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The Australian home prices debate Part 2: Why prices may not collapse.

March 21st, 2009 · Greg Atkinson · 171 Comments

In Part 1 of the Australian home prices debate I looked at some of the factors that could drive home prices down in Australia. Now in Part 2, I shall outline the other side of the debate and consider the arguments that support the view that the Australian residential property market will generally withstand the fallout from the global financial crisis and not follow prices down in a similar way to the U.S. and U.K.

The case for why property prices will not collapse in Australia.

There is housing shortage in many parts of Australia.

Often you will see figures or graphs that show that the demand for housing in Australian  is currently outstripping supply. Whenever I hear and see this I always wonder where the tent cities are of people who cannot find a place to live? What does it mean exactly when people say there is a shortage of homes or there is a pent up demand for new homes? To be honest I treat this statement warily as it is usually tossed around by real estate groups or home builders etc. I am sure there is a demand for new homes but in times of economic downturn people can stay at home with their parents, immigration levels be cut (and have been) and extended families can live together etc….so this demand can be reduced. In any case what would be more useful to know is the number of buyers active in the market as opposed to some statistical exercise looking at theoretical pent up demand. (does anyone have that sort of data?)

Interest rates have tumbled, now is the best time in years to buy a home.

There is no doubt that the recent cut in interest rates means that less income is needed to service a mortgage and so in theory housing should be more affordable. But it may not exactly be the best time to buy a property as home buyers are faced with the possibility of losing their jobs or if the doomsayers are correct, a significant fall in property prices. However generally I think most people would admit that lower interest rates helps support the property market just as it did back in the recession of the early 1990’s.

Housing demand in Australia is fuelled by relatively high levels of immigration.

Immigration (along with a natural increase in population) certainly increases demand for housing. However as we have seen just recently immigration levels can be cut and also people leave Australia every year to work overseas for a period or time, or permanently to live in another country (although I guess these numbers will be down as well). Therefore it would seem a little risky to rely on immigration to support house prices especially if there were to be a severe recession and unemployment crept up to say around 10%.

Buying property has always been a safe bet over the long term.

It is hard to argue against the fact that most people feel that buying their own home and owning “bricks and mortar” is the safest place to park their wealth. There have of course been times when property prices have fallen in Australia and they will fall again, but over the life of average mortgage (20-30 years) it would be hard to find a significant number of people who were left with negative equity in their homes.  I would expect the same could be said for long term property investors as the majority would have have seen capital gains in addition to benefiting from some favourable tax incentives. (such a negative gearing)  Of course as the saying goes, past returns are no guarantee of future performance so all this could change. If the confidence in property being a safe investment fell then this could lead to a decline in prices. I would say that some confidence in property as investment has already been lost due to the stock prices declines in listed property trusts, the collapse of a number of property developers and plenty of negative coverage in the media.  The question is how much has confidence been eroded?

The median home prices quoted in the media are misleading, there are still plenty of affordable areas in Australia including in the major cities.

Looking a median home prices and then saying housing is too expensive simply indicates some people in the media etc. do not understand the term “median”. It does not matter if the median home prices in Sydney are high as long as their are plenty of homes available below this median level. Also many people for example simply live outside Sydney and commute from the mountains or central coast etc. and this does not seem to be taken into account when people want to promote a property bubble. Are there areas of very expensive property prices in Australia? Yes. Will these prices correct downwards? Probably (and some areas are sliding downwards at the moment). Will this translate into a nationwide property collapse? Why should it? Just remember if the top end homes in any city or town take a beating then this will drive down the median home price, but it does not mean property prices across the nation are collapsing.

Home prices did not fall significantly during the recession in the early 1990’s, so why should they now?

The simple answer to this question is that no two recessions are alike. Perhaps in theory there is no logical reason why home prices should fall across the nation, but they still could. If people start to feel property is no longer safe then there could be a flow of money out of property (into cash, commodities or even stocks) and prices would fall. Just as good stocks get sold at crazy prices when the stock market crashes, good properties could also be sold off at lower prices if people decide to exit this asset class. The true value of any property is what someone is willing to pay for it, so today’s valuations could mean very little if there is a lack of buyers. (just look at the write-downs in the infrastructure trusts to see how nasty this downwards correction can be)

The government will support home prices.

It would probably be political suicide for the government to go to an election with home prices tumbling and people seeing the value of their family home slashed. We have already seen the government increase the First Home Buyer’s Grant (FHBG) and I am guessing more support will follow to prop up the market if needed. These measures may not save the day but I think it is pretty safe to assume the government will try and stop any rot in home prices. We also have “RuddBank” in the pipeline and let’s not forget that both sides of politics get plenty of political donations from property developers. However you could also argue that the government may simply not have the money to help home owners if the economy deteriorates further so perhaps further government support is not a certainty?

There are of course other arguments that support the view that home prices in Australia will not tumble but I hope I have caught the most common issues being debated at the moment. As always please feel free to add your comments as I am not property expert, although I do have have an interest in an investment property in Sydney.

My own feeling is that both side of the debate have valid arguments and we will only find out later this year which view turns out to be correct. I hate to be a fence sitter, but I genuinely feel that nothing is within Australia’s control at the moment; if the global financial crisis starts to resolve itself within 2009 then the Australian housing market should hold up, however if things take another turn for the worse then who knows what will happen? My crystal ball is simply not working very well.

171 responses so far ↓

  • 1 Pete // Mar 21, 2009 at 2:04 pm

    I generally appreciate this article, although I think the title should be changed to make it consistent with Part 1. (‘will’ should be ‘may’, you don’t want to seem biased)

    “Buying property has always been a safe bet over the long term.”

    It has hasn’t it? But we need to consider that capital gains need to beat inflation, over the longterm aswell (or else you just lost money). Yes house prices go up relatively continually over the long-term, but by how much?

    Recently (last 8 years), prices spiked severely. If these prices are to ‘continue’ to go up, they will need to go up significantly over time to match inflation. What happens if inflation gets to 10%. Will wages go up aswell? Will we be able to borrow that money to even buy a house at even more inflated prices?

    Here’s a question. If house prices were double what they are today, would you still believe in a continued real estate boom?

    Consider: Wages need to rise at equal levels to housing for current booms to be justified. Will they? (I don’t think they will even come close). Will house prices continue on an upward trend as purchasing power (credit availability and employment levels) are eroded?

    I feel sorry for people who will lose their homes. However I do not feel sorry for people who have bought, invested in, and contributed to a bubble. Greed has been rife and plenty throughout the bubble…from the Real Estate speculator and agent, through to the family man who thinks he is smarter than the man he bought from.

    The ones who will eventually benefit from the housing slide will be the next generation – the innocent who have played no part in the current mess. They are the ‘sunshine after the rain’ that will come after a real estate nightmare.

    However the youth will have different struggles – high interest rates, low credit availability…who knows, Conscription? Climate change? High cost of living?

    Something else to consider:
    Why do people buy houses?

    Yes there are many many reasons. One reason that is like an umbrella to them all is: For the future.

    Consider: What if we have another world war soon? What if climate change becomes a real problem (as in, very noticeable) very soon? What if people start losing faith in their future?

    People make longterm commitments when they have longterm plans and a longterm ‘hope’, and for longterm stability in life.
    If people lose faith in their future being as good, if not better than the present, then people will start thinking more about the ‘here and now’ than the “i’ll own something in 30 years of debt enslaved servitude”. (Or maybe they won’t).

    Anyway, rant over

  • 2 Greg Atkinson // Mar 21, 2009 at 4:45 pm

    Pete, I have changed to title of the blog. You were correct, the original title could be viewed as bias. As usual I find it hard to fault your logic and I would only say that do not expect prices to race ahead in Australia for many years but nor do I get the feeling at the moment, that prices will tumble. Is it unreasonable for prices to move sideways for some years without any major downwards correction?

  • 3 Pete // Mar 21, 2009 at 8:46 pm

    To me it seems unreasonable that a bubble, built on the foundation of easy credit, will not deflate if that foundation falters.

    That said, if the housing market (*cough bubble*) does move sideways, isn’t that still a loss in real terms? (eg when you adjust for inflation)

    In my opinion there is only two things that can prevent a major housing fall
    1) the immediate, powerful and prolonged rise of internal Chinese consumption that would require Australian resources (although consider whether the resource sector alone could prop us up?)
    2) the Australian Gov’s economic shenannigans (which I believe would only have short-term effects and cause long-term damage. People won’t fall for FHOG forever)

    On an unrelated note – it just occurred to me that IF China does rise again, fuel prices will skyrocket, AGAIN. Which leads to a higher cost of living, etc. A real pain. Good to spark renewable energy innovation, but an economic drag for everyone all the same. It would make life a lot tougher for the USA to recover from a recession wouldn’t it. I wonder if any countries have considered that strategy yet (once they have dumped all their US bonds of course)

  • 4 Senator13 // Mar 21, 2009 at 10:17 pm

    I think sometimes it is easy to generalise the real estate market. Each individual suburb is different and often can not be compared to each other. Yes, some areas might go down, but other areas might do quit well. The next few years will be hard no matter what market you’re in – real estate or shares – but I think there are still good individual deals out there where profits can be made, it’s just a matter of finding them… And that’s the tricky part.

  • 5 Greg Atkinson // Mar 22, 2009 at 9:46 am

    Pete, I think that the government will do it can to stop the housing market falling in a heap. Anyway the RBA has a few more rate cuts up it’s sleeve and I am guessing we may see another cut in April, although I think they should take it easy now.

    As for China, I think it will be a while before we get back to the highs of the resources boom. For a while China and Japan will make the miners take low prices as a payback for the days when BHP, RIO etc. were raising prices 30% or more at a time.

    Anyway if house prices move sideways for a few years or even declined a little (say around 10-15% on average) I do not think this would worry most homeowners or long term investors. All asset classes have their lean years and people seem to have forgotten that even gold has had some very lean years. Maybe we will just see a few leans years in property until the GFC sorts itself out?

  • 6 Pete // Mar 22, 2009 at 8:35 pm

    Senator13: Do you really think that some areas might go up in price while others go down?

    I get your point, but personally I think it will be much more a case of how far each one will fall. Big falls vs smaller falls.

    Shares on the other hand, have potential due to their diversity. I wouldn’t invest in financials any time soon. But gold, oil, perhaps some others, might do very well.

    Real estate just does not have the diversity of shares. You have residential, commercial, hotels and holiday homes (maybe theres more). But they will all be affected by the same major market forces.

    Greg: As the RBA said itself, I don’t think further rate cuts will do anything. I agree that the Gov. will try its best to prop up the real estate market, but I don’t believe it will be able to do it. The Opposition is still there, and whilst they are stupid, I don’t think they are stupid enough to let obvious bubble reinflation go without punishment.

    Again, I think the real-estate market will not stagnate or just move sideways – due to the simple factor of credit. People are currently up to their eyebrows in debt. People will need even more just to keep the real-estate market afloat. You need to ask yourself: Do you think people will get that credit? (will the banks continue to offer these loans, knowing the risks?) And, will people even ‘want’ the credit?

    I’d love to get all my ideas on just one page… I seem to cover so much. I’m pretty sure all the guys at have covered most of this already anyway.

  • 7 Senator13 // Mar 23, 2009 at 7:49 pm

    Pete, yes I do really think that some areas might go up in price while others go down… It’s just a matter of time span… And, choosing the right property. I do agree with you that in the immediate future things are going to fall, just a matter of big falls vs small falls… I just think surly if you look out 3-5 years down the track, yes some areas will still be down (and may never really recover), but there will be other areas that will show growth. It’s just a matter of entering at the right time for the right amount of time, in the right area… What that area will be, I don’t know…

    I defiantly agree with you in relation to shares offering more variety. Within the share market you can be part of the real estate/property market, retail, wholesale, mining, energy, financials and the list goes on and on. Within each of these sectors there are a vast number of individual companies to choose from. I also like the liquidity that shares offer and I would say that the share market is my preferred method of investing. One of the reasons why I read!

    I am no expert, but I like to keep informed about all aspects of investing, both long term, short term, stocks, real estate, even zeppelins if they ever make a comeback lol. I think blogs like these are good because if it helps people stay informed it’s a good thing. If it makes people ask a few questions and try to think things out logically it’s a good thing. If it prevents people from getting into debt up to their eyebrows that they can’t finance it’s a good thing. A lot of people have not done these things and its one of the reason why we are in the mess that we are in. But I am not going to write off an entire market, but I will watch them for any opportunities that come along. I don’t think any one is going to argue that every thing is rosy at the moment, but I do want to be in a good position for the recovery… When ever that may be.

  • 8 Greg Atkinson // Mar 23, 2009 at 8:06 pm

    Senator, I hope you keep visiting the site. The aim here is to allow people to discuss stock market and investment issues free from spin and hype. I agree with your investment approach, there can be good and bad properties just as there are good and bad stocks.

    I do not want to put a curse on anything, but dare I suggest the stock market might be finally sorting itself out? I am not suggesting we about to see a massive rally, but perhaps the panicked selling phase has passed?

  • 9 Pete // Mar 23, 2009 at 10:13 pm

    Senator: I think I agree with pretty much everything you just said.

    Except that “I don’t think any one is going to argue that every thing is rosy at the moment” – people do! That’s why we aren’t in the proper depths of a recession/depression (yet).

    Greg: I like your optimism, but I think our sharemarket has a way to go yet. There are so many companies just operating on the debt razors edge. I feel it is just a matter of time before they cannot service that debt. Unless the Gov. steps in, they’re in big trouble.

