article/australia-land-down-underwater-mortgage-debt-pt-deux-which-banks-short

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  17. “We looked into the four largest Australian banks – Australia and New Zealand banking Group Limited, Commonwealth bank of Australia, National Australia Bank Limited, Westpac Banking Corporation.”

    http://www.zerohedge.com/article/australia-land-down-underwater-mortgage-debt-pt-deux-which-banks-short

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  18. Great minds think alike sorry for the duplicate post..

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  19. compound interest is the problem,
    it generates inflation faster than zimbabwe,
    but hey, its a ‘modern’ idea, so it MUST be right, eh?

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  20. As an entrenched capitalist, I’m always interested to consider the pros and cons of this entrenchment. We watched Michael Moore’s ‘Capitalism’ again last night. Strongly reaffirms our view that Australia IS different. Canada’s decision to raise its interest rates (the only G7 country to do so) indicates Canada IS different, too.

    One zerohedge respondent got it right, noting that: “Australians will stop paying / buying everything else before they start to default on their mortgage.”

    What he might also have added is that Aussie _investors_ attempting to sell properties, either through auctions or open sale, simply _withdraw_ them from the market if clearances fall or properties flood the market. While (fear of) inflation spurs gold prices, inflation very effectively reduces property debt over time. Both ‘tangibles’ benefit.*

    Deflation also assists property cashed-up investors (or those with real equity) to acquire property at reduced prices. Yes, one might argue that their ‘equity’ is reduced. For the serious investor, that equity reduction is simply an ‘on-paper’ loss. Even in Japan, where deflation has reigned two decades, investors benefited from near-zero interest rates. Their major cost, in renting out houses and units, was virtually nothing.

    This is not to claim that _either_ inflation or deflation is ‘good’; simply that every dark cloud has a silver (or golden) lining… . :)

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  21. Comment by Biker on 12 June 2010:

    One zerohedge respondent got it right, noting that: “Australians will stop paying / buying everything else before they start to default on their mortgage.”

    Australian economy is over 50% consumption based when/if they start to do this unemployment will rise, recession is assured.

    What he might also have added is that Aussie _investors_ attempting to sell properties, either through auctions or open sale, simply _withdraw_ them from the market if clearances fall or properties flood the market. While (fear of) inflation spurs gold prices, inflation very effectively reduces property debt over time. Both ‘tangibles’ benefit.*

    Investors in a position to hold their properties withdraw them from sale.. Investors/homeowners needing to sell have no choice they must market their properties..

    Deflation also assists property cashed-up investors (or those with real equity) to acquire property at reduced prices. Yes, one might argue that their ‘equity’ is reduced. For the serious investor, that equity reduction is simply an ‘on-paper’ loss. Even in Japan, where deflation has reigned two decades, investors benefited from near-zero interest rates. Their major cost, in renting out houses and units, was virtually nothing.

    With stagnation or deflation of prices you are not getting the capital gain to justify the losses incurred in servicing a mortgage. 10% interest on a $400000 mortgage on a $500000 house that is losing value or at best holding value, your worse off than renting and investing the difference.

    As pointed out in previous posts by myself and others, Australian banks source 50% of their funds from overseas, even if Steven Keens prediction of 0% Reserve Bank Interest Rates you will still find mortgage rates still at 5% here. $400000 mortgage at 5% is still $20000 a year in interest.. $20000 is a lot of money if you don’t have a job. if you are struggling to pay your mortgage it is highly unlikely you can have savings to use to offset the mortgage.

    This is not to claim that _either_ inflation or deflation is ‘good’; simply that every dark cloud has a silver (or golden) lining… . :)

    100% agree here.. There are always opportunities in the market, up or down.. first step is to never be so overcommited with debts that you can not take advantage of these times.

    Stillgotshoeson
    June 12, 2010
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  22. Biker, Japan sero interest rates during deflation was only possible on the back of the savings of Japanese housewives and appropriation of funds from their Japan postbank directed essentially by the state to plug holes. This is also the Keating era crew socialist strategy, compulsory super appropriated by union mates and cronies. The 4 pillars strategy embeds the cronies into wealth management. They gear up during the booms with money shovelled down their throats by the banksters, and when it goes cyclicaly negative, market cap drops and gearing goes up and collateral is stressed then they raid the bankster and unionist controlled super via capital raisings.

    But other than super there is no savings backbone and the built at the same time an imported debt and consumption and asset inflating machine. The current acount deficit is treated like a hot money mugs paradise. The Americans could creat USD’s out of nothing and there were the mugs like the Japanese housewife who could get no interest from her post bank. You have to think like a unionist, a Keating or an Obama. But no free lunch from foreigners washing their phoney USD money or taking risk they didn’t understand and the bottom line is the 1890’s like watcher says above. If we had the savings we wouldn’t have the massive current account hole.

    It show how intellectually vacuous they were and the remnants remain. Always the quick fix like the Henry grab, and he even rolled out a GST styled solution built of a consumption model extended into global markets. Trouble is it only works if you can be a thug in the boom times and if there is no bad times. And in resources there is always busts. Stupid is as stupid does.

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  23. “The housing loans in Australia are recourse loans (borrowers are personally liable to pay even after foreclosure) ”

    You can’t get blood from a stone.. Bankruptcy will be the buzz word.

    Stillgotshoeson
    June 12, 2010
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  24. Thanks for your thoughts, folks.

