I guess the people that purchased his inner city apartment are happy

He writes as if it is so obvious that the FHB’s were the reason. If it was so obvious he should have been able to predict it being the case.

Just throwing up some observations. Please let me know if I have misread something or am way off the point…

I don’t know if this figure is correct, but he states 171,000 people received the grant. Now in the grand scheme of things that number sounds pretty small to me. That is just a few suburbs worth of people… Out of an entire nation, for FHB’s to be the driving force behind the move I would have thought that number would need to be a lot larger? But I don’t know… It just seems on the low side to me…

Also, as stated in the article, an 8% increase in house prices is not all that much I don’t feel either. Even an 8% decrease I would still be saying that is not much of a decline (and I expected around negative 10% in the current environment). When comparing to the double figure returns on the sharemarket 8% seems pretty tame… I’m not saying that it is sustainable, just that it is not a super high increase. On that note, I would love 8% increase per year!

A few people have made some comments about the changing investing environment. These days, not only do we have to analyse any actual investment, we also seem to have to second guess what the Government is going to do and if it is going to pull the rug out from under us. Now to me this feels more dangerous then what we had before. Maybe it is just me… But it does feel like the Government thinks it is ok to change the rules and where the goal posts are with zero notice… Makes things harder that is for sure.

You all sing the same tune – “the Gov. is all powerful and has guaranteed house prices”.

Do you think the USA wanted their house prices to fall? The UK? Anywhere? They tried. If it only costs a few dollars to support the bubble then i’d have much more faith. The reality is that it will cost the economy.

And the Libs will get some more use out of their debt truck.

Second-guessing the Government and the actions of Mr Rudd – in contrast to considering the fundamentals of economics – seems like a gamble to me. But each to their own.

And on that note I won’t be posting here for a little while. I said what I wanted to say, and tried to be helpful and provide an alternate view to the bullishness. Time for time to do its work.

Yes it is Steve..we live in the real world not one driven by spreadsheets alone.

The stock markets aren’t reflecting it right now – Largely because the Americans are giving their banks every opportunity to trade themselves out of insolvency I think. (It’s really about the banks there too.) But the effects will be felt in those markets in time.

Might be time to stop focussing so much on supposed “free markets” and thinking more in terms of what governments want us investing in and why – Which again is what will make Ken Henry’s report so potentially informative. I hope?

The consequence is that the government has now designated an asset class that is a rolled gold protected species because the entire economy has become so heavily dependent on lending for real estate purchases. Is that the fault of government? Partly, because they’ve encouraged real estate speculation through favourable tax treatment for real estate purchase and investment. It’s a factor of the free market, so we can’t quibble too much, but then again, the government has shaped the market such that this was the inevitable outcome.

That doesn’t mean that investors in real estate are guarranteed windfall profits. But it does seem to mean that they are guarranteed not to take anything more than a very minor loss. You could make more money investing in gold, shares, whatever. But uninformed mum & dad investors who are told and believe that property only ever goes up would be given a secure haven to store their ‘wealth’. Perhaps.

I accept the situation, but I think it’s a disgraceful situation. If this is the way it’s going to be, I just wish they would come out and publicly state the rules of the game rather than pretending to dance around it.

Bank failures are very, very bad news of course. With the tax payer getting to bail out the banks aka the UK and US. Way better to not let the rot get into the banks in the first place. So keep housing ticking along.

With my second point being that so far they have done that successfully – A little too successfully for their own liking even? But bank failures simply could not be risked and at the time the RBA crashed interest rates and Rudd upped the FHOG and the States came on board with slashing stamp duties for FHBs they had no idea what they were facing except it looked like being VERY nasty.

Although if an individual’s major focus is the fact that house prices are way higher than they can or wish to pay, then it easy to lose sight of the fact policy makers are playing a way bigger game in which house prices are only one element (albeit a very important one.)

As to Chrissy pressies – I’m thinking in terms of suggestions “Uncle” Ken Henry might have for us. With Rudd OK’ing a few of them soon. And some of them being more the “trick” than “treat” variety just maybe as well! But it still helps give investors some direction. There is a super review being carried out as well. And that’s of significant interest to me too.

10 year plan hey Greg? Some of it could be way longer if the last one is anything to judge by. But my interest levels are high!

Overall, I think Pete’s right in that the real estate bubble is unsustainable in its fundamentals. What we don’t know is Rudd’s level of desperation and/or stupidity. If he’s as desperate and stupid as I think he is, I think we’ll see him try to keep the bubble going until he can get re-elected. What other choice does he have?

At the moment, we could be looking at a slim Christmas for the retailers, based on underlying desire to deleverage, stimulus wearing off and higher interest rates. Alternatively, if Oz racks up the credit cards again for a big Christmas spend (please, yes please!), retail might fall in a heap right after Christmas. So Rudd could stimulate going into Christmas or he could save the world with a bailout in the new year.

Did anyone mention moral hazard? They should name a horse ‘moral hazard’ and enter it in the 2010 Melbourne Cup – would be an unbackable favourite. The TAB would have to suspend betting!

I also think that Rudd will call an early election. I can’t see the ETS getting up (and rightly so in its current form). But of course the real risk for Rudd is that the economy starts to tank as the stimulus wears down, including house prices coming off the boil. I reckon he can’t credibly announce new stimulus at the moment because everyone thinks we’re back to boom times. He’d make Whitlam look like a miser and the coalition would have him for breakfast. And he knows he can’t survive a house price crash. What a bind to be in! So he has to call the election before the $hit hits the fan. This is what he’s really worried about – the ETS is just propoganda.