    I’ll give an example: TSI is Transfields Infrastructure fund. I’ve invested in it before (got a decent dividend and ditched at a small profit). This fund is very heavily leveraged – that is how it operates. However servicing that debt may (probably will) become very hard if interest rates soar, and energy prices do not. Yes, it has assets to back itself. But who would buy them? At a premium price or fire-sale price?

    I have my eye on some nifty ‘renewable energy’ type funds…but as nice as they seem, I cannot justify the investment risk in this economic climate.

    Also, I think that certain companies (*cough RIO, BHP*) have not had their shareholding reduced enough to value them at their current worth. I know that is a big call, but that is because I am very pessimistic on resources at the moment.
    *If our dollar rises against the Yuan…maybe they Chinese would consider sourcing more from Brazil? Or elsewhere. We’d be doomed as an economy I fear.
    *If our dollar depreciates, we might get more exports, but our sheer debt levels will destroy our leveraged companies…and hurt our Gov’s deficit spending big-time.

    I sort of feel that it is a lose/lose situation. But, that is very negative of me. I think Australia as a solely resource-exporter is a tragedy. WA and some of QLD will boom, whilst the rest of the country (you know, the populated bits) will suffer the inflated prices it brings on (again).

    Not sure if that helps…

  • 10 Greg Atkinson // Mar 26, 2009 at 7:09 pm

    Pete I guess as far as the stock market goes it is a question of how much do prices have to fall before we are at the bottom? I get the feeling we are bouncing around the bottom now, but as the failure of Lehman Brothers showed, things can really get worse very quickly so I guess am a cautious optimist at the moment.

  • 11 Pete // Mar 27, 2009 at 9:33 am

    I don’t think we are at the bottom. Whenever there is huge leverage in play, we’re not near the bottom.

    I think as they have said on DR, P/E ratios need to come right down, perhaps even to under 10 to become attractive again. I think until companies start to average those kind of levels, we are still ‘bloated’.

    It is probably (?) an error to assume that a 50% fall from a high constitutes a ‘low’. I think the trap we fall into is comparing current levels with the high level, or low levels of different years (eg, 2003). We should instead be considering the MAXIMUM the ASX could fall (realistic, not ‘to zero’), and working our way up from that level depending on our outlook for different sectors.

    The reason I say this is that for years we built our economy on optimism and falsehoods (credit). We need to consider what the ASX would look like without them.

    An unethical analogy:
    Imagine a really fat person (think Biggest Loser). This person loses 30% of their bodyweight due to exercise and dieting. Based on only this information, is that person skinny now?
    That person then loses another 10% of their bodyweight due to exercise and dieting. Are they skinny now?
    The answer is that we still don’t know. Of course we can make assumptions and speculate, but that is not accurate. All we know is that they are LESS fat than before. Just like the ASX is less valued than it was.

    It would be easy for us to tell by looking, because we know what a skinny person looks like and we’d be able to tell if they were fat or not quite quickly.

    The problem with the ASX is that there is no ASY or ASZ to use as benchmarks. We don’t know what a ‘skinny’ ASX looks like.

    So in my opinon, calling the bottom is very very hard. Just like the bear market rallies in the Great Depression, it seems that people called the bottom 3 or 4 times…and were wrong. This case might be completely different.

    Keep in mind that I am being ‘idealistic’ here… Communism is idealistic, but doesn’t work in reality.

  • 12 Greg Atkinson // Mar 30, 2009 at 8:55 pm

    Pete I agree that picking the bottom is near on impossible..well picking it with any great accuracy is anyway. But I tend to be one of those contrarian types and look for signs of hope in despair and tend to get gloomy when the market is soaring. Mind you it is a real challenge being optimistc at the moment!

    By the way do you think the government will extend the top up for first home buyers? It would seem to be popular politics…both sides of politics love getting people into their own homes it seems.

  • 13 Pete // Mar 31, 2009 at 11:30 am

    Greg: Well, look out for those suckers rallies. When we hit the ‘real’ bottom, I think that even contrarians will be hard to find (initially).
    When you look at graphs from the great depression (and recessions) and notice the ups and downs, that is only a portion of investors creating those ups and downs. As people get more and more pessimistic over how much the market can actually return for them, I think there will be less and less volume of trades as people decide to hang on to their money instead of risk it.

    I guess i’ve never tried to guess about the FHOG. Um, at this stage I think probably yes. But it totally depends on Rudd and how much he wants to protect the RE market.

    So far his attitude has been to protect it. But it’s hard to tell how far he will go. Maybe FHOG is only the beginning and he will come up with some more seriously expensive hair-brained schemes to try prop RE up. Or maybe he will say “well, we tried” and leave it at that.

    Pollies playing with economics seems to be a pretty volatile game of late. I don’t know if any of us would have predicted this time last year that we’d have had several stimulus bailouts by April…

    And I agree, there is a huge bias by pollies who are RE investors. The NSW housing minister has about 16 houses from memory (it might be 12? I can’t remember exactly. Also that was a stat from last year, the housing minister might have changed since). I think it is a bit corrupt actually.

  • 14 Greg Atkinson // Mar 31, 2009 at 1:05 pm

    Pete to be honest I do not spend much time studying the Great Depression. The world has changed so much since that time that I really cannot see much point is looking there for any signs of how things will unfold this time. For example China was not an economic powerhouse back then and Japan was not the world’s second biggest economy. In fact the global economy back in the 20’s & 30’s was vastly different and the way shares were traded (and owned) was also vastly different. In addition we need to remember that World War 1 and the 1918 flu pandemic also had a hand to play in creating the conditions ripe for the Great Depression…thankfully these factors have not been in play this time around.

    As for sucker rallies, well I have been sucked in before and I will be sucked in again. But buying good quality stocks when the ASX All Ords is bouncing around 3500 seems like a better deal to me then buying in 2007 when it was around 6500 🙂

  • 15 Pete // Mar 31, 2009 at 11:59 pm

    Greg: I agree that the world is definitely different since the Great Depression, especially for all those things you listed. The one thing that has not changed however is general human behaviour, including emotional behaviour.

    I don’t see how it matters so much that the forces are different – if a market is destined to fall, people will sit by as it falls continually predicting that ‘this is the bottom’. The reason is simple and obvious – because when we hit the bottom, the people who are first in will have the most gains. I think the driver for this thinking is one (or more) of these, depending on your philosophy:
    – fear (of ‘missing out’)
    – greed
    – self-pride (‘I am wise and I will know the best time to invest more than anyone else’)
    – challenge (‘I want to see if I can pick the bottom’)
    – speculation (‘I’m going to guess where the bottom is, I hope i’m right)
    – individuality (‘I don’t care what anyone else says, this is my choice’)

    Perhaps I have gone too far into that.

    My point is that a suckers rally will probably sucker in all of those people. That is what a suckers rally is for. There would be no suckers rallies at all if everyone was pessimistic and thought the bottom was at the end of a black hole.

    So I give credit to optimism (especially as I am quite negative about these things, optimism should be encouraged I think). The only problem with optimism or even pessimism is that neither are particularly helpful when trying to understand and manage risk. And both have a swag of associated emotions that are not entirely helpful when making important financial decisions that could potentially rob you of your wealth.

    Here’s some thoughts that will probably not help explain, but i’ll give it a go anyway:
    *Have you ever made a decision to not buy something because it is too expensive, only to find out the next day that it has been put on sale and is now affordable? You feel like you were wise and dodged a bullet right?

    *Have you ever bought something overpriced, and then it went on sale the next day? (I bought a stereo recently and this happened, grrr) It makes you feel rotten and that you should have put more thought and patience into it.

    *Have you ever made a decision not to buy something, and then found out the next day that the item either went up in price or is no longer available? You might kick yourself for it for a while. But you get over it, because there are other items to spend your money on.

    *Have you ever bought something, only to find out a week later that someone has an even better item they bought for less money? You kick yourself for not doing more research and jumping in too early.

    *Have you ever bought something (like shares) without really doing any research and then found that they have gone up in value a huge amount? You make a nice profit and feel happy. But you also find a lingering feeling of ‘stupidity’ in that it was luck more than anything that made you prosper. You don’t feel wise, and you don’t necessarily value your profits so highly. You wonder how upset you easily could have been if things went the other way.

    Okay, so my point there is that people make emotional purchases. We don’t necessarily do enough research. We often choose to believe that the future will bring what we ‘want to happen’ rather than what ‘will happen’. This is one of the problems we run into when we start to hope, rather than to calculate.

    Personally, when I started trading shares I noticed a lot about myself. The greed was amazing. Looking back at some of the foolish trades I did out of pure greed was really interesting, such as buying more than reasonable amounts of shares, holding on to failing shares, buying shares without doing research, jumping on to shares with bullish charts or recent share price jumps…all the most basic mistakes.
    I was fortunate enough to actually make some money from my stupidly risky and overbought trades. I did okay, but I realised later how much I could have lost. I didn’t feel wise, I felt like a complete idiot who was lucky, nothing more (fortunately I reviewed all my shareholdings very critically at the right time and got out of my foolish positions).

    Something I noticed is that these emotions never go away. The only thing that has changed is my ability to recognise these emotions and to not act on them. I have seen these EXACT same emotions in several other traders I know in person. From this experience and the experience of others I conclude that most traders are similar and feel these emotions. I also think that these emotions are very evident in the market (eg, when a company gets a sniff of bad news, company shares drop 10%…only to climb back up again a few days later when the rationality kicks in. This works for gains too).

    Because traders are so emotionally driven, so much stock market behaviour can be put down to ’emotions’. Suckers rallies as an example, whereby people start to get bullish when they see a little bounce in the index. Everyone jumping on the bull-train because they don’t want to be left behind if it takes off. And i think the chart for the Great Depression tells us a lot about that kind of behaviour.

    I think it is a bit like a self-fulfilling prophecy in a way. The sucker rallies exist because it takes a lot to extinguish the hope and greed of humanity. Every single rally could represent a different ‘resistance’ level of some sort for a bubble lifecycle ( – Note: I used google to get the image, it is hosted on many sites)

    After each suckers rally, perhaps we then drop to the next level, eg:
    – Fear, then rally and drop to
    – Depression, then rally and drop to
    – Panic, then rally and drop to
    – Capitulation, then rally and drop to
    – Desperation…where no-one wants to invest any money anymore, they’d much rather hold on to it.

    Each might have its own sucker rally, or might be combined with another, eg:Panic and Capitulation rally together.

    The real irony and the self-fulfilling part is that we NEED to get to Desperation in order to start a proper bull-market again. Because Desperation is the point at which no more money will be taken out of the stock market – it is deflated to near it’s maximum extent.

    It all sounds very dire really. I think the point that you will know that the market has bottomed is when NOBODY is saying that it is a good time to invest (hence Desperation). There’s a real irony there in that it takes everyone to be against investing, for investing to finally be worthwhile (positive). Although, I guess you could probably feel some comfort if you put all your money in at the Capitulation stage, that it probably wouldn’t be too many years before you broke even. That’s assuming you’re not broke.

    Companies going through such a cycle will be really taken through a wringer. That is one area in which a companies present ‘value’ may not correlate with its future prosperity – eg, if the company doesn’t survive the ordeal.

    Anyway, thats a really long post and my idea on how markets fare in a Depression. If anyone has other ideas or something to add, i’d be really interested to hear about it.

    Note that I am not suggesting that you are wrong Greg, nor having a dig at you at all. These are my thoughts on the emotional/behavioural side of share market investing in a Depression. (Recessions are different and tend to affect sectors differently I think. Also they are usually mild, especially when the Fed steps in 🙁 )

  • 16 Greg Atkinson // Apr 1, 2009 at 10:12 am

    Pete, I agree with much of what you say but you are sort of assuming that 100% of investors will react in the way you described above, however we also need to remember there are large sums of money that are not traded in that way. Warren Buffet for example is well known to buy in fear and sell in greed as are many contrarian type investors. We also need to take into account the Sovereign Wealth Funds..these control vast sums of money and play by their own rules. I suspect most of these funds are focused on long term returns and are probably looking around as we speak for bargains. We are not in a situation where there are no buyers, we are just in a situation where the remaining buyers are cautious. (and as I mentioned in another comment, cashed up Chinese and Japanese companies are in buying mode and have been since last year)

    I am not saying any of this will stop further market crashes, but it does put a floor under the market. In addition I really think any reference to the Great Depression is taking things too far, as I have mentioned before the global situation was entirely different back then so let’s leave it confined to where it belongs – history. If we want refer to some financial event how about the Savings & Loan Crisis of the 1980’s..why doesn’t anyone talk about that? After all it shares many similarities with the current mess and is at least in the modern era. (I think U.S politicians etc. avoid talking about the S&L crisis since it would become obvious they are just as guilty as bankers for the current mess!)

  • 17 Pete // Apr 1, 2009 at 2:35 pm

    Yes I agree that there are different investor groups in the market that won’t abide by those rules. I would be interested to see how influential they are at those later stages.

    I figure that even these sovereign wealth funds are controlled by someone, and that someone is human(s). If they are following set rules, by the letter, then they may be immune to the emotional side. China’s buying of US bonds never ceases to amaze me actually. But as to whether they (or others) will put a floor under a falling market – I think that is a big assumption on whether they have:
    a) the money (enough to ‘sustain’ anyway)
    b) the will
    c) legal ability (Gov. intervention when China buys our stuff?)
    d) the currency (will we let them buy in USD? What happens if we only allow AUD, and China can’t convert it’s holdings of USD into AUD without a complete disaster?)