    An ‘investor’ putting 10% down on a $500K house is no investor. He’s a speculator. He could get lucky. He could get burnt. If rents are high and interest rates fall, he _might_ even survive.

    There are mugs who bought too high into gold, before it really sank the last time; experienced traders who thought 6850 was a buy a couple of years back; and dimwits who practised set-and-forget in Super, simply as _a matter of course._ And there are naifs who buy rentals at the top of the property market on 10% down. I really don’t have a lot of sympathy for speculators, or anyone who permanantly entrusts all their financial matters to the jaws of the jackals.

    Neither deflation nor inflation are good for a nation, but they can benefit those who believe possession is still a large fraction of the law. Anyone who _has_ to sell, in a panic, should steer clear of _all_ risk… and simply keep their money ‘safe’ in a bank, earning highly-taxed, fairly low interest… . ;)

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  25. I’m debt free and have been about 60% Oz residential RE and 40% cash throughout the GFC. (Whilst under no illusions about my ability to successfully trade stuff like stocks.)

    It doesn’t strike me as a get rich quick scheme but it’s still about the best I’ve come up with for me at this time.

    On an another issue, I rarely read this bloke’s stuff without feeling I’ve gained some understanding (or getting a laugh):

    http://www.abc.net.au/unleashed/stories/s2923818.htm

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  26. “Bankruptcy will be the buzz word.”

    Yeah, I know that’s a _big_ part of The Game Plan here.

    We wish no-one that kind of drama. If it happens, we’ll add to our holdings.
    We’d certainly never a.) wish it on anyone; b.) make it a key part of any investment strategy.

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  27. “they raid the bankster and unionist controlled super via capital raisings” – Avoiding that is one of the potential advantages of having a SMSF.

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  28. Well worth reading, Ned.

    Picked up on this comment, since I had an experience which applied, today:

    “Borrowing can only be repaid by the sale of assets, including those funded by the debt, or by redirecting income, perhaps generated by the asset purchased, towards repayments. Unfortunately, in many cases, the current value of the asset will not cover the outstanding debt. The level of income and cash flow generated is insufficient to cover interest costs or amortise the amount borrowed.”

    Well, there’s nothing really new there, but I had to actually explain this very principle to a beautiful young realtor who offered me a property this morning. Very nice house in a very good location…. BUT low wages and high(er) unemployment are features of this regional centre. So the house is $530K… returning just $315 per week!~ Believe it or not, capital growth has been pretty good in that area, but that ‘investment’ would need _us_ to pay it off. No deal, of course. I reminded her of our criteria and advised her that her best market for that house might be an established home owner selling another home to buy into this one. As a family home it’s a good buy, very long term… . In fact, to reinforce Shoes’ point, one might actually be better renting* it in the _short_ term!!~

    * _If_ one was directing the money saved into a low-tax, high yield investment.

    Reply
  29. $530K for $315 pw rent is definitely not a happening thing even in these days of relatively low returns Biker. Unless there is lots of development potential, it certainly sounds like a property for a home owner who derives value from the lifestyle it affords rather than something an investor would want. Horses for courses though!

    Reply
  30. while Das’s article agreed with my thought that Greece is pretty much toast while it remains within the EU (or the EU is gunna battle while it carries the likes of Greece), I guess the things that I found most interesting about it were:

    * His opinion of the AUD
    * His thought that a GFC which is becoming a GSC (global sovereigns crisis) could become an EMC (emerging markets crisis)
    * The passing reference to why the USD continues to hold up and the implications of that

    Das is probably my favourite writer – He seems to believe in making a buck – Although he isn’t into destroying the world to do it. He derived a perfectly reasonable bit of satisfaction from the US doing to itself what he had predicted. Then he stared into the abyss and said Inflation might be better? (I didn’t enjoy that comment at all at the time. But had to agree; Despite the perceived upcoming personal pain); And now he is saying what he is … :)

    Shame Das doesn’t write much about Oz per se.

    Reply
  31. Ross,

    Andy Xie’s view sums up pretty much my thinking at present; which includes a cyclical stock bull market peak in the future:

    Bernanke Low Rates ‘Poison’ to U.S. Economy, Xie Says

    Shamim Adam, bloomberg.com, December 8, 2009:

    Federal Reserve Chairman Ben S. Bernanke is prescribing “poison” to the U.S. economy by keeping interest rates near zero and fueling a wave of speculative capital that may cause the next global crisis, former Morgan Stanley chief Asian economist Andy Xie said.

    Bernanke is making decisions based on “marginal considerations” that will help short-term growth and employment, instead of focusing on the “soundness of the system,” Xie wrote in an e-mailed note today. The next worldwide crisis will probably strike in 2012, driven by inflation as the low cost of borrowing spurs increases in asset prices, he said.

    “There is a Chinese saying that one could quench the thirst by drinking poison,” said Xie, who predicted in September 2006 that the U.S. economy would fall into a recession in 2008. “Bernanke seems to be prescribing exactly this to the U.S. economy. The slower Bernanke raises interest rates, the bigger the next crisis.”

    Bernanke, a scholar of the Great Depression, has overseen a record injection of liquidity into the world’s largest economy, pledging not to make the mistake of the 1930s, when officials tightened policy. The Fed chairman yesterday said that the U.S. economy faces “formidable headwinds” including a weak labor market and tight credit that are likely to produce a “moderate” pace of expansion.