Poor Rudd – he showed such promise but will end up being seen as a very ineffectual PM with absolutely no courage.

So that is one point. But the other (and possibly more important one I was trying to make) is that housing would seem to me to be much more affordable than it was when interest rates were much higher. The market has been reset to something like 2004 levels of affordability perhaps?

Pete, you say it is not sustainable. Well all I can say to that is that Rudd seems to reckon it is his job to ensure it is sustained – He isn’t a big believer in letting “free markets” do their thing (unless that thing happens to be what he wants) as you’ve also obviously observed. And he would roll around on the floor laughing at any suggestion that Australia might be a “better place” if he didn’t do such things. As would the RBA and Treasury.

They exist to direct and control and to intervene and manipulate (and extract taxes) for the greater good as required, is their take on things. And the GFC has very strongly reinforced that view of their roles in their minds.

So that fundamental shift in emphasis and willingness to actively involve themselves in markets on the part of policy makers has to be factored into investment decisions very heavily nowadays – It was always extremely important of course. But now it is even more so. Which makes the outcomes of something like Henry’s review even more important nowadays than it may have been in the past. Rock on Chrissy – I can’t wait to see what pressies Uncle Ken has put in my stocking.

Even the schools cash splash has been wound back a fraction. Perhaps they are making some room in the budget to put some more money into real estate?

My ‘guess’ is that the Gov wants to be able to say that all their calculations or ‘forecasts’ in the budget were actually better than predicted.

That will be an avenue for them to say that the stimulus ‘worked’. Even though it is just less spending that intended.

They realise that the Liberal Party is continually going on about debt. So it wouldn’t surprise me if the Gov wanted to punish them for it a bit by reducing it (in the short-term).

Kinda makes an election easy if you can say that everything you did was good (“look at the figures”) and everything the Opposition said was wrong (“look at the figures”).

Even if it is horse crap.

Election may be coming soon if the ETS doesn’t pass in December? (double disolution)

And their strategy may be less of a “keep people happy” strategy than a “but we’re nowhere near as bad as those guys!” strategy.

Personally I hate that I voted for Rudd, but I hated Howard more. Lesser of two evils? I wouldn’t vote for Hockey, and voting for Turnbull seems a bit strange. But I won’t vote for Rudd again.

Sorry for the triple post guys!

I think you might have missed my sarcasm in my previous post. The sarcastic bit was me suggesting house prices doubling from here (apologies for my low form of wit).
The median DINK (double income no kids) wage would not even be able to afford to live in the median house if they doubled.

Who is going to buy the houses in that case? No-one would want to. Plus you shouldn’t need to be a DINK household to afford a home – many people are not.

Ned:

Are you telling me that you don’t think Krudd would act to mitigate a crash Pete?

Touche!

I don’t think Rudd can mitigage a decline in the ‘growth’ (in real terms) of the property bubble over time. Now, I am keen to emphasise “real terms” and “over time”, because he may be able to prolong the bubble. All he’d need to do is introduce the FHOG again, this time with 50K bonuses and people would be all over it.

But…the more he tries to keep them up, the more he is taking away from the rest of the economy to support a bubble. It is sustainable in the short-term. It is not sustainable in the long-term. All it would take is a significant shock to our economy to bring things to ‘crisis levels’ again. How about a global shock that significantly reduces global credit availability? How would he fund stimulus then?

Property bubble expects infinite growth – with finite (debt-fueled) capital.

Plus, I don’t think we should pretend that the Gov. really has a clue as to what they are doing at any given point. They have proven themselves to be economically illiterate and political deceptive.

If inflation rockets real assets like houses will rocket too. Look at the basket case Zimbabwe and real estate prices.
Check to see how real estate has historically performed in high inflationary environments — it has done quite well in these environments (even outperforming equities).

Yes indeed. The factor that makes this ‘different’ is debt. Simply, high inflation = high interest rates. In fact, ludicrously high interest rates. No-one will be able to afford the interest payments to keep the bubble afloat.

However, people who own their own home have a huge advantage.

Now just need to ask ourselves, is our property bubble fueled by debt or people who ‘own’ the houses? If you ask me, i’d say most of them don’t technically own their houses at all – the banks do.

Take a look at solar panels and pink batts. Solar panel companies were given a day’s notice that the rebate would be culled. Similarly for the dodgy johnny-come-lately pink batts installers – given a day or so’s notice that the handout would be reduced from $1600 to $1200. Businesses had made decisions in the expectation that those programs would run to their conclusion. At the very least, the government had not given an indication that the rug was about to be pulled.

Now before any of you call me a socialist, I don’t for a second believe that businesses that rely on government handouts are sustainable. Nor should they expect subsidies to continue ad infinitum. But it just goes to show how arbitrary it all is.

Further, the fact that the first home buyers’ boost is still going strong speaks volumes for the government’s intentions. While other elements of the economy can be sacrificed, house prices are sacrosanct. Even the schools cash splash has been wound back a fraction. Perhaps they are making some room in the budget to put some more money into real estate? The FHOG would be probably the only stimulus that is immune from tweaking (unless you call an increase a tweak).