    Anyway I guess that is just China – i know there are other institutions out there besides sovereign wealth funds (eg super funds), so your point stands. My concern is that too much value is put on their heads, when perhaps they will have little to no influence on a falling market’s behaviour. Conversely, they might also be hugely influential (consider the world banking giant conspiracies)

    I think the main comparison between now and the GD is that we are facing a Depression, not a Recession (at least according to DR, and others). The main things I understand of the difference between the two are (besides the two quarters of negative growth crap):

    *Recession is due to excessive growth of an economy (or sector) beyond sustainable means. Eg: “Let’s all invest in IT companies! 1000x growth!”

    *Depression is due to a major structural issue in an economy that can only be rectified by liquidation. Eg: “Let’s destroy the strength of our banking system with ‘creative accounting’ over many years”

    I think a Recession is usually short (1 to 3 years). And a Depression can last a long time (more than a decade, based on that one occurrence).

    I just made those definitions up, someone please correct me if you disagree.

    The thing about the GFC is that it is structural. It is not just something that affects an economy for a while and then gets better. It appears to affect every single sector of an economy too, because the economy has relied on this faulty structure for its mis-allocated growth.

    I compare the GFC to the GD because it is the only thing I know that was similar in ‘effect’. Unfortunately Depressions are fairly untrodden ground, so you may be right that it is different, especially as the factors are different. Maybe we won’t even have suckers rallies. Maybe markets won’t fall any further. No-one knows, but we can do our best to read the signs and compare them with similarities of the past to help us make our estimations.

    Personally I think we will see the bottom when the bulk of the leverage is weeded out of Australian companies. The surviving companies will be capable of getting by without leverage and making profits from assets they own. I think it will be quite a while yet…and our banks will be tested thoroughly first. So far they have had it far too easy.

  • 18 Greg Atkinson // Apr 2, 2009 at 2:10 pm

    Pete I think there are a few different views on what constitutes a recession or depression. According to Investopedia a depression is: “A severe and prolonged recession characterized by inefficient economic productivity, high unemployment and falling price levels.” A recession is a period of GDP contraction and most agree that this needs to happen for at least two quarters before the “R” flag can be raised. So going by those definitions we are not in depression territory yet but of course that depends on how you define high unemployment and falling prices etc….and if you are pushing gold as an investment 🙂

    Personally I think the debate around the place is getting a little too gloomy and that as painful as this nasty correction is, it will all come out in the wash as they say….eventually. General Motors is not failing because of the GFC, it is failing because it makes cars people do not want to buy, the GFC is just speeding up the failure process.

    Anyway there is a floor to this market out there somewhere. (and we may have already seen it!)

  • 19 Pete // Apr 2, 2009 at 2:42 pm

    I see your points regarding Depression vs Recession. I’m not economist so that was just my opinion on things.

    What I find interesting is how we each look at things differently. Also the ‘when’ factor for a recession or depression…personally the exact day (or even year) isn’t of so much concern to me. It’s more the fact that it is coming. A bit like armageddon, but not fictional and with far less burning meteors falling from the sky.

    I wonder if the start of the GD was considered a ‘recession’? But by the end, even the recessionary part would have been considered ‘depression’, right? It just seems to me that recessions are the place for the public to quibble over economic semantics, and depressions are where the public quibbles over how it will afford to live.

    In regards to GM, I agree there. Although consider that Toyota is getting hammered too (not failing though).

    I’d like to say that I hope the floor has been seen to the market – but I think much more good will come from this if we haven’t seen the floor yet. Although who knows what strife our Gov. will get us into.

  • 20 Greg Atkinson // Apr 2, 2009 at 3:10 pm

    Pete I am not too worried about the exact definitions either..and I bet they were calling the Great Depression a “slowdown” for a while before the awful truth struck home. In fact quite a few “Warren Buffet” types went under during the Depression simply because they went in a bit early and lost a fortune. Of course our government and a few others around the world have the ability to really make this mess even more nasty so I might be optimistic, but I am sure not betting the house on a recovery at this stage!

  • 21 Greg Atkinson // Apr 15, 2009 at 11:31 am

    In case anyone was interested I found some interesting information on the website of the National Housing Supply Council. See their: Website for more details. Scroll down the bottom and you will see the housing supply report for 2008.

  • 22 Greg Atkinson // Apr 29, 2009 at 11:02 am

    Some news just getting the media treatment today:

    Home sales climb to 13-month high (from

    New home sales rose to their highest level in 13 months in March, as the first-home buyers grant buoyed demand.

    Total new home sales rose by 4.2% last month to 8210, accelerating from the 3.9% growth pace in February, according to the Housing Industry Association. The increase marked the third month of gains.

    …so I guess this is putting a floor under the housing market, but I wonder for how long?

  • 23 Ned S // Jun 3, 2009 at 5:04 pm

    It does seem a bit perverse that all the people who are hoping that house prices go down are people who really want to buy into housing.

  • 24 Gary // Jun 3, 2009 at 8:41 pm

    Well I guess Prof Keen’s prediction that prices would fall 40% is probably not looking good now. It looks like prices in Australia may not even fall 15%?

  • 25 Pete // Jun 5, 2009 at 7:47 am

    Gary: My understanding is the Steve Keen did not actually set a specific date for the 40% drop.

    Things progress slowly. The Gov. interferes with the market. People continue to not have a clue about what is really going on. We avoid a ‘technical’ recession.

    Does that mean that the basic underlying forces that are pushing house prices down are no longer there? No.

    Those forces are there, and they are getting strong. Unemployment. Less availability of credit. Increasing interest rates. These things are still important. The Gov. can play little games and prop up the market momentarily with its silly FHOG, but those downward forces get ever stronger.

    It is only a matter of time. Don’t fall for the short-term “it’s all okay now, they fixed it” thinking that is so rife in the media and politics. The Gov. can’t fix anything.

  • 26 Greg Atkinson // Jun 5, 2009 at 9:17 am

    Pete according to this report Steve Keen said it would happen within 5 years. (gives himself plenty of time so we will be waiting for a while to see if he was right!)

    See: Merchant of gloom makes a bet

  • 27 Ned S // Jun 5, 2009 at 12:21 pm

    Pete – A mate sent me an email early this year where he asked my thoughts on buying a full-on negatively geared investment property. My answer basically went along the lines of “Risky; I’d wait.” Yesterday I sent him an email where I said:

    “Not sure I’d give property the all clear just yet. But the risks do seem to have dropped off a bit.

    The following article is pretty interesting:

    Strange as it might sound, the graph in that DR article is one of the nearest things to some genuine US “green shoot” potential I’ve been able to find – It does at least indicate that the subprime mortgages that caused a lot of the damage have reset and the rest of the ARMs (which I only assume really are lower risk overall?) will have pretty much been flushed out the system by late 2011 regardless.

    I can still see the possibilty of a housing correction in Oz at some time. It’s logical enough – Capitalism is supposed to have recessions and house prices are supposed to go down in recessions. (Usually; Australia has defied that trend in the past I gather?) But no big deal, recessions end and house prices go back up.

    However, we live in a world that does hate recessions. And in a country that seems to rely on banking, mining and housing to keep its economy going. Lowering corporate tax rates would help the miners – I’m fully expecting that to be a recommendation of the Henry tax review. But even in the absence of that, the Oz government can and has protected both the banks and housing.

    It is pretty obvious that the piper will have to be paid eventually. By someone. And in a fractional reserve banking system, government will certainly be angling for that to include anyone who has any money saved. So government will re-distribute the cost. And push it forward.

    As to the thought that they’ve fixed things – I don’t think they have fixed a single thing either. But the impact of problems in the system has been delayed. And stimulus put in place to keep unemployment lower than it would otherwise be. Until some sort of genuine recovery can just maybe start. With housing in Oz being a protected species in the interim. I have very little doubt it is in a bubble. But it is a highly protected bubble that is being being given every chance to correct slowly over time rather than crash.

  • 28 Senator13 // Jun 6, 2009 at 9:21 pm

    Looks like the real estate market will hold up at least for the rest of the year with the extension of the First Home Owners Grant and Boost.

  • 29 Pete // Jun 6, 2009 at 11:43 pm

    Greg: Thanks for the link. I did know about the bet. Interesting ‘spin’ by the articles author don’t you think? ‘Merchant of gloom’? Just because suggesting anything will drop is now supposedly negative? So overpriced housing becomes affordable housing…oh wait, it’s still a drop, therefore negative. Anyway, thanks again media spin 🙂

    Ned: (sorry, long ranty response)
    See, the problem with housing is still the mortgages. These are a long-term investment, not a short-term one. The only people who should be taking out short-term mortgages are those wishing to make some quick dollars on capital appreciation, usually through renovation.

    Now regardless of how much governments want to prop up housing, they still have some things constantly eating at their shaky foundations:

    a) unemployment – the big stinker. You can’t buy a house with no job, you can’t keep paying a mortgage with no job. The unemployment rate is rising in both Australia and in the USA. That means less people can buy new houses. However the unemployment rate is only rising SLOWLY. It doesn’t go to 10% overnight. Not all people realise how valuable their jobs are just yet. When the majority of people start worrying about their jobs, very few houses will be sold.

    b) interest rates – do you really see these going lower? They almost physically cannot go any lower. A recent DR article pointed out that they were negative in real terms now anyway. If the RBA puts rates down to zero, what will the banks charge? Zero? 3%? 6%? Remember they still source money from overseas, just like our government is also doing (which means the Gov is COMPETING with the banks for loans…which drives rates up)

    c) availability of capital – again. This one is another major factor. All those changing Loan to Valuation (LTV) ratio’s meaning higher deposits required for home loans. Which FHB’s have 50K saved and ready to go? None of them! Gen Y are pathetic, but only because they have been raised to be, by a debt-loving society. (There is actually a lot to the topic of capital availability).

    I know I keep touting these three factors as important, but they are ALL increasing slowly. The Gov. can fight off the short-term effects, but it has to keep adding more to its arsenal each time, because it has stronger forces to fight. By next year they will be even stronger. And my guess is even stronger the year after that. They are all bearish for real estate.

    So many people are jumping from the ‘RE Bears’ bandwagon to the ‘oh no, the Gov will prevent it’ bandwagon. Come on, get a grip! The Government is NOT an all knowing, all seeing, all powerful entity that can control everything. If we were a Communist country, then yes, it could have much more control than it does. But simply, a market is a market. All the Gov. can do is manipulate it WITHIN the constraints of its political ideology. Can the Gov. turn around tomorrow and say “all house prices must sell at 2008 values”. Hell no. The Opposition and half the country would revolt. China could do it though. Not that it would work. See, the Gov. is making what LOOKS like progress, but is in fact just using the biggest and best wildcards in it’s deck. It is all about perception – that the Gov. has enough power to fix it all. Stimulus? FHOG? Are they sustainable? No.
    (I could go on about that for hours, but i’ll stop)

    It does concern me that we (and myself included) seem to be such short-termists. Can we really not think beyond the latest news headlines?

  • 30 Ned S // Jun 7, 2009 at 12:27 am

    Pete – I’ll have a think about what you said and reply after that. In the interim, I’d just say my personal timeframe is 10 years minimum. But buy and hold until death is my preferred option.

  • 31 Ned S // Jun 7, 2009 at 12:11 pm

    Pete – I can’t argue with your three points. They are perfectly logical. But I still must temper any crash in Oz housing prices against the thought that government is prepared to operate on borrowed money. And will borrow more if it reckons it is neceesary. And against the quite extraordinary cuts in interest rates we’ve seen recently. With Australian housing probably being one of the principal benificiaries of all of this.

    While it sounds a bit melodramitic, about the nearest analogy I can come up with for it, is that Australia sees itself as being at economic war (I seem to recall Rudd made a comment to that effect?) and within the context of the war effort, housing has been declared an essential industry. (As was banking.)

    I guess to at least some degree, you take the view that they can fight but they can’t win? But what would be a win? For mine, 20% falls in housing won’t cause too many people to bat an eye. I think if the majority of people are honest with themselves they are probably expecting some sort of a fall. 10% unemployment can have a way of giving house prices a bit of a shake.

    But most of us are also expecting inflation I think. Which is why gold is in so many people’s thoughts at the moment.

    I believe we have stagflation in the country already. And that is a very handy way to balance house prices against incomes over time. House prices go down a bit. Inflation pushes wages up a bit. The RBA chooses to not get too zealous about fighting inflation for a while. Just maybe the world gets a bit of growth. Oz piggy backs along on same. The RBA pushes interest rates up a bit. We get another recession. And at the end of it we find ourselves with a big deficit to be repaid. But just maybe with some genuine economic growth finally going on.

    That sort of scenario does cause a lot of people a lot of pain. But it doesn’t crash and burn the general economy. And by and large, Australian house prices have historically come through such episodes relatively intact. Sure, we seem to have overdone the property thing a bit more than usual this time. But the RBA has also responded by putting in the lowest interest rates for 50 odd years.

  • 32 Pete // Jun 7, 2009 at 4:33 pm

    “For mine, 20% falls in housing won’t cause too many people to bat an eye.”

    A 400K house now valued at 320K? That’s a big deal. A lot of people would enter negative equity territory…even for Prime loans. A 20% fall is one thing, but a recovery is another. When do you expect the 20% to be regained? What if that takes 5 years? Or longer? In ‘real’ terms that is a huge loss, depending on the rate of inflation.

    “And by and large, Australian house prices have historically come through such episodes relatively intact.”