    Emergency Measures

    “We’ve got to figure out a way to get out of these post- bubble emergency actions a lot more effectively,” Morgan Stanley Asia Chairman Stephen Roach said in an interview with Bloomberg Television in Hong Kong today. “I worry that Ben Bernanke, while he says one thing, will do another.”

    Inflation in the U.S. remained “subdued” and interest rates are likely to remain low for an “extended period,” Bernanke told the Economic Club of Washington.

    Policy makers around the world cut interest rates and boosted government spending by more than $2 trillion as part of emergency steps to counter the global recession. The Japanese government today unveiled a 7.2 trillion yen ($81 billion) economic stimulus package amid signs the recovery and Prime Minister Yukio Hatoyama’s popularity are waning.

    Fiscal stimulus worldwide restored stability “temporarily” and may be inflationary, said Xie, now an independent economist. Asset-price increases are also making a “significant contribution” to global growth, mostly in emerging economies, and industries such as property, automobiles and commodities, he said.

    “The policy consensus to prop up the global economy with stimulus will continue until inflation takes off or governments are broke,” Xie said. “This strategy is too expensive to last.”

    Inflation will likely become apparent in 2011, and a “vicious wage-price spiral” could take place the year after, Xie said. He said the lag between money creation, which happened last year, and inflation may take more than 18 months.

    Asian policy makers are already studying capital controls to limit “hot money” inflows that may stoke asset bubbles and force their currencies to appreciate.

    “Inflation would scare central banks into tightening dramatically in 2012, which would pop the current asset bubble,” Xie wrote. “By then the global problem would be more serious than now. In addition to the leverage problem in the household and financial sectors, the government sector would also be hugely levered then.”

    The trillions of dollars that governments are spending is “buying some time,” Xie said. One of the risks is that governments may not have enough money to “cushion the pain during the coming economic restructuring,” the economist wrote.

    “The whole world is drinking poison to quench the thirst,” Xie said. “It may feel like relief now. The sickness will strike in 2012.”

    * Caroline Valetkevitch and Jonathan Stempel, JPMorgan Chase’s Lee: Stocks near bottom, reuters.com, June 9, 2010:

    U.S. stocks are now near a bottom and could rally before the end of July, the chief U.S. equity strategist for JPMorgan Chase said on Wednesday, adding that U.S. equities currently may be a better bet than European shares.

    JPMorgan’s Thomas Lee, speaking at the Reuters Investment Outlook Summit in New York, projected the Standard & Poor’s 500 index .SPX would climb more than 10 percent to reach 1,200 by the end of July, and hit 1,300 by the end of this year.

    The benchmark index on Wednesday ended at 1,055.69 points, down 0.6 percent on the day.

    “We’re still pretty bullish on stocks,” Lee said. “Consensus right now thinks markets are going to be flat-lined through the summer. I don’t think that’s what’s going to happen. My best guess would be we are making a bottom pretty early in June, and then we have a strong rally.”
    Individual investors, however, are buying corporate bonds, even though their net supply is shrinking.

    Lee does not expect the U.S. economy, which has grown for three straight quarters, to fall back into recession soon, but he sees the U.S. Federal Reserve holding off on raising interest rates until at least well into 2011.

    Birinyi’s Rubin sees sharp rally in U.S. stocks

    Edward Krudy, reuters.com, June 8, 2010:

    Birinyi Associates’ director of research and senior portfolio manager Jeffrey Rubin speaks at the Reuters Investment Outlook Summit in New York, June 8, 2010.

    The U.S. equity market is nearing a bottom after its recent fall, said Jeffrey Rubin, director of research at Birinyi Associates, told the Reuters Investment Outlook Summit on Tuesday.

    Birinyi’s year-end target for the S&P 500 is 1325, and Rubin says that level is still achievable, which would require a 25 percent rally.
    Equity markets have tumbled around the globe as fears of an economic slowdown in Europe and Asia combined with weak U.S. labor market data have gripped investors. The broad-based S&P 500 is down around 13 percent since a peak in late April.

    But Rubin said he still favors U.S. equities over other assets class. He said the chances of a bear market for the S&P 500 are low because market fundamentals remain strong and the chance of the U.S. economy suffering another recession are slim.

    “Manufacturing is picking up, retail sales are picking up,” said Rubin. “Double dips are very rare, very rare; it’s happened once in the 1980-81 period — anything is possible but we don’t at all subscribe to it.”

    Technical market indicators suggest a near-term bounce, Rubin said. The index sits 3 standard deviations below its 50-day moving average, an indicator that investors use to judge whether the market is oversold. In addition, stocks are trading at around 12 times their earnings, lower than in some past bull markets.

    “We’re market-oriented, so we think there’s no better indicator than the market itself,” said Rubin. “If you look at Coach, Tiffany’s, Ralph Lauren, Home Depot or Lowe’s … these aren’t experiencing growth because of stimulus money.”

    Rubin said that in the middle phase of a bull market stock picking is more important than in the early stages when a rising tide lifts all ships. He highlighted Ford Motor Co, Best Buy Co Inc and Caterpillar Inc, and Apple Inc as stocks that would do well in recovering economy.
    Birinyi’s S&P 500 forecast will be evaluated throughout the year. Rubin said factors that may cause him to reduce it would include a break down in leading stocks like Apple, a deterioration in the economy, money flows out of the market, or a significant change in sentiment.

    “A couple of days ago Apple was up 8 points, Google was up 15 points,” he said. “If you start seeing the internals of the market get weaker that’s one of the things that would lead us to reduce our estimates,” he said.