    Ned, that is the kind of thinking that got us into this mess. Without any firm logic behind it, that statement is nothing more than a gamble. At the Casino “the roulette table has landed on red 40 times out of 50 tonight. That means I have a 4 in 5 chance of winning!”. I think we should judge each scenario by its merits and only compare like with like. If your angle is ‘human behaviour’ then i’m fine with that as long as you can provide some rationale.

    I’ll keep my RBA response short. The RBA is useless. It has virtually no more power left. All it does nowdays is release statistics and spin crap.
    1) Do you think the RBA raising rates would be politically palatable? No way. People would lose their homes.
    2) Do you think the RBA dropping rates would achieve anything? No, the banks will increase mortgage rates independently.

    I have a major problem with the notion that the Gov. CAN bailout our Real Estate sector. I will explain my thoughts:
    (I’ll use a mini-scenerio where I jump to conclusions. Each * indicates an area the Gov needs to spend money)

    1)* Government increases FHOG
    2) This inflates prices temporarily, but does not affect AFFORDABILITY (ability to pay for the entire house)
    3) Banks are charged more for capital overseas
    4) Banks pass on charges to home owners
    5)* Gov forced to increase concessions for home owners (somehow)
    6) People manage loans for the time being, but NEW loans are hard to come by
    7) Market prices start dropping due to lack of new buyers
    8)* Gov has to increase incentives for people to buy(again)
    9) Banks worry about risk, increase the requirements for loans (actually this step can be seen even now)
    10)* Gov has to intervene either through legislation forcing banks to lend (crazy times…) or by increasing FHOG and other home owner benefits
    11) etc etc.

    My key assumptions:
    – credit will cost more, not less. This is due to our need for credit sourced from overseas, and increasing RISK associated with it.
    – loans are required to purchase real estate

    My basic points are:
    a) In order to buy houses, Australians need LOANS
    b) In order to keep the housing bubble afloat, Australians need to be CONSISTENTLY BUYING
    c) The Gov. needs to increasingly and consistently ADD incentives (eg $$) to the housing market to keep it afloat. This is because of b) and all the issues with loans (rates, availability)

    Not once did I mention Unemployment. That is a MAJOR factor to consider.
    I also didn’t mention the major factor of the Gov. borrowing to replace household borrowing. That is a completely unsustainable practice.

    Now if the entire housing market was built on savings, then everything would be much different. The Gov. would only need to bridge the current demand gap and then fill it in occassionally with some capital.

    The difference is the LOANS.
    – Loans are an ongoing cost. A persons ability to service a loan can be greatly affected by many things.
    – Loans can be a variable cost – eg, they can be cheap or expensive.
    – Loans can vary in availability.
    – Loans are NOT your money and therefore rely on other parties (banks, overseas lenders) to supply them.

    Okay that will do for now…I hope I have made some points

    Part 2: Can the Gov. prop up housing?
    Yes, of course, it is the Gov! But how can it do that?

    1) Regulation/legislation. “All houses will not sell below their 2008 valuations”. Likelihood? Virtually impossible in a democratic country.

    2) Forcing banks to provide cheap, available loans. Very unlikely. The Gov. can put pressure on the Banks, but unless it either loans the money to the banks directly (through money printing or just passing on money from elsewhere), the Banks will start losing a lot of money. Imagine if you were a bank and were told you had to loan money out at rates lower than inflation? Therefore LOSING money in real terms? You’d say “whats the point of us being in business?”. Profits fall, banks disappear.

    3) By bridging the gap themselves. Ever increasing FHOG is one way. Major tax breaks is another. Direct capital infusions is another (the Gov lending to people at zero interest for first 5 years, etc). This approach is the most likely, if the Gov was to try and prop up the market perpetually. Only issue is – it costs a LOT of money. For a Gov losing money in a recession, this is money they will be spending on propping up a bubble, whilst the rest of the economy suffers. Which means higher unemployment, reduced profits from companies, less taxes, less revenue. All bad things. And as those things grow, we have less money for housing investment and the Gov will need to supply even MORE money to prop up the bubble.

    Okay, but ‘what if’ the Gov. only needs to sustain the bubble for another 2 years, before it can take care of itself?

    Well lets think about that. For the bubble to be self-sustaining we need:
    1) huge credit availabilty, eg 2007
    2) high employment/company profits (companies will need to be confident they should rehire)
    3) huge Gov revenues (to pay for all the debt and to prevent the necessary increases in taxes to pay for the Gov. debt, because this would hamper companies and hurt economic recovery and confidence).

    Okay, so how could we get ourselves into a situation whereby those needs are met:
    – Could a Chinese commodity boom save us? That would affect 3) and partly 1) and 2).
    – Superman?

    Okay you will have to excuse my joke there. China is the obvious answer. The question is, what does a commodity boom do? Does it:
    – affect availability of capital (loans)? Yes it does, but only slightly. A booming economy will mean that other countries are more willing to lend to us. But will other countries have any money to lend? That is another question.

    – increase employment in Australia? Yes, but only slightly. Only so many people can work in a mine. BHP will only employ so many people to work for it. WA would benefit pretty strongly…but how about VIC? NSW? Would there be low unemployment? I doubt it. Mining revenues go to mining companies, the Gov, its employees, and indirectly into the community through the employees. This indirect injection of money will not be huge, and it is not necessarily directed into the most needed areas.

    – Help Centro? Help Babcock and Brown? Help Bendigo Bank? John Smith’s law firm? Willy’s Tasmanian winery? Annette’s Sydney fish and chip shop? No, no, no, etc. A LOT of the high income earners in Sydney were in FINANCE related jobs. They are not affected here, unless the easy credit booms start up again and everyone forgets 2008 (which won’t happen). These businesses will not be looking to hire people. They’ll be looking to rid themselves of debt if possible. They’ll still be looking to survive.

    – Allow for Gov revenues so huge that they are able to pay off Gov debt without further taxing the economy. A bit of ‘yes’ but not really. There is potential for huge Gov. revenues from a Chinese commodity resurgence.The question is, how much would the Gov. need?
    Well, lets say the Gov has to keep spending on the economy at the same rate as usual (no cutbacks) AND also pay off it’s debt. Lets imagine the Gov debt is $200Billion (but it could be much less…or much more).
    Lets imagine the rate of interest is 5%. Each year the Gov needs to make at least $10Billion from the commodities boom in order to pay off the interest. Then it would need to be putting in an EXTRA ~$20Billion to pay off the debt within 10 years, and an EXTRA ~$20Billion or so to maintain the opulent standard of living Australians have become so used to. So thats a minimum of $50Billion PER YEAR revenue from China, for an entire 10 year period. (yes the calculations aren’t precise but are there to illustrate the point).

    Is that approx. EXTRA $50Billion value achievable? Well, it would have to be a ‘mega boom’, the likes of which has never been seen. And meanwhile the Gov. would have to hope and pray that other expenses such as welfare do not increase (unemployment anyone?).
    Here’s a basic chart from the budget:

    I’ll stop here. My overall point to this whole post is that the Gov does not REALISTICALLY have the power to prevent the RE bubble from deflating without destroying the whole economy (at which time it will deflate anyway). The only realistic possibility being a huge resurgence (and I mean bigger than we’ve ever seen) in commodity demand from China or elsewhere.

    (And that is without considering China’s perspective)

  • 33 Ned S // Jun 8, 2009 at 1:19 am

    Pete – You have a very thoroughly thought out position. It actually makes me a bit more confident in my somewhat bearish stance. I’ll just pick out the bits I have to comment on:

    A 20% drop – Stock market investors accept that such dips (and worse) can and do happen. Only someone who ascribes to the pretty one sided view that house prices can never come down would be failing to factor a decrease into an RE purchase in Oz these days. A timeframe for recovery – Allow 10 years (or less) and I’d fully expect stagflation to have worked its despicable “magic”.

    Australian house prices have historically come through such episodes relatively intact – I know of two situations where this has not been the case: 1) the Melbourne land crash of the 1890s and 2) the Great Depression. In the latter case, it is my understanding that government introduced legislation to prevent Home Owners from being evicted. (For what that was worth – I doubt it greatly affected prices; But imagine it alleviated some social misery?)

    I believe the RBA lacked the mandate and suitable financial tools to prick the housing bubble. I’d actually like to see them given both of these. Although I must admit I worry about giving them such power too. And am sure that a lot of people would just totally disagree with it. But irrespective of one’s personal feelings on it, I’d be surprised if we don’t see governments putting legislation in place to try and contribute to more stabilty and less boom and bust in the next morph of our financial systems.

    Do you think the RBA dropping rates would achieve anything? – I do not believe any further decreases in interest rates will be passed on to borrowers by banks. However, as the banks will surely pass the decreases on to depositors and pocket the difference, further decreases will continue to be very good for their bottom line. Which will work against the need for banks to significantly raise interest rates to maintain their profitabilty. I also understand that banks have very susbtantial overseas borrowings. But also understand that the Rudd Bank is hoping to ride to the rescue regarding commercial property if really needed. Which takes pressure off the banks bottom line again. Which is still ultimately good for people who have borrowed to purchase residential property. And while it would mean an even bigger national debt hangover of course, the average Aussie will probably see it as both necessary and even good at the time.

    Gov. borrowing to replace household borrowing. That is a completely unsustainable practice – If it becomes a “habit” we are in trouble. Our lot seem to think they have it under control. (And the Coalition has even gone so far as to describe Rudd Bank as a “panicked response” to the recession – How ever one interprets that outside of being a bit of politicking?)

    I’m not especially happy about all the spending either. But given that the alternative did seem to be shaping up to be a 1930s type deflationary crash, I think all but the most committed of Austrian economists would have gotten a bit weak at the knees. Can government intervention save the day? The likes of DR say No. But even a gloom and doomer like Roubini says Yes, by spending LOTS – But isn’t pulling any punches about the pain involved. And believes a double dip recession is certainly possible.

    Me – I’m just watching and waiting to see what I can make of it. But without getting too excited about the prospect of 10% unemployment either. (Although government is pushing the friendship with the debt a lot this time around.) But either way, 10% unemployment is no guarantee of a crash in residential RE. (Where I wouldn’t regard a 20% drop from the recent highs as a crash – Even though the thought probably mortifies some – For mine it is more along the lines of a significant correction that could certainly hurt some recent purchasers, but be a possible buying opportunity for others, to be considered in light of the other factors prevailing at the time.) Just out of interest, Oz commercial property has certainly been known to crash by 50%, even in quite recent history. It is higher risk of course.

    I guess it a matter of how bearish one is on Oz residential RE at the moment. (I doubt there are too many really committed bulls?) I’ve certainly been feeling the risks have all a gotten a bit high since at least late 2005. In that regard, I take an interest in property in the Brisbane region.

    I’m not expecting things to be too flash for Oz residential RE prices. Even now I get the impression things have gone a bit cool after the recent First Home Owner buy up? Could Steve Keen be correct and we do see 40% drops? Maybe. I’m not too sure how Keen came up with that figure – His assertion that the Oz house price index was 43% above its 1986 to 2008 figure for the average family of workers perhaps? If so, I guess I’d make two points: 1) while Oz is fairly socialist, I suspect that as a nation we aren’t fully committed to making life equitable for “the average family of workers” and 2) if he is assuming the only way for the situation to be corrected is through house prices coming down, he just could be missing “half” the picture – Namely that inflation and rising wages can be expected to have an impact on redressing that imbalance over his stated 5 year timeframe as well. (Leastways, in anything other than a deflationary environment it can be expected to have an impact. And I can make some pretty compelling arguments that Oz has got high inflation even as I write, despite any RBA assurances to the contrary.)

    So all in all, I’ll be watching prices trends and the broader economic picture to see what I think is actually happening. But sure, I’m a bit bearish, and probably with good reason I think. It would be hard for any person who is trying to be objective, to look at a graph of Oz house price trends and not say, That looks like a bubble.

  • 34 Pete // Jun 15, 2009 at 11:57 pm

    Sorry for lack of reply Ned.

    I did read it, I just didn’t have too much time for a comprehensive reply in the last few days.

    Australian house prices have historically come through such episodes relatively intact – I know of two situations where this has not been the case: 1) the Melbourne land crash of the 1890s and 2) the Great Depression.

    What are the differences between those periods and now? A HUGE real estate bubble. Massively inflated prices. It is not realistic to expect prices inflated at 10% to drop by 50%. It is however realistic to expect prices inflated at up to 50% to drop by 50%.

    Can government intervention save the day? The likes of DR say No. But even a gloom and doomer like Roubini says Yes, by spending LOTS – But isn’t pulling any punches about the pain involved. And believes a double dip recession is certainly possible.

    Okay, so the Gov. spends lots. Where does the money come from? That is like a child (Australian population) going on a credit binge financed by the parents (Gov.). If the parents are not make extra money to sustain the childs spending, then how will they keep credit in check? Also, those same parents will not have any extra cash for essentials such as schooling, hospital, dental, holidays, clothing, etc, whilst they are servicing the huge debt bill. At some point they would actually have to tell the child “sorry, stop spending, we can’t keep up!” as the loan repayments increase cumulatively.

    Now with the scenario above, the only way for that to be sustainable is for the parents to earn more and more from wages (eg, Gov. gets money from mining boom), or for interest rates to continue dropping (Gov’s borrowing costs continually dropping).

    Well, we know borrowing costs cannot continue dropping forever, so the only sustainable way is for earnings to increase beyond the levels of servicing the debt, so that they can actually start repaying the capital of the debt.

    But either way, 10% unemployment is no guarantee of a crash in residential RE.

    Don’t underestimate this. How many foreclosures does it take to set-off a cascading fall in house prices? How many extra houses on the market will force prices even 10% lower? Once those houses are 10% lower, which speculators will be really worried about negative equity?

    See I think the problem with your point is that we dont need to see 10% of houses fall into foreclosure (or other reason for sale) in order to produce a 10% fall in price. Not even close. All you need is a small change (perhaps a bit more than 10%) in the supply of houses on the market. So if there are 1000 houses on the market in your suburb in May, and 1100 in June, that is 10% more competition for sellers, not buyers.

    If the market it teetering on a knife edge, only bouyed by extra (somewhat falsified) demand by FHB’s due to the FHOG, then it won’t take much to swing the balance (especially if FHB’s stop buying).

    If so, I guess I’d make two points: 1) while Oz is fairly socialist, I suspect that as a nation we aren’t fully committed to making life equitable for “the average family of workers” and 2) if he is assuming the only way for the situation to be corrected is through house prices coming down, he just could be missing “half” the picture – Namely that inflation and rising wages can be expected to have an impact on redressing that imbalance over his stated 5 year timeframe as well.

    Steve Keen does not subscribe to the inflation idea, so you are right there. One way to look at things is in real terms. If inflation takes hold, house prices may not drop in nominal terms, but may drop 40% in real terms. This makes Steve Keen and that fella he bet against both correct (although I’m not sure if ‘real terms’ was a condition).

    Personally I do not have a problem with real estate itself – it is a necessary part of life. The problem lies with the means to purchase it, which is debt, and lots of it. In Australia we have slowly progressed from tight lending standards to very very relaxed ones, with dire consequences. Now that trend is reversing. As this was one of the major reasons for the real estate boom in the first place, this will affect it in the opposite direction.

    All that stands in its way is Gov. intervention.

    And as I explained in my previous post, they can temporarily affect prices in nominal terms, but not permanently in real terms. For permanent real price increases we would need a complete return to the financial conditions of the past, which include (and don’t I just love these lists…):
    – high employment levels (which naturally includes high wage levels)
    – low interest rates
    – strong Gov. income
    – cheap and available credit
    – strong sentiment towards real estate growth.

    The only one of those we still have is:
    – strong sentiment towards real estate growth.
    …and that will fade in time (slowly, it takes time for the herd to turn).

    Ultimately time will prove me right or wrong. I don’t claim that I can predict the future, my claim is that through my somewhat logical reasoning, all factors point downwards. The only illogical components are:

    – Government (which can actually be somewhat predictable)
    – buyer/seller sentiment (which can also be predictable)
    – black swans (unexpected, high-impact events. These will usually be negative though)

    My two pet hates are:
    – people who think that the masses probably know what they are doing (eg, combined intelligence…yeah, okay)
    – people who give emotional arguments (just because they want something to happen, does not mean it will)

    Thanks for your posts, they are always worthwhile

  • 35 Pete // Jun 16, 2009 at 12:07 am

    My comment:

    See I think the problem with your point is that we dont need to see 10% of houses fall into foreclosure (or other reason for sale) in order to produce a 10% fall in price. Not even close. All you need is a small change (perhaps a bit more than 10%) in the supply of houses on the market. So if there are 1000 houses on the market in your suburb in May, and 1100 in June, that is 10% more competition for sellers, not buyers.

    If that is a bit confusing (some of my points are poorly written), then the difference is:
    We are not expecting 10% of all mortgaged homes to go to market. We are just expecting an increase of homes already on the market.
    So for instance, if there are 10,000 mortgaged homes in a suburb, we do not necessarily need 1000 of them to go on the market for prices to drop 10%.
    Instead, if there are say 1000 homes on the market for that suburb, we only need a 10% increase in homes already on the market, which would be 100 homes (or 1% of mortgaged homes in that suburb).
    Those are symbolic figures only and obviously not representative of real suburbs. My point is that I think those two things can be easily (and incorrectly) thought of as the same.

    I would be interested if someone sees a flaw in that argument and would like to comment – those are just my thoughts on the subject (it makes sense to me, but perhaps I have missed something).

  • 36 Ned S // Jun 16, 2009 at 11:49 am

    Pete – I take a fairly long term view on residential property investment. So my opinion on it is coloured by whether I see deflation or inflation as being the biggest risk factor over that longer term. And my best take on it is that the most likely risk is from inflation. Although I surely will admit the prospect of deflation was being heavily factored into my thoughts until quite recently. Since then that risk has abated I think.

    So I’d probably just answer most of your points from that fundamental perspective. If I’m wrong in that, then the downside potential for Oz residential is extremely high. But if nothing else, governments do seem to be able to cause inflation if they decide it is more desirable than the alternative.

    I sometimes ask myself if my thoughts re inflation coming make my stance in relation to gold a bit illogical though. I’m not particularly positive towards the idea of buying bullion right now. I’ve got a few reasons for that. But am quite happy to sit on a little bit I bought in 2005.

    I also think it could be worth bearing in mind that a lot of heavily leveraged speculators just could be out of Oz residential RE now? They got plenty of warning that price drops were quite possible. And plenty of opportunity to sell at decent prices courtesy of the FHOG.

    As to the effect of forced sales through homeowners becoming unemployed – That’s a tough call to make – But as a start I’d probably have a look at what has happened in the more recent past when Oz unemployment has gone up around the 10% mark.

    Longer term, one of my thoughts on Oz residential property is that it just could be affected by retiring baby boomers having to cash out their investment properties. And even longer term again, I’d have doubts about “fun in the sun” regions where a lot of the boomers have bought retirement units – They just seem especially high risk to me.

  • 37 Greg Atkinson // Jun 17, 2009 at 9:41 pm

    Ned S – I think the “fun in the sun” places have already been hit hence the reason so many colourful Gold Coast property developers have come unstuck. What is it with the Gold Coast anyway? It seems in terms of real estate that it is the boom and bust capital of Australia!

  • 38 Ned S // Jun 17, 2009 at 10:23 pm

    Greg – The one that worries me even more is the Sunshine Coast. I get the impression it is a poor(er) man’s version of the Gold Coast. Lots of units and lots of potential for more units. No real economy to speak of??? Hinterland stuff where you have a fair drive to get to shops and services. (Anyone thinking fuel is going to be cheap long term is a bit of a dreamer.)

    But anytime I mention my reservations to people who like the region, they don’t seem concerned. They figure the lifestyle makes up for it maybe. I’m thinking a good way out – 20 years? But I can see a lot of potential for the region to find itself with a surplus of unloved units as boomers move past the active retirement phase into aged care and/or decide being closer to family support back in the cities where younger family members have jobs is necessary.

    A whole bunch of geriatrics clustered together in units, pinching pennies as they get older and their super funds dwindle just doesn’t sound like the basis of a healthy regional economy to me.

  • 39 Greg Atkinson // Jun 18, 2009 at 8:43 pm

    Ned S – A few developers with big plans for the Sunshine Coast and regions on the fringes have also hit the wall. I would guess there are areas out there that might come close to dropping by 25%?

    It is nice to have a yard and plenty of space but the novelty can wear off when you are stuck in traffic for an hour trying to get to work.

  • 40 Ned S // Jun 18, 2009 at 9:21 pm

    G’day Greg – Unfortunately that hasn’t stopped the mindset – I saw a comment recently in relation to a somewhat contentious Maroochydore development that “the area is in much need of improvement.” (IMPROVEMENT???)

    And that was just after I’d been asked my thoughts on a Southerner buying a Maroochydore unit through a mob who only(?) charge a maximum of 6% to “look after” the investor (patsy?). A shark pit I think? My reply to the original question (made by an associate of the purchaser) said:

    The QLD Sunshine Coast hey? The number one ranked region in 265 markets in Australia, Canada, Ireland, New Zealand, the United Kingdom and the United States for being “Severely Unaffordable”:

    Think you know my feeling on units – “The value is in the land – Even the ATO lets you depreciate the building – And we all know how tight the ATO is.” Maroochydore – Not exactly a place I get the feeling has the most well balanced of economies? What industries is it based around again – Tourism and retirement come to mind? Plus off the plan; As in the things haven’t been built yet – In a time when we can probably expect a few residential property developers to go broke. I also wonder if your work colleague has read the following:

    Ah, the potential joys of “fun in the sun” property ownership for the southern speculator!

    Or this:

    Not that I’m at all convinced the author’s conclusion is correct – But at least he offers some suggestions for suburbs in QLD that just could do OK – Comparatively at least.

    Took a quick glance at a few of the answers to FAQs given by The Investors Club web site – Yep – Sounds about right: You know nothing. And your accountant isn’t very clever either. So they are there to help. (For 6% of the purchase price which you don’t pay but the vendor does because he is Santa Claus and loves giving away money.) And they’ll educate your silly risk averse partner if necessary – So you are both then happy to put your own home up as equity – Just like in Storm Financials.

    Sure, buy property in QLD by all means. But at least try to exercise a bit of commonsense I think. Of course, if the bloke’s idea of commonsense is that beach front property is good because they aren’t making any more of it, I understand his point. But can make a few counter arguments as well – Leastways enough that I incline to a more conventional property investments. But either way, I’d sure be taking a different approach to getting into the market.

    I’m no property expert Greg. Just a mug with a long term interest in the asset class. So my opinion can be wrong just as quick as the next bloke’s – But at least it does have a certain degree of rationalality behind it I think.

  • 41 Greg Atkinson // Jun 18, 2009 at 10:10 pm

    Ned S – thanks for the links and the information. When it comes to real estate I reckon the term “expert” should be treated with some caution.

    Neil Jenman makes a lot of very good points. I have heard numerous stories about property valuations being made by a company that was a little too close to the developer.

    Of course state and local governments could do more to protect people from property scams but if you look at political party funding you will see many property developers are quite generous when it comes handing over money to all major parties…I think this is something that needs to be looked into.

    Nothing wrong with your approach in my view Ned. Makes perfect sense to me. Buying a property for most of us is a big deal and being cautious would seem the wise cause of action.

  • 42 Ned S // Jun 18, 2009 at 10:57 pm

    Greg – Jenman’s OK – But not necessarily great – Like a lot of commentators, I suspect he tends to profit most personally from taking an extreme position? (Jenman’s thing is basically The whole RE industry is a shonk and he’s there to help/warn/protect.)

    I think Jenman is honest – Wouldn’t read his stuff otherwise. But honest people who can profit from taking extreme positions can get pretty carried away with their own rhetoric I think. Grist to the mill. But at the end of the day, it is basics that (should?) count. Eg proximity to rail etc within the macroeconomic environment.

  • 43 Ned S // Jun 19, 2009 at 4:31 pm

    Greg – I threw caution to the wind in early 2008 when I bought a couple of basic properties in the greater Brisbane region after waiting for prices to correct since at least 2005. (Paid cash for both – As a general rule I don’t like buying stuff on hock – That’s my Great Depression family training coming through.)

    One was needed to live in and the other seemed as good a place as any for my superannuation funds given that I had no faith in my ability to become a stock market trader. I’m not sure any amount of education can turn pig poo into a strawberry? But I continue to explore the unlikely possibility.

    But I also kept enough cash under my belt to buy a couple more if prices should drop – Which I expected even before the GFC. And now I just keep saying: Property prices are supposed to come down in difficult economic times – A bit anyway? But the government intervention this time around has been quite extraordinary. It’s all quite fascinating stuff.

  • 44 Greg Atkinson // Jun 21, 2009 at 9:04 am

    Ned S – I think Jenman does seem to raise peoples awareness of what happens in the real estate sector and that is a good thing. But of course he is like the rest of us in that he cannot predict how the property market will behave with any certainty. Some areas become “hot” and others areas that were once popular drift backwards. It’s a funny world out there.

    I have never actually purchased an investment property in my life although a couple of places I did own turned into investment properties because I went overseas for work. So when I have looked at buying I was more focused on if I would like to live there and not so much on if it would appreciate in value etc.

    As for turning pig poo into strawberries I am not sure this can be done 🙂 but it won’t stop people from trying!

  • 45 Ned S // Jun 23, 2009 at 12:06 am

    I don’t think I’ve ever owned a property I didn’t regard as an investment property – Not that they’ve all worked out as well as I might have liked – Smile!

  • 46 Greg Atkinson // Jun 25, 2009 at 7:05 pm

    Ned S – I have always been a bit of an accidental property investor so that is why I do not get too stressed out by the property price debate. My home is now in Japan and the chances of ever seeing a capital gain from our apartment here is next to zero, so I just enjoy the yakitori and relax 🙂

  • 47 Ned S // Jul 11, 2009 at 5:16 pm

    On 26 November 2008 Steve Keen had this to say about his bet: “If house prices drop less than 20% peak to trough, I lose; if they fall 40% or more, Rory loses, and the loser has to walk from Parliament House to Kosciusko.”

    That seems to be a pretty convoluted bet – Despite the much vaunted 40% drop figure that would turn the other bloke into a walker, Keen’s only risking blisters if they don’t drop by at least 20% – While I’d still regard it as a gutsy punt by Keen, it isn’t anywhere near as radical as betting on them going down by at least 40%

    Seems to me like a drop of anywhere between 20% and 39.99% means they both get to keep sitting on their bottoms and playing with their mathematical models – Or am I misreading it?

  • 48 Greg Atkinson // Aug 17, 2009 at 10:02 pm

    Ned S – I think this is a good read about house prices in Australia: Evolution or revolution for the RBA? Interesting reading I thought.