    Reply
  32. Some interesting predictions.

    “Prime Minister Yukio Hatoyama’s popularity (is) waning.”

    HaHa… understatement of the week… !~ :)

    Reply
  33. “$530K for $315 pw rent is definitely not a happening thing even in these days of relatively low returns Biker.”

    I wasn’t _really_ insulted that she thought we might buy it, Ned. We build great homes in good locations for $130K – $150K less… and pick up $50 – $125 more per week than that nice home fetches. I know she’s _new_ to realty (in fact she once worked for me) but over the years I’ve been a little surprised at the naivety of many agents. (Maybe they think I’m really, really stupid!!!!~ :) :) :) C’mon, Steve, you can have a field day with that one. )

    Yes, I found the Das comments re. the AUD interesting, too. Confidence in the US buck still surprises me… a sign that my own naivety wouldn’t help me as a currency trader. Think I’ll stay with what I think I know!~ ;)

    Reply
  34. It is my suspicion that I get classified as an Oz residential property BULL on this site because I really DON’T believe basic entry price properties will drop more than 15% in the next few years. AND I even allow for the possibility they might go up?

    But irrespective, my real interest is in what are the returns on Brisbane residential RE properties, and how might I acquire enough of same to unquestionably retire relatively hassle free. :)

    Reply
  35. Ned: “I really DON’T believe basic entry price properties will drop more than 15% in the next few years.”

    With you on that, but some marketS _may_ drop that much or more. Our view is that good quality stuff will hold value. Where we differ from most here is that we visualise rising costs of (WA) building lifting values as much as 6% per year. That’s what our builder is adding annually, when we attempt to duplicate a successful project the following year.

    Now, you _can_ get 6% interest from a bank… but then you’re hit for tax!~

    The block we’ve just built on cost us $144K. Nothing this good is under $200K now… just two years later. We’d love to hear about a bank paying that kind of rate! :)

    Prospective tenants today asked if we’d take a deposit on a ‘rent-to-buy’ deal. They’re looking to rent (rather than sell) their family home.
    We may sell them a one year non-refundable option-to-buy… .

    Reply
  36. Confidence in the US buck still surprises me

    I don’t think it is true confidence in the USD.. It is lack of confidence in the others.. USD to some appears the best option.. for a little while that will probably be true..

    Stillgotshoeson
    June 12, 2010
    Reply
  37. Got to admit that the ability of the USD to keep popping up trumps periodically tempts me to put some bucks into it to trade back out of – Given my thoughts that the process we are in could go on for a decade – And despite the fact that I know I’m a really, really, really lousy trader! :)

    Reply
  38. “I know I’m a really, really, really lousy trader! :)”

    Well, I was making pocket money trading for nearly five years straight… Got overconfident and blew a bundle (all my winnings) in the fifth year.
    Made five times as much in property that same year, so my shares loss reduced my property capital gain. For some reason, my missus did not see any humour in that :) so I have never bought a share since. These daze I’m only allowed to muck about with the ASX within Super… and only when shares crash… !

    Yes, it’s just fear that keeps the US buck ‘stable’… but that’s very much at odds with DR’s perspective. The China Rap they’re about to run should be interesting. Just read a prediction of 10% annual growth in China, despite the goverenment pullbacks. Perhaps their citizens’ propensity to save may cushion any negative developments… (?)

    Reply
  39. “some marketS _may_ drop that much or more” – Agreed Biker – And it’s also one of those things where if a bloke doesn’t get the taste on his tongue that this property is a Yea as opposed to all the others he’s looked at that we’re Nays, then it’s best to sit in cash.

    Reply
  40. “my missus did not see any humour in that” – That brings to mind something my Dad once said re my Mum Biker? Hot damn, if it wasn’t for their sheilas, 15% of blokes would’ve been well heeled and the rest broke – In his day anyway. Which is probably the natural way of things with Gouh having a lot to answer for in that regard? :) :) :)

    I’m as thick as bricks – But at the end of the day I still reckon I can figure out what are real (comparatively) low risk assets worth owning outright and do my basic sums re whether I can live off the income reasonably reliably generated by same. :)

    Reply
  41. Comfort is all we need, Ned. There’s a lot to be said for independence and a little bit of industry in with that. Still haven’t figured out to make consistently quick or easy money, like a few here have… . ;)

    Reply
  42. Comfort for me is perpetual income with out haveing to work :)

    $20 Million Picasso is worthless to me… I’d rather have $2000 a week coming in every week for the rest of my life…

    Stillgotshoeson
    June 13, 2010
    Reply
  43. having even :)

    Stillgotshoeson
    June 13, 2010
    Reply
  44. “…with out having to work :)…

    “…and a little bit of industry in with that…”

    ‘having’ is the operative word. ‘Choosing’ if, when and how to work is an integral part of the comfort factor. You’ll find life without _some_ industry is pretty vacuous.

    Learning how to master new skills can be quite a joy, particularly if your life has been sedentary for the most part. Look at Bill, up there on a barn roof, holding a sheet of tin and being blown about like a paper plane… . :)

    And when you’re eating the fruits of that industry, because you’ve chosen among multiple levels of independence, nothing tastes sweeter… .

    Reply
  45. ‘having’ is the operative word. ‘Choosing’ if, when and how to work is an integral part of the comfort factor. You’ll find life without _some_ industry is pretty vacuous.

    There is much I wish to do with my life.. More travel, learn languages.. English for 1 :)
    I will be able to find things to do I am sure..