  • 49 Ned S // Aug 18, 2009 at 9:23 am

    Thanks Greg – I just wish one could place a bit more faith in what the RBA says. But given that jawboning is one of their principal tools of trade, whatever they do say has to be taken with a large dose of salt.

    But Yes, it is pretty obvious that until the economy in Oz turns bad (with a downturn in Asia being the probable trigger – Some day, eventually, I sure haven’t got a clue when?), we aren’t real likely to see any major downward correction in Oz house prices at all.

    Not good news for anyone who has had their little heart and soul set on picking up a cheapy house. Such is life as another Ned is reputed to have said – Smile!

  • 50 Greg Atkinson // Aug 18, 2009 at 1:37 pm

    Ned S – I have just posted a new blog which will give you an idea of what faith I put in what the RBA says 🙂

  • 51 Biker Pete, Cape Breton // Aug 24, 2009 at 12:20 pm

    G’day Greg and Ned… . Just a quick note to let you know that many of my comments aren’t appearing on the DRA site. Not annoyed… . I take it as a compliment… and evidence that my viewpoint is a little too dangerous to print! 🙂
    Thought you should know, anyway. Cheers! BP
    (Hurricane Bill went through the Maritimes today. Had to hole up for two days in a nice little hotel overlooking the bay, watching yacht owners batten down their hatches… .)

  • 52 Greg Atkinson // Aug 24, 2009 at 12:53 pm

    Hi Biker Pete. What were you saying that might have annoyed DR?

  • 53 Ned S // Aug 24, 2009 at 11:00 pm

    G’day Biker – Sitting on the balcony with a bottle of vino watching the lightning and enjoying the cooling influence and nice fresh smell of rain from a tropical storm works for me – Not so sure about Canadian hurricanes though?

    Oz residential RE – DRA would be better off leaving it alone if they can’t talk sensibly about it. I think we all know we’re being fibbed to about any chronic housing shortage in absolute terms nationally. But that doesn’t mean there isn’t a real one in terms of what is made available and at what cost in places where people need to and/or want to live. And there is no point bleating about it. The economy is reliant on that sort of manipulation.

    If the economy is good Oz housing will do OK; And if the economy is bad the Oz tax payer will get the pleasure of propping it up.

    I’ve had to revise my assessment of it over the last 3 months – It’s about as close to a risk free investment as one can get in Oz.

    Sure it’s in a bubble. But isn’t everything? And if one is going to buy into a bubble, then one that is funded by the tax payers of a resource based economy in the Asian region is probably about as good as it gets.

    The main short term risk to an investor that I’d have some confidence identifying is changes to the desirability of owning multiple properties brought about by the tax review. Changes to land tax being one that I’m especially keeping an eye out for. It’s such an obvious one to fiddle with that I find it almost inconceivable that they won’t.

    Major risks longer term are that boomers start to sell investment properties to fund retirement – Which you’ve mentioned previously – But they’ll be doing that with shares too. Or the Asian economy turns bad – In which case Oz shares will be bad news as well. Or Oz loses a war with Indonesia! (Smile.)

  • 54 Biker Pete, Nova Scotia // Aug 26, 2009 at 10:57 am

    G’day Greg and Pete. Left Cape Breton today. Had to hole up for a few days until the hurricane passed… . (Also sipping a red, Ned. Chilean. Anything over C$12 is good value here… and very, very few good Aussie wines make it to the NH.)

    What HAVEN’T I said that didn’t annoy DRA, Greg!? 🙂

    This is the second time I’ve been censored/censured by ADR. Doesn’t bother me a bit! As I said, it’s a compliment. What I’ve offered DRA is obviously spot-on… and untimely to boot… .

    In most sites of this kind you’ll find a few rabid property bears. Most will eventually disclose their real intent in time. Even here I keep meeting people who tell me “Life dealt me a bad hand!” My response “Deal yourself a _new_ one!” isn’t always appreciated… .

    We _know_ property works… and will keep working. It has made us multi-millionaires several times over… not too bad for a couple of tiddlers, just ordinary people who realised they knew virtually nothing- researched- acted – and worked hard at making it work. And yes, we’ve been lucky, most of the time. (The harder I work, the luckier I get! 🙂

    But, as you know, we hadn’t predicted the market would recover the way it has (and you predicted it would, Greg*);
    otherwise we’d have stayed in ASX past 3800. Mind you, our super is still making enough each night, while we’re asleep, for us to live on… . Can’t complain about that, or the TTRs Costello introduced… . An extra $50K+, tax-free annually… on top of our salaries… and property returns.

    Henry: “…changes to the desirability of owning multiple properties brought about by the tax review…” Land tax increases wouldn’t worry us at all, Ned. Our main concern is where money is best placed, defensively: property, super or cash. That order isn’t random. At present our best returns are in that exact order. Cash is a very poor third. Our second concern is the actual timing of our bailout of super. I have the ‘personal’ dates triangulated, but the Henry Report could throw a Spaniard in the works… . We may decide NOT to bail, depending on any new rules… . I don’t think that the government will mess too much with property (too many major effects on the economy and accommodation if they do) but I think Super is open wide. Hopefully any changes will be graduated, meaning I’ll convince the missus to quit working mid-2010 and help me dig soakwells!!

    Now I know an old friend of ours terms our current situation ‘gloating’, but you know I’m more surprised than anyone how well the plan has worked, since we first began to really plan.
    It takes a lot to admit you know bugger-all… and take on the hard work of listing every single thing you _don’t know_ about taxation, salary-packaging, property, super, bank negotiations, etc, etc., and then finding out… and working to realise your agreed goals. And it takes a certain amount of guts to hold fast while the Prophets of Doom tell us why Australian property _should_ fail, year after year. The $300 billion worth of new gas deals may delay that eventuality in WA, at least until we drop off the perch, anyway… ! 😉
    * Thought our eldest was being respectful of his elders by not commenting on the $220K extra he’s made this year, but it didn’t last, Greg. He just couldn’t resist… ! 🙂

  • 55 Greg Atkinson // Aug 26, 2009 at 5:46 pm

    Biker Pete it sounds like all is going well with your trip! Sometimes DRA get a little too focused on the doom story and miss the big picture. The world is not heading into a massive depression and paper money is still accepted at most there is no need to carry around a bag of gold dust just yet 🙂 Glad you son did well with the stocks!

  • 56 Ned S // Aug 28, 2009 at 11:36 am

    G’day Biker and Greg – I guess one of the things that worries me about the tax review is that it is a vehicle for social change. And a pretty obvious bleat at the moment goes along the lines of “I don’t have a house and you’ve got two – Gimme one!”

    Now how does the government achieve that? Well tax disadvantaging investors seems like an obvious play. And continuing to advantage FHBs. If government plays it smart I’d imagine it can be done with minimal cost to government and without significantly impacting the price of housing overall – Any significant correction in the price of housing would be extremely bad for the economy generally and for the government politically of course.

    Indeed played even half smart, I can see the potential to decrease any risk in the market by moving property out of the hands of investors who have leveraged heavily on multiple properties and into the hands of FHBs. I’d actually be quite surprised if a fair bit of that hasn’t occurred recently anyway – The FHBs who bought obviously got their houses from someone and by and large I’d imagine the sellers were investors who were offloading what they could quite reasonably have perceived as risk at the time. (I’d doubt the FHBs rushed en masse to new subdivisions and bought land – There just wasn’t that much vacant land ready to go on short notice surely?)

    I’ve still got a few concerns for the global economy generally. But suspect we’ll have a good idea by December how justified those might be. And fortunately (for me anyway) that suits my timeframe of being happy to wait for the results of the tax review before buying another property.

    There are pretty strong indications that stamp duty will be done away with. That’ll be a positive for the market but will leave a $20 billion pa tax shortfall to pick up elsewhere. Land tax seems an obvious one in that it’ll potentially hit the owners of multiple properties hard. And Ken Henry is no dill – He is aware that people have historically “arranged” their investments in ways that tax advantage them – And has gone so far as to say he doesn’t see that as a good and equitable and desirable thing at all.

    You mention you once knew “bugger-all” Biker – I’ve been mortified over the last year since I’ve actually started trying to learn some big picture stuff that what I “knew” was way less than bugger-all – Rather it was just out and out wrong! Specifically I genuinely thought central banks were inflation fighters. But I now know they are inflation targeters. Big difference that!

    People who save their money and buy stuff debt free are not playing the game as government would like to see it played. The good boys and girls who are to be supported are those who take on lots of debt and responsibly pay it off thereby supporting the system in every possible way.

    I still get a bit bitter and twisted over that – Geez – They could have just told me rather than portraying themselves as inflation fighters all these years when it just ain’t true – Smile! But better to learn late than never hey?

    And the big picture is that government and central banks will continue to target positive inflation and encourage people to take on debt and the prices of real assets will go up over time. That is simply how the system works and if they do know of any other way to make it work they’ve decided they don’t like it – Leastways not now that the game is underway according to those rules. So any waffle from the likes of Glenn Stevens that it will all be different in the future with people not taking on the same levels of debt and behaving more responsibly is extremely suspect rhetoric.

    Unless governments and central banks somehow fail catastrophically in what they do. Not all that likely I suspect? If anything the indications are they’ll err on the side of high inflation rather than deflation. Leastways I’m sure they will if they possibly can. And they do have an awful lot of resources behind them.

    If ever you do look like being in Brissy Biker, swap emails through Greg and we can have a cold one on a hot day or a hot one on a cold day as may be appropriate. Cheers!

  • 57 Ralph // Sep 7, 2009 at 12:17 pm

    This has been a fascinating debate.

    I can see both sides of the argument. Personally, I think the government will throw as much money at real estate as they can. And then they might print some more and shovel that at housing. Over the past 12 months or so, I’ve observed that house prices are the last sacred cow in the Australian economy. I can’t decide whether it’s the car manufacturers or the housing industry that’s more protected.

    Pete also makes some good points about the weight of numbers being in favour of the market overwhelming any government intervention. I agree that it makes sense, but I don’t think that will stop the government pulling out all stops to prevent the slide. It just comes down to how much money (and debt) the government is prepared to commit. Are increasing house prices more important than everything else? That’s the big unknown, I think. We’ll find out in the next few years.

    In an ideal world, reduced credit and reduced demand should be enough to result in a sizeable fall in house prices. But the government is not going to take its finger out of this pie. I think it’s clear to everyone that houses are severely overpriced, but it’s in the government’s interest to keep them that way, whatever they may say about housing affordability. The votes of home owners retaining their sense of (artificial) value in their houses outweigh letting the market take its course. You can imagine the outrage of home owners if and when negative equity takes hold. I don’t think Rudd will be flavour of the month. And there lies the policy.

    So, on balance, I would like to see a market correction, but don’t think it will be allowed to happen. Provided the government maintains it’s strong interventionist stance, I agree with Ned that, for the short term at least, it will be the closest thing there is to a one way bet.

  • 58 Greg Atkinson // Sep 7, 2009 at 1:52 pm

    Ah the good old government support for car makers. We provide tax payers money so Holden can export subsidised cars to the Middle East. Too bad they don’t give us an discount rate on oil prices. Both sides of politics have continued to support the “Australian” car industry even though it is all foreign owned.

    As for house prices I would like them to move sideways a touch or down a little to take some heat out of the system. In that way few people will get burnt. Mind you a lot of the statistics regarding home prices are basically flawed as we need to take into account that we are only ever looking at small faction of the overall market, i.e. only homes recently sold or up for sale go into the statistical mix. This means for example that at the moment properties at the higher end of the market and in the first home buyers range are probably distorting the figures a little.

  • 59 Ned S // Sep 7, 2009 at 2:52 pm

    Dodgy housing stats? Two quite recent online Courier Mail reports one day apart – One says the median Brisbane house price is $480k (REIQ figure to the end of June 2009 ?) and the other says the median Brisbane house price is $437k (RP Data maybe? Or ABS???):,23739,26029964-5011140,00.html,23739,26027894-5011140,00.html

    Alright, it’s “only” about 10% difference. But 43k is still pretty serious money to a lot of Aussies. And I certainly imagine it could impact one’s thinking if they were considering stuff like what renos might be worth doing.

  • 60 Ralph // Sep 7, 2009 at 2:57 pm

    Well, Kev doesn’t want to be PM of a country that doesn’t make things.

  • 61 Ralph // Sep 7, 2009 at 3:21 pm

    Not surprised that there are dodgy housing stats out there. Now that our economy is reduced to digging up dirt and selling houses, all sorts of jiggery pokery will be resorted to.

    What gets up my goat is why it’s such a protected species. They government didn’t step in to prevent my (not many) shares from going down in price. But house prices are a different matter. But my feeling is that although intervention and support is rife, there is a limit to how much people can spend on ever increasing real estate prices. It will be very interesting indeed to see what happens when the first home owners boost drops back in October. I fully expect another subsidy to come in if the home owners boost takes anything more than marginal heat out of the market. It’s criminal.

    Then there is the source of the data. I’d say RP Data is more likely to be bullish re housing stats. Christopher Joye is almost hysterical when anyone dares to challenge his data. I believe RP Data may even being contracted by the ABS to do their housing stats (not entirely sure though). Vested interest, I wonder?

  • 62 Ned S // Sep 7, 2009 at 6:27 pm

    Ralph – I used to think in terms of recessions cause housing price declines (and still do) but now I also think in terms of housing price declines can cause recessions – Leastways they can if they result in major banks becoming unstable. To me that’s the fundamental reason it is such a protected species – And especially so in Oz.

    There’s a bit of reason to be bearish on Oz housing in that I suspect FHBs have pretty much hit the wall in terms of borrowing capacity – Oz lenders seem to have gotten a bit more conservative. But there’s still plenty of potential investors who could get loans if they want them. And some who can buy for cash – For example SMSFs are sitting on an average of over $800k – And even without selling assets they have about 23% in cash – Over $200k cash in each fund – And they can borrow nowadays.

    I took my punt a while back – I reckoned we were in for drops of anywhere up to about 20%. But short of seeing a recession in Asia generally I’ve had to back off that call. Stocks? They’ve never been something I’ve had any comprehension of. But if I did decide to have a punt I think I’d be putting a good bit of effort into finding about trailing stop losses.

  • 63 Senator13 // Sep 7, 2009 at 7:27 pm

    The housing stats are extremely dodgy. Almost daily I see a stat that says they are one thing and then the very next day it is a different figure. Some say they are set to boom. Other say they are in for a crash. I am a firm believer of “playing each ball on its merits” so to speak. Sometimes I think there can be a bit of “stats overload” where it gets hard to distinguish between the mass of different opinions that are around.

    I am currently looking to get into the housing market as a first home buyer. I was looking before the grant was boosted and have held off buying because I have not found what I thought was the right place for the right price in the right area for my personal circumstances. I have always watched the share market and real estate market but have been watching and researching now with the intention/means to buy a house for my self for well over a year now (probably closer on two). I would like to think that I have a pretty good grasp on my local market so I am not going into all of this blind and with a fool hardy attitude. And my motivation is defiantly not to get a $7k/14k/21k grant as if you get this kind of thing wrong it is going to cost a hell of a lot more then $21k.

    During this time I have been able to observe the different motivations by many different people. Some of the positives of someone like me buying at this time are probably not going to be the same as someone who already has a current house, mortgage, credit card, family to feed ect and times like these may not be the best time for them. Everybody is different and only time will tell.

  • 64 Pete // Sep 7, 2009 at 8:34 pm


    But my feeling is that although intervention and support is rife, there is a limit to how much people can spend on ever increasing real estate prices.

    That is how I feel aswell. I am beginning to think more and more that the Gov. will try and waste money to maintain this bubble. Although the RBA pretends that it doesn’t like it (surely those two are in cahoots).

    Here’s a mini-scenario:
    – Interest rates go up
    – Credit tightens (banks require more deposit, LTV ratio)

    Now, for house prices to go up, or even stay level, we need to bring new buyers into the market constantly. Because there is always a need to sell houses, i’ve mentioned those before.

    Now the Gov. has brought forward a lot of FHB’s with the FHOG. In their rush to meet the September deadline, what happens after September? Where will the buyers come from?

    It’s not so much that the market needs ‘some’ buyers, they need a significant number to create enough demand to support high prices, and an even greater number to drive them even higher.

    Now if interest rates go up, and credit tightens, surely we put a lot of people who could have been buyers (or want to be) out of the game. Until they can save some money that is. And that really messes up the negative gearing thing too.

    Others have mentioned that the Gov will just support the market. Well, does the Gov have somewhat infinite power to do that? Some would argue yes, others would argue that they wouldn’t get away with it. At least they wouldn’t win the next election.

    See the problem being that its a catch 22. The more the Gov bails out the housing bubble, the more it has to borrow. The more it borrows, the higher interest rates will get. The higher interest rates get, the more it needs to borrow to bail out people and support the property bubble. Etc, etc.
    We get to the stage where the Gov is trying to buy half of your house for you. Which sounds great, except the things that actually drive our economy (you know, actually producing stuff? rather than being consumer whores) will really suffer. Like small businesses. Big businesses. Agriculture. Everything.

    So, I believe it comes down to a few different paths that can be taken (well if you believe in that Sliders stuff then it is somewhat infinite but we won’t get into that):
    1) Gov does not bail out property, bubble crashes, takes our banks down with it and all sorts of stuff collapses.
    2) Gov gives minimal support, especially to banks (eg bailouts) and tries only to weather the storm with minimal intervention needed to keep banks alive
    3) Gov gives a lot of support but realises that it is a losing battle against the market and winds its support down over time…banks crumble or get bailed out.
    4) Gov gives a lot of support and tries to keep the bubble going and the banks and sends the country into more debt that we ever could have imagined*

    * At this point, we are in big big trouble. Because unless the Gov can get its hands on some nifty parcels of money (eg China boom, resources boom, etc) then it is just going to be accumulating more and more debt…somewhat indefinitely. Possibly not indefinite if the bubble can be contained at the same level without growth or shrinking, eventually the market (thanks to CPI inflation) will catch up to it. That takes a lot of years.

    So I think it would be possible that at the point where the Gov struggles to get financing, it may consider printing money. Once that starts we are in a lot of trouble.
    Britain is at a stage like this right now I believe.

    And as for housing stats, yes they are all dodgy. Look at where they come from? It is like asking a used car salesman how much a car in his yard is worth.
    The problem is that, unlike with shares, there is no ASX, no regulations, nothing that will simply and reliably provide stats. RP Data is about as trustworthy as a puppy in a shoe factory. Same with the REIA (RE Institute of Aust.)

    I won’t go on about the constant fear-mongering that goes on too (although there is a lot of it, eg “if you don’t buy you’ll be sorry”), but one of the ‘Sold’ signs in my city actually said “Too Late!”, which I thought was interesting. If they had plenty of business surely they wouldn’t need to do that?

  • 65 Senator13 // Sep 7, 2009 at 8:45 pm

    Pete – Interesting observation about the ‘too late’ sign… I have ran into a lot of real estate sales agents who really try and push you into a sale and then you come back a few months later and there they are pushing a new item as well as the old one and you just think to your self “were you not the same guy that said I would ‘miss out’ a few months ago?”

    Also a very good idea about having a real estate ASX/ASIC type body. REIA is not much at all.

  • 66 Ned S // Sep 7, 2009 at 9:33 pm

    Good luck with it Senator! As you indicate, we buy for different reasons at different times.

    I finished up a lengthy stint of overseas employment in 2007 and signed the dotted line for one to live in about March 2008. Fully expecting to cop a 10% whack! (The real estate agent was even honest enough to agree that he thought the “current cycle was over” – Or words to that effect.) And that was before any of us had heard of the GFC of course.

    The price has held courtesy of Mr Rudd. We’ll see what the next few years bring. I still wouldn’t be at all surprised to take a whack at some time. But given that my timeframe is hold until death (which I’d prefer is at least two decades off and preferably three!!!), I’m pretty confident I won’t be selling at a loss.

    It was strange actually, in that when the GFC did hit, I wasn’t at all happy having lots of cash in Rudd’s unguaranteed banks when all Mr Bush’s guarenteed ones were looking like folding – I’m pretty sure I would have bought then if I hadn’t already.

    A mate of mine wants one as a full-on negatively geared investment. I said to him “But you still have a $100k mortgage on your home – Surely it’s best to pay that off first?” Not from where he’s sitting apparently. And he’s only thinking in terms of about five years at this time. But he’s a high income earner with the very, very great bulk of his investments in stocks via super. So he’s looking to get an alternative investment I think. Plus the tax breaks of course.

    All sorts of different motivations out there!

  • 67 Pete // Sep 7, 2009 at 9:47 pm

    I had the following discussion with a friend recently:

    Friend: “Yes, but if you can afford to buy a house, why is it bad to buy now?”

    It depends if you can afford the house at much higher interest rates. And even if you can, will that put you on the poverty line? If not, then it may not matter to you.

    Although you’d be kicking yourself if you wound up paying more for the house than it is worth.

    But, that aside, if you expect a crash, why not save up even more money and wait for the crash. Yes, in a crash interest rates are likely to go through the roof. However, if you have a very significant deposit such as $100K+ then the high interest rates won’t affect you as much.

    For example, buying a house that was $400K, but has dropped 20% and is now 320K. Add in 100K of savings and you only owe $220K. Even at 15% interest rates that is 33K a year interest only, which is manageable (but a bit tricky on single low income).

    Or you could have that same house at $400K, no discount with a 50K deposit, leaving you with $350K to repay. Then if interest rates got to 15% (and lets say you paid some off by then) you’d need 15% of 320K = 48K a year interest only, which is slightly more significant.

    So, regardless of capital appreciation or depreciation of an asset you own, it does make a difference when you buy and how much of a deposit you have.

    That wasn’t a direct quote of what I said though, my memory isn’t quite that good

    Older generations usually have a bunch of money tied up in stuff like super or other houses and don’t have the deposit issue that FHB’s have. Do not confuse the two! SO often it is older generations advising the younger ones…yet their situations are so completely different. A life of indebted slavery (living with very little disposable income) is not a particularly good life. And interest rates will cause you a lot of stress.

  • 68 Senator13 // Sep 7, 2009 at 10:50 pm

    Ned/Pete – thanks for the advice, it is very much appreciated! Actually I have really valued both of your views/opinions that you have written on this site over the last little while. It has been good to read and to see different perspectives on various matters that have been discussed. And on many occasions I have stoped and gone “oh yeah, I did not think of that” so keep it up!

    Some of my thinking behind me wanting to buy has been:

    1. I need somewhere to live – I have to move out of home eventually – I am still young, but I can’t stay at home forever.
    2. I can not live in shares/cash.
    3. I figured if there was ever a good time to start – now would probably be it given my personal circumstances – low rates, secure job (or as secure as a job can be), I have a good deposit, I have been saving the amount that I would use to cover repayments each month for some time now so I know what I can live on. Some costs will go up that are associated with a place – but others like $70-80 per week on fuel to get to work will go down as I am looking at areas that are much closer ie walking/riding distance. I have done a lot of budgeting over a fairly long period of time to know exactly where my costs are.
    4. I have a safety net in that I am fortunate enough to have a very loving family that I am extremely grateful for so that I can move back home if I do get into real trouble and rent it out if the need arises. I am looking in an area that has a high rent yield so between that and my income I should be able to cover even very extreme rate rises and still be able to keep the underlying asset in the hope that things come back under control and that it appreciates overtime.

    There are a few other things that I wont go into here as it would take all night but I think I have most of the bases covered that can be covered. A few additional points to mention – the banks have defiantly tightened their lending in a very big way. At the start of the year I went and got a pre approval done and even when a few banks overseas where going under and things were very bad they were pretty much throwing money at me stupidly. I went and got another pre approval done a few weeks ago and they have really tightened things up in a big way. They still throw in a free credit card with their loans – I thought that was a bit stupid of them. They are concerned with people being able to repay loans and saying credit is tight, yet they are giving people credit cards that would make it harder for them to repay??

    Anyway thanks again guys.

  • 69 Ralph // Sep 8, 2009 at 9:30 am

    Interesting comments. It seems that there’s a consensus that the Gov is spending wildly to keep the housing bubble going.

    Pete, your points make logical sense. But the government has been successful in defying logic – for now. Can they keep it up though? It looked like house prices were going to fall about a year ago, but then the FHB boost came in and changed all that. It really depends on how determined the gov is to keep this all going. I agree that they are going to have to make a decision shortly on whether they are going to go all out to prevent any falls or whether they’ll back out at some point.

    I’m guessing they’ll try option 4 – spend like crazy and go into unimaginable levels of debt. Kev couldn’t bring himself to say 300 ‘billion’. Makes me wonder what sort of numbers the government will go to. Surely if Kevvie goes too high, the politics will start to turn against them. Surely.

    I genuinely think that the government can’t continue to splash money on real estate if other areas of the economy are going without. When the public realises that the government is propping up house prices at the expense of other stuff, I think sentiment will change. This can’t go on forever. At least I hope not anyway.

  • 70 Pete // Sep 8, 2009 at 10:10 am


    Can they keep it up though? It looked like house prices were going to fall about a year ago, but then the FHB boost came in and changed all that. It really depends on how determined the gov is to keep this all going.

    Yes, this was just a small boost. And I agree that the Government could do more for the property bubble. They did speak of getting rid of stamp duty*.

    However, I think there is a limit to how much the Gov. can spend on the property bubble. They do need to factor these things in at budget time. They do need to continually explain themselves in front of the media and the opposition in Question Time. And for every dollar they throw into propping up this bubble now, they’ll need even more to keep it inflated later.

    Can you imagine the budget figures next July? You’d see the pie chart of expenses as normal, and an overwhelming amount allocated to “stimulus” if thats what they want to call it.

    But besides the stimulus I am sure they are already planning again (eg another $900?) thanks to that stupid G20 meeting, can the Gov. actually defend spending to prop up the bubble? The Opposition would eat them for breakfast. Because it isn’t 90% of Australia wanting this bubble to continue. Not at all. There are many many people who see problems with the bubble and think it should not be supported.
    However…a lot of those people still think that house prices will go up (they just don’t like the idea). I believe the bubble’s days are numbered.

    *Abolish Stamp Duty
    The Government could do this. What would the effect be?
    – house prices would probably increase a bit as people got greedy

    – state governments would need to start thinking of alternate revenue streams because stamp duty was such a great earner in the past

    – home buyers would require less start-up money to get into the market. Although, if the FHOG is stopped, then no stamp duty is a little bit like FHOG for everyone. But not really, because it is just a lack of a cost, rather than a boost in money (some FHB’s look at 21K and think ‘wow, a lot of money for nothing’, but they’re deceiving themselves).

    – because home buyers would require less start-up money, bank LTV’s (deposit required) would be less of a factor. 10% deposit on a 400K house is 40K. Add in stamp duty and it is a lot more. So stamp duty would definitely affect ability to purchase a house.