    Stillgotshoeson
    June 13, 2010
    Reply
  46. “There is much I wish to do with my life.. More travel, learn languages.. English for 1 :) I will be able to find things to do I am sure..”

    We do those. Three decades is a _long_ time to spend doing them.
    (Although my kids are now both doing precisely what you propose, year-after-year… )

    Reply
  47. There is a lot above to cover.

    @ Ned, following sunny views and “making a buck” often aren’t mutually compatible. Goldman use it to take you down. Or if you had followed Kerry Packer, he won and you lost. There is more money in misinformation. Buy the rumour sell the fact. There is way more money in clipping the turnover ticket than worrying about the eventual quality of the trade. As hard asset long investors you have an interest in the quality of the trade whereas the narrators you listen to probably don’t. The macro economy and incomes are a trailing factor. The US market flatlined during the norties even while asset inflation and consumer spending were ripping along up to the GFC. All the narrative was bullish and it didn’t do a thing but suck in investors.

    @ biker, yours is a sensible and defensible position on present day reality and on a 4 decade historical basis. It is a bit like NPV though and it is vulnerable on macro economic issues. Residential bricks and mortar has intrinsic value, if you could have had your style of position in 1930, navigated the Lang (Keating’s mentor) legislation, serviced yours debts or got a moratorium from the bankers, ate a little leaner, and survived through to WWII and put a few bucks into markets on the side then you would likely have been a mogul in the 50’s. But if others were to have unnavigable issues with any of the trip up points they might consider realising your assets ahead of the event. There is massive risk being caught in cash under inflation and high risk in most markets but you know what Eisenhower said about risk and trying to avoid it.

    @ Watcher, your stuff is significant as usual, I suppose one factor that separates us is the distrust I have for what Rubin is saying. I don’t trust the markets are indicating economic reality or forward expectations this time. Its a bit like the reserve bankers CPI basket that can be proved to have been a racket. What can be proved on the US market is that mutual money (savings) has been coming out from the market and “ïnvestor” money is now dominated by leverage. There are too many fiddles in the reporting with too many revisions to past period consumer spending and false starts on reversals of unemployment that prove to be statistical lies. Plunge protection team action on the market is real and you can see when they make the moves in the off market futures against no report at all more than them trying to counter poor earnings report events. Forward p/e’s are crap even before the write downs on markt to fantasy accounting. I agree there has been a small uptick in consumer spending but it is very small and the market has been singing it for too long with no result. Australia was significant with visibility in consumer goods imports from mid 09 significant but now it has flatlined. Unemployment is way lower but is turning out to be a lagging indicator in Australia and a forward indicator in the US where it stays negative even after that consumer uptick and all that stimulus you talk about after you take out census jobs.

    Reply
  48. Shoes, if you have taken a zero interest rate loan in USD and swapped it into a CDS position in Euro or AUD or NOK and you have to unwind that position by buying USD’s if your position is closed by regulation or when the market finally becomes convinced your collateral is crap. The full value of the position is a buy in USDs and a sell in the risk currency.

    As long as imperial global reserve USDs were marching out around the world buying into commodities and risk markets the USD was suppressed everywhere except where the seller fixes against the USD China/Asia/Mid East. That turns into asset inflation in destinations where that USD leverage originated risk money chases assets, and that is compounded by the US zero interest carry trade.

    That is why Geithner has no case against China having protected itself from the US merchant bankers sowing inflation, and a big factor in us having had our asset bubble.

    Reply
  49. Some good points there, Ross. Our family ‘sold the farm(s)’ in good times (1927)… and took it all back, by force, around ’33. No police for three days to prevent them from reclaiming their property through the purchaser’s default, anyway.

    Then they pretty much did what you described, above.

    We’re not blind to the full range of possibilities. One main purpose of being here is to consider all the worse-case scenario(s); to balance the sheer optimism all about us in WA. :)

    Reply
  50. ” Plunge protection team action on the market is real and you can see when they make the moves in the off market futures against no report at all more than them trying to counter poor earnings report events.”
    Yep. See Friday night last on SP500. We were supposed to have a significant sell-off. Shorts loading up overnight.PPT ate them all. Later after a small drop during trading hours the PPT pulled up the action at a key point looking for help from longs, and sat there…until the covering started. Market actually finished slightly higher. Similar moves on the Aussie. At least thats my conspiracy theory and Im sticking to it. I think they’ll keep at this game until technicals favour large long entries a little higher.

    Reply
  51. Both great links, Ned. Thanks.

    The ABC interview appears to reinforce my wife’s strong recommendation to place nearly all our super into offset accounts. As I mentioned a few weeks back, it was interesting to see Noel Whittaker recommending that strategy; the first time we’ve ever seen him give that counsel.

    Reply
  52. Biker has you wife changed her view on giving me one of your houses for free???

    If not ill make you a deal ill buy one of your houses from you for the same price you got it for, as long as it is one you got at least 10/15 years ago!

    I will pay for it INFLATION adjusted too???

    How does that sound?

    Reply
  53. Hmmm… . Very attractive deal, Steven. I admit thinking about it for three nanoseconds. Nearly everything we bought in that period sold within three years, for double or more what we paid. Never even had For Sale signs on anything, either.

    That was our Special Rural period: blocks of three to eight acres, vith views… and dams… and a house on one smaller block, with subdivision approval. In all three cases, realtors approached us with offers
    and we sold. One of those blocks (with estuary frontage) is now far into the million-plus range.

    My missus is pretty tough. I wanted to pay off my kid’s HECS fees (nine years at Uni just completed) and she gave the proposal one-star, thumbs down. We have given our kids nothing, really. Unlikely she’ll send you a title, mate… .

    She has, however, just emailed her mom, to tell her to shovel out all her Liberian Iron Ore stock, now BHP is threatening Rudd with mining proposals in west Africa. Her granddad helped float the stock eons ago. Could be interesting… . :)

    Reply
  54. her mom???
    what does that mean???

    Reply
  55. Means she’s Canadian, Steven… . :)

    Reply
  56. Aha! Aussie wimmen not good enough for you, Biker Pete?

    Reply
  57. Nah, it’s not that, mate. But very few will sit on the pillion happily for months on end, in foreign countries. One or two actually flew off the back at high speed… .

    Seriously, I’ve no problems with mixed marriages. I’ve heard of the Irish marrying Kiwis… and I once knew an Aussie who got hitched to a prisoner of Mother England. Don’t know if he was kept on a leash as short as mine. :)
    Owwww!~ fa*k! I was only kiddin’, hon!!~ :(

    Reply
  58. …o dreaded deflation…then we are all shaded to death by our own greed…like the old cypress oak with her long starving branches entombed in a thin shroud of dense verdure…o…o…o…

    Reply
  59. Thanks for your comments everyone. I have been watching real estate around Brisbane for years now. The last couple of months I have seen very significant reductions. Of course most are not advertised as mortgagee in possession, but some are. I think if you get a bargain in real estate, it may be the time to buy, if you don’t have to borrow too much.

    If the banks start raising interest rates independant of the Reserve, they will be pressured at some point to keep things under control. There is no way that Australian home owners could cope with interest rates over 10 percent and I think there would be too many defaults for the banks to cope with. I wouldn’t even put it past governments putting in measures to stop the banks raising rates too high (I know they can’t do that at the moment but I don’t put anything past those tricky politicians). Political suicide to see a lot of people thrown out of their homes and who’s going to buy them if they go into default?

    Reply
  60. “I don’t put anything past those tricky politicians…”

    Have to agree, Annie.

    I don’t know anything about Brisbane property (I think Ned probably has a pretty good idea) but intervention by politicians is a _sure_ thing… .

    On interest rates, I think BIS Shrapnel may have called it right: one percent rise by 2013. But a Black Swan event could mean that it falls significantly. We had factored in 10% three years ago. So had the banks and the other pundits. Even the RBA got it hopelessly wrong. Imagine our surprise when rates fell to half our estimate… and we enjoyed a couple of years of real surplus.

    When economists who _teach_ the magic arts predict Oz rates of zero percent, you really have to ask about the science. In fact, it’s really impossible to predict rates, but if DRA is correct and things do go bust in Oz, rates will fall appreciably, again. As you correctly noted, that won’t be the issue. And, if austerity steps in… and Aussies save more, that should ease the $upply issue.

    If things really go bust, loss of equity won’t be our worst scenario. Other issues (unemployment, crime, deflation) will be issues far more significant than paper lo$$es on your home value.

    As you say, this _may_ be a good time to move. I tend to things may be a little flat for some time, but I know _nothing_ about your QLD market.
    A mate pointed out, last night, that we hold two of the very last empty blocks in our subdivision here. We’re seeing interest in those _and_ our houses, simply due to population increase and sheer lack of supply.
    Take those away, in a period of multiple interest rate rises; and one could predict minimal price growth… .

    Reply
  61. I agree Biker. Things can go either way and I think it is the prudent thing to plan for both scenarios.

    I sold my house three years. Been overseas and renting since I came back. Have a big deposit and just bought a house on acreage from a guy that had to sell in 3 days, so it was very well priced. I had been looking for years and knew what i wanted and was ready to pounce quickly. I didn’t do it to make money, I really just want a home again, where the wildlife play, I can grow my own veges, not on town water, close to work, and I can make repayments and pay it off in 8 years at the present interest rates. I intend to hang onto it for quite a while so don’t really care if the price goes up or down in the short or medium term. Big enough to rent out rooms if things really go bad.

    Not much of a capitalist am I? hehe

    Reply
  62. Congratulations Annie. Now you’ve got some cool months to get those vege gardens prepared ;)

    Reply
  63. Annie: “I was… ready to pounce quickly.” Great imagery!

    Chris Mayer’s DR(US) take on China, this morning:

    “We heard stories of how people buy brand-new apartments and don’t even attempt to rent them out. They just hold onto them. Interestingly, besides property, the Chinese also like gold as a store of wealth.”

    Why interestingly? Both are tangibles.

    “I intend to hang onto it for quite a while so don’t really care if the price goes up or down in the short or medium term.”

    Great attitude.

    One of the criticisms of property is that it’s illiquid, not too easily converted to cash. While offsets are one answer, the ‘usefulness’ of housing as shelter means one can hold through hard times. What you’ve done in buying that property which can produce food, rent, income, is insulate yourself to some degree from possible future trauma.

    “Not much of a capitalist am I?”

    We also fail that test. Theoretically I should have agreed with the couple who, on the weekend thought the rent on our latest home was $10 per week more. Our agent is _incredulous_ that we’re now putting solar HWS _and_ electricity panels on rentals. Our rental policies are unusual, to say the least.

    We’re simply looking for slow-and-steady returns on investments… and we’re always surprised when we inevitably sell something we didn’t even advertise, for more that we’d ever hoped to realise.

    Must go and buy more jars. The kalamatas this year are spectacular… ! :)

    Reply
  64. Thanks Lachlan, just have to work out some innovative ways of keeping the possums off the veges! Maybe a couple of those dome type thingys but i hear spreading dog hair or camphor balls around the garden works.

    Reply
  65. Hey Biker, yes property is illiquid but having money in the bank (could have bought shares but a bit too risky for me at the moment) is a waste of time. Having to pay provisional tax and having it eroded by inflation was really annoying.

    I will be planting some olive trees. yum.

    Reply
  66. Needing a place to live is a pretty compelling reason to buy – Especially if one doesn’t see themselves as much of a capitalist and doesn’t fancy themselves as much of a trader in highly liquid asset classes – And even more so if one doesn’t need to borrow much and is conscious of the fact that retirement is coming up. This just isn’t a country where I’d feel comfortable going into retirement as a tenant through necessity.

    Brisbane – Prices went up about 20% in 2007 – I was fully expecting a correction and a plateau after that (and that was before anyone had heard of a GFC) – We got a minor correction (7% maybe?) – But the FHOG put paid to the plateau with prices recovering and going up a bit more. I’m still expecting a correction – But must admit I’m not very sure about anything nowadays – In the wake of the GFC.

    So personally I’m continuing to hold in about 60% housing and 40% cash – Given that each of my properties is able to be developed and I have the cash to do it and that I feel more comfortable with rent as a source of relatively reliable and stable retirement income than anything else. I can continue to keep my options open for now so that’s what I’m doing. But won’t be too surprised if I take some sort of a whack along the way. :)

    Reply
  67. Well, our offsets are pulling nearly 7% tax-free, so maybe we’re getting it right, Annie. One of our kids is getting 6.8% in interest, but tax is really knocking him about… .

    Olives: Best year we’ve had in twenty. The biggest surprise, among all the varieties we’ve planted, is the UCal hybrid, which has been barren since we planted it (just one!) a decade ago. This year it was covered with almost perfectly-spherical olives, a rich purple-black, looking very much like very large cherries. I noticed the parrots preferred them to all other varieties… and picked them rapidly.
    Wish I’d put a dozen more in… .

    Looking forward to fruit dehydration once our own solar power system is up.

    Reply
  68. Ned: “I can continue to keep my options open for now so that’s what I’m doing.”

    Good plan, good balance.

    No 4 Sale sign on that too-cheap block, BTW. My mate oughta be sober by now :) so I’ll ring him to find the source… .

    Reply
  69. Sorry biker I can only speak in Australian

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  70. “No 4 Sale sign on that too-cheap block” – You don’t get too many blocks over this way for $200K Biker – Let alone nice high ones with water views. The miners over your way earning $100K plus pa must reckon they are in property heaven! :)

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  71. Possums: We ‘export’ around seventy each year, Annie. You need a medium-size box trap*, with a hanger hook to stick an apple on. Red apples are best. To make it irresistible, when nothing else works, smear just a little honey on the apple.

    We export them to a location around 6 km east of our place, after marking the left ear with a quick dab of liquid paper. (It stays on…!) We’ve never trapped the same possum twice, although we’ve caught them with young… and we’ve caught three varieties, including phascogales. They’re probably after the honey. We release the latter on our own place, because they predate mice and rats, which are drawn to poultry feed. Definitely the most beautiful of all native animals on our property.

    * You’ll probably catch a few dozen rabbits in each trap annually. These, together with snares and air pellets, reduce the salad-munchers… and the back legs are magic slow-crocked with rosemary, garlic and red wine. (Haven’t tried possum, yet… but if DRA’s hard times are a’comin’, you never know!~ ;) )

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  72. “Sorry biker I can only speak in Australian”

    No, my apologies, Steven. Must admit I had wondered.
    Whatever it was, I knew it wasn’t English. :)

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  73. I’m glad you know how to spoil yourself BP. I could do with a lesson..until then have a shiraz for me ;) Your patch in the west sounds real cozy. The Americans eat possum.. or is that a different type of critter?
    Annie possums have never given my gardens a problem. Hares used to ringbark my rose motherstock and I used a low hotwire to stop them but maintenence was a pain. Was effective though. Total exclusion via tunnel structure has lots benefits. A low cost commercial fabric like hailguard will stop birds, pets and hail without reducing light intensity by any meaningful amount. Ive never seen anything chew through it but cant guarantee they wont.. maybe chicken wire better.

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  74. “The miners over your way earning $100K plus…”

    Mate, their _wives_ were making that much back in the early eighties.

    Think _we_ just sold a block ourselves. Have to put them on hold for two weeks, though… ATEoTFY… . Pretty good timing… !!~ :)

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  75. Possums, rats? Rosemary, garlic? – One of the places I worked, the wage slaves used to cook their freshly caught rats up with a company blow torch – Mmmm … Yummy! :) I’m content enough to be in Oz and not finding it necessary to work for now. :) :) :)

    On another note:

    http://www.couriermail.com.au/money/shares-outshine-property-for-investors/story-e6freqpf-1225879330117

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  76. “A low cost commercial fabric like hailguard will stop birds, pets and hail…”

    I’ll check it out, Lachlan. Thanks. :)

    Never had to resort to roast rat, Ned. Think I’ll give it a miss for now…
    We actually have rosemary _trees_. For some reason our soil is perfect for a variety of good things. Sadly, every avocado I’ve attempted to grow has expired. No luck with lychees, either. Roos took those: “Oh loooooooook… Chinese Takeaway!!” Instant ground-pruning… .

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  77. Was chatting with a neighbour recently when a contractor came up to us a bit worried about a possum sleeping in another neighbour’s driveway. I asked if said possum was “sleeping” under a power line perchance? Yeh. No worries said the neighbour I was chatting with – The local indigenous people “take care” of such – So my guess would have to be that possum is quite acceptable tucker?

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  78. http://www.couriermail.com.au/money/shares-outshine-property-for-investors/story-e6freqpf-1225879330117

    Great link, Ned. Ta.

    Found D Whittaker’s comment relevant, since the liquidity issue was one we’ve just discussed. I’d have enjoyed participating in that research, just to what we’ve learned during three decades that the researchers _might_ have missed. “Too much trouble!” seemed to be a common complaint about rentals, in the responses. Even with quite a few rentals, we haven’t been fazed, yet.
    I think the key may be good referee-checking.

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  79. “I asked if said possum was “sleeping” under a power line perchance? Yeh.”

    Still laughing…. ! :)

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  80. By and large I work on the theory of When in Rome, at least try the tucker the Romans eat Biker – But can happily say that if I ever ate rat, no one specifically went out of their way to inform me! I’d definitely recommend tongue for example – As the very finest form of corned beef. Russians regard it as a delicacy – So I’ve never eaten it there – Way to dear! But an Aboriginal bloke who didn’t figure he was too flash to eat same clued me to it many years ago.

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  81. Haven’t eaten bungarra yet, but I’m tempted, as we have some monsters.
    “Cross-between-chicken-and-fish,” said my pa, who had been into territory no wajella had entered for more than five years and coped pretty well for up to six months at a time.

    I’ve eaten tongue, as a kid. Can’t remember the taste… .

    Perhaps our strangest meal so far was a plateful of fried dragonflies, in eastern Java. Not bad… and pretty crunchy… .

    How long were you in Russia, Ned… and when?

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  82. Still remember being present when two Chinese Aussies were chatting maybe 5 years ago – The PhD geneticist felt to comment on the fact that when they go back “home”, their kids are quite reluctant to go to the dog restuarant – And the dentist commiserated. When it comes right down to it, food’s food I guess?

    My dad highly recommends witchety grubs – Cooked on a wood stove to give them a nice crisp exterior. But I’m not sure I totally trust all his Great Depression era childhood memories of what’s nice and what isn’t – Given that in a flash of exuberant recollection he fed the family bread and milk with sugar one evening – And decided he reckoned it was crook too! :)

    Russia – About one month in 2005 (spread over two trips) and 3 months in 2008.

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  83. bungarra? – Had to look it up – It’s bloody great mate! :) Same bloke who put me onto tongue in “civilization”, fed me sand goanna in the bush. Absolutely top tucker!!! A bit more like pork than anything else though is my recollection?

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  84. OK… I’m into pork. That’s it, then. Will google for recipes. :)

    We have the witchetties… and the woodstove. I can see that AUSterity has some great advantages. Bush Tucker!!~

    Hey, hellzapoppin’ here, property-wise. Can’t remember this kind of action in the last three years. Queues for rentals… and two likely sales.
    Why? What is happening????!!!!~~

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  85. “hellzapoppin’ here, property-wise” – Yeh, as some parties occasionally mention, Oz is not a single property market. And nor is the US even for that matter if one compares Case-Shiller to the FHFA.

    Recipes – For sand goanna? Try it as it comes out of the baking pit would be my recommendation – And start thinking of additives if necessary afterwards maybe? As stated, I do recall it is very, very nice a la naturale – With plenty of natural grease! :) Though the one the old people truly hungered after was porcupine (echidna) – They’d part with half their pension cheque down the pub on “payday” for one of them!

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  86. Emu is pretty fatty stuff, too. First time I’ve heard echidna praised!-
    Definitely not finger food… .

    Wondering about this recent surge of activity…

    At first I figured the rise in the basic wage might be part of it; then the RBA’s hold on rates; but I think it may (also) be rising rents. Some of the rental owners around us are asking (and getting) silly figures… rents we’d be too embarrassed to put in writing: $650 pw and so on… .

    Then there’s the virtual zero vacancy rate. I’m under growing pressure to sell this one or select tenants from the queue. And the missus is now making “Don’t sell!” noises!!! I need a Bex and a good lie down… but I think I’ll have port and coffee… . ;)

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  87. A port and a coffee? – I’ve never been that FOND of coffee myself! :)

    Tricked if I know Biker – My suspicion is that “we” are going to take a hit. But I felt like that back in early 2008 when I bought two regardless. As my feeling was that any hit was likely to be limitted to around 10%. Would it break my heart if any such hit was higher? Well Yes, it probably would! – Given the possible collateral damage to the general economy. :)

    But as a hedge I sit on some cash regardless – Hoping that I might get to convert it to property at a somewhat more attractive rate someday? :)

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  88. Thanks Lachlan, have got some chicken wire and I may try that first. Seems to keep the possums off the herbs where I am at the moment. At least the hundreds of koalas that live at this new place won’t be eating anything but the gum leaves.

    Strangest thing ever eaten_flying fox and yes it tastes like chicken. This was before the hendra virus scares.

    Hope I’ve done the right thing buying this house. Time will tell.

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