    So removing stamp duty seems a bit bullish for the property bubble overall, right? I think it is, although it doesn’t particularly affect FHB’s. My guess would be that this is the Governments next move.

    However…there is of course a catch. What will the state Governments do? Expect higher rates. Expect higher fees for everything state related, including rego. Expect lower quality state services.

    That is unless the Government compensates the states by giving them extra funding. And we know how well states manage large funds. Also, the Government would have to get this money from somewhere, and for every house bought (for high or low prices, including foreclosures, everything) the Government would need to be providing compensation. Think amounts in order of the FHOG (and more) multiplied by every single house bought, instead of first homes. Not sure what that amount would be.

  • 71 Pete // Sep 8, 2009 at 10:33 am


    Just quickly, my thoughts on your points:

    1. You can rent.
    I rent, and I like it. If I don’t like my neighbours, I move. If I don’t like the area anymore, I move. If I change jobs, I move.
    If I don’t like my job, I can quit it. If you have a mortgage, can you quit?

    2. You can live from their profits.

    3. Low rates are okay if they are fixed. Banks do not like giving fixed loans. There are a lot of restrictions on fixed loans. Young people trying to get fixed loans have told me the banks weren’t interested. Variable rates are exactly that – variable. Just because they have been low for a while now does not imply they will stay low.

    4. Rental is an option if you get into trouble. However, do not think that you are the only one that knows this. The person I am renting from is doing exactly that – renting out their place because they could not afford it alone. Consider reasons why a high rental yield may not subsist over different situations.
    For instance, inner Sydney, high paying financial jobs lost means less demand for those types of rentals. Consider why there is a rental demand, and if that demand could be supported elsewhere, cheaper. People will travel further to work if it costs them less rent – especially if income becomes an issue.

    Those are my thoughts. Everyone is obviously free to make their own decisions. The market could continue up for a long time. Interest rates could stay low. Unemployment could turn around significantly (although this is interesting: Roy Morgan Unemployment Poll which is higher than ABS states).

    Everyone should make their own decisions based on the information they have, and not based solely on someone else’s advice. For instance I believe the only person that should manage my finances is me.

  • 72 Ned S // Sep 8, 2009 at 11:09 am

    The figure I recall seeing quoted for removing stamp duty is $20 billion pa Pete. But how to make up that shortfall? Removing franking credits on dividends is a possibility – Which makes things “equitable” for Aussie and foreign investors regarding our stocks and potentially brings lots of foreign money into Oz which the government wants. Plus causes stocks to go up more which Aussie stock investors will accept as compensation for the loss of the tax advantage – That’s the sales pitch anyway. (Smile)

    Giving the states the right to levy a seperate % tax on incomes to be collected centrally by the ATO when we put in our annual returns has also been mentioned as a way for the states to acquire revenue – Smart move politically from the commonwealth perspective – Hey, if you don’t like the rate your state sets then take it up with your state premier – Or move to a different state. It really has got nothing to do with the commonwealth surely? That one just might be enough to turn me back into an expatriate!

  • 73 Greg Atkinson // Sep 8, 2009 at 11:28 am

    Pete the unemployment rate is one of those things Governments like to tweak. The classic tactic is to “retrain” people because if you are getting a training allowance and have no job you do not appear as unemployed as far as I recall.

    Interesting link…thanks. Also I saw some stats a while ago showing how total average weekly earnings are falling as overtime hours etc. are slashed.

  • 74 Ralph // Sep 8, 2009 at 11:53 am

    I think stamp duty is an interesting one. As Pete says, not really a boost, more of a lack of expense. I reckon it’ll help keep prices high, but perhaps not as high as a direct handout such as the FHB grant.

    I find it hard to imagine what they’ve got in store for us next. I’m sure Treasury is spending plenty of time working out what the next bit of assistance will look like and it’s probably something we haven’t quite seen coming.

    I’m also expecting some tax changes. Perhaps something to encourage investors. Fat chance of negative gearing ever being removed or capital gains on the principal residence.

    I’m also interested to see how the government justifies future assistance. The FHB boost was spun as a way to help tradies stay in work. I don’t think it’s entirely unexpected for the government to come out and say that the motive is actually to support house prices. Hard to say how that would go down with the public – but if two thirds of people own or are buying a house, as I’ve read in some places, it probably won’t be a big deal.

  • 75 Ned S // Sep 8, 2009 at 1:04 pm

    To me, the real point of the FHOG (and any stimulus aimed at minimising significant drops in house prices) is to ensure the Oz lenders remain solvent.

    When the FHOG was increased in October 2008 Rudd and the RBA and the Oz Treasury quite possibly had little if any understanding of the levels of risk that the Oz banks were exposed to through the international banking system in particular – Even the Americans were really battling to get a handle on just how big the hole was on their side of the pond and what to do about it.

    In October 2008 Rudd was expecting house price declines in Oz – He said “Well, I don’t have detailed information on various parts of the housing market, it’s different across various parts of the country. But, you know, if the economy is being buffeted abroad, then it follows, from forces abroad, it means that it’s going to impact all parts of the Australian economy as well. That’s just the truth.”,23739,24485656-5003402,00.html

    So Oz stimulated housing. But that stimulus was specifically applied to protect the banks because that was where the real fundamental albeit unknown risks were perceived to be at the time. In my opinion?

  • 76 Ralph // Sep 8, 2009 at 1:30 pm

    That’s true, Ned. And the banks still are basically insolvent. Take away the deposit guarrantee and the FHOG, and they are swaying in the breeze. Perhaps the government will come clean and let us all know that our banks are dependent on ever increasing house prices and that’s why the government has to keep on propping it up. But that wouldn’t be good for confidence, the magic ingredient in all of this.

    I always laught whenever Swan (Goose) or Rudd come out and say that Oz banks are so well capitalised and better managed than any other banks in the universe. Before this financial crisis, I didn’t know much about monetary theory. I still don’t know all of the nitti gritti details, but I do now understand that our fractional reserve banking system is a house of cards built on ever increasing asset prices. I also understand that any significant drop in house prices would tear an enormous hole in the banks’ balance sheets.

    I asked a banker friend who brokers loans for pharmacies what the loan to value ratio is an he said that it’s 93%. And we know that many mortgages are much more generous than that. So it doesn’t take much to figure out that banks don’t have much cash on hand at all. It wouldn’t take much to wipe them out completely. Maybe our banks have enough cash to meet 7% or 8% of their oblications, while foreign banks have only 5% cash. Gee, that’s confidence for you, isn’t it?

  • 77 Pete // Sep 8, 2009 at 2:55 pm


    Removing franking credits on dividends is a possibility

    It is my understanding that Ken Henry does not like this idea.

    Thanks for the $20B(pa) figure, it gives an idea.


    but if two thirds of people own or are buying a house, as I’ve read in some places, it probably won’t be a big deal.

    It’s a point, but we can’t make the assumption that those people are happy that prices are rising. A lot of people can see that houses are very overpriced and they don’t like it. That doesn’t mean they won’t buy though.

    Plus, as time goes on, the youth are becoming more and more aware that houses are overpriced. Every year we get a new influx of school leavers, and an outflux(?) of retirees (although there could be less retirees).
    Out with the content, in with the discontent.

    Also…you have a lot of Liberal voters who will dislike Labor’s policies, regardless of how much they still benefit from them.

    So I personally doubt that so many people want prices to rise.

    On another note this article about banks giving people Mortgage Holidays is interesting.

    Every 12 months of mortgage holiday a person has, they lose equity in their home equal to the current mortgage rate (or higher depending on compound interest? not so sure about that).
    Holidays right now are costing ~6.5% equity a year.

    What I also find interesting is that banks could deliberately use this strategy of providing holidays to manipulate their books for July. Simply by still counting the interest as income, and not realising foreclosures. Obviously this becomes a problem for the future, but they can worry about that later 😉


    Oz banks are so well capitalised and better managed than any other banks in the universe

    I totally agree with you. I used to cringe every time I heard it. Also, the difference between Prime and Subprime may well be just a few percent.

    Recently in the US more Prime mortgages were being foreclosed than Subprime ones.

  • 78 Ned S // Sep 8, 2009 at 3:52 pm

    That’s why the G20 reckon it is too early to withdraw stimulus yet Ralph – Lots of the big foreign banks probably are still wobbly. So the G20 is playing it real safe – As they see it anyway. With risking high inflation pretty obviously being preferable to deflation.

    Think banks in any of this and think global and I suspect we’ll be about as close as we can be to having a handle on the big picture stuff.

    As to Oz housing prices specifically, I’ve pretty much given up making predictions. Lots of demand that could turn into significantly lower demand if they do take a tumble. Lots of leverage stacked up against lots of stimulus. With Oz being in one of the potentially brighter regions of a potentially lack lustre global economy. With most major Western governments running scared of deflation and having a decided preference for inflation. Too hard to call.

    Although if nothing else I expect the inflationists to “win” long term one way or the other. If there is some way to make an economy work other than based on debt in an intentionally inflationary environment I doubt it’s been a core part of any Western university economics department’s curriculum for a very, very long time.

  • 79 Pete // Sep 8, 2009 at 4:07 pm


    If there is some way to make an economy work other than based on debt in an intentionally inflationary environment I doubt it’s been a core part of any Western university economics department’s curriculum for a very, very long time.

    Except maybe the University of Western Sydney (*cough* Steve Keen) 😉

  • 80 Greg Atkinson // Sep 8, 2009 at 4:54 pm

    Of course the big problem is that what should happen and what will happen in regards to Government policy are two very different things. We are now getting into that part of the electoral cycle in Australia where nothing very nasty will be suggested by the Government. So I guess house prices will be supported in some way and the stimulus money will keep flowing. I reckon anything remotely nasty that the Ken Henry reviews comes up with will be parked for quite some time.

    Of course if you are over 65 watch out. The ALP does not poll well in that demographic so those people are pretty much fair game.

  • 81 Senator13 // Sep 8, 2009 at 6:17 pm

    Pete – thanks again for your points and noted.

    Well said Greg, what should happen and what does happen are two very different things… This Govt does not like pain and will do everything it can to make things very easy on people. But no one should rely on the Govt to come in and do everything for them. It is that thinking that got us into this mess in the first place.

  • 82 Pete // Sep 8, 2009 at 11:02 pm

    No worries Senator13, I am happy to provide some info.

    Greg is right though, what should happen and what will happen are different things. That is why I try to provide a helpful logical (from my perspective) analysis of things.

    The problem is that not everything follows logic. But, defying the logic typically causes other problems. So personally if I would rather be debt-free in a country that has resigned itself to propping up a housing bubble, than a debt slave like the unfortunate.

    Because, even though I might not get the bailouts, I will keep:
    – my freedom
    – the ability to save/invest (although possibly tax disadvantaged)
    – the ability to choose a different lifestyle
    – the ability to move to another country if needs be

    Something like that. It is a horrible situation we are in, and any which way it goes it will hurt someone. Either the generations of now, or the generations of the future.

  • 83 Ned S // Sep 8, 2009 at 11:20 pm

    Wonder if Prof Keen’s views are part of the uni’s core studies Pete – As opposed to being something to mention somewhere along the line in one of the first year lectures as an example of an archaic oddity?

  • 84 Ned S // Sep 9, 2009 at 1:25 am

    Senator – If you do find yourself deciding to rent a property or any spare capacity in one at some point in the future, I’d strongly recommend getting some good solid tax advice regarding it all before proceeding – Assuming you aren’t already fully clued up on such things that is.

  • 85 Greg Atkinson // Sep 9, 2009 at 8:19 am

    Ned S – I saw an article in which the head of the economics department where Prof Keen works distanced himself from his views, so I am guessing Steve Keen is somewhat “out there” when it comes to economic thinking.

  • 86 Greg Atkinson // Sep 9, 2009 at 8:36 am

    Pete, I pretty much agree with your approach. I would only add that if a person needs to take on debt that they plan for interest rates rises and adverse events. Debt in itself is not a bad thing if managed correctly, the problem is people (and companies) often over extend themselves. Isn’t it amazing that some of the so called smartest financial minds ended up sending companies to the wall because they took on too much debt?

    There was a time when people would get a home loan and save all they could to pay down the loan. These days many people seem to get a loan then use the “equity” for a new car, flat screen TV etc. and this is where many of the problems start. Instead of working to give themselves a “buffer” they actually do the opposite.

    I guess many people would be a little worried about the size of their buffer now?

  • 87 Pete // Sep 9, 2009 at 9:47 am

    We may be in the midst of Subprime v2.

    The non-bank lenders are having a hard time surviving, thanks to that Government guarantee (they get charged higher rates by local and overseas lenders because they are not covered and are therefore higher risk).

    Eg, Suncorp, who is offering 110% loans, by using the equity in parents of FHB’s houses:

    (and it is not only Suncorp, this is common with non-bank lenders who are struggling to compete)

    So now we have a dual risk of negative equity affecting both the mortgaged house and the parents house. There is the potential (not guarantee of course) that both the parent and the child could lose their homes.

    Subprime v2.

    That is what happens when markets are distorted. Government guarantees banks, non-banks suffer or come up with ways to stay in the game.
    If the Government removes the guarantees, overseas lenders increase lending rates due to risk and banks are subject to potential bank-runs.

    It is probably only a matter of time before we are left with only 4 banks in Australia.

  • 88 Ralph // Sep 9, 2009 at 9:49 am

    And that’s clearly a problem. The “equity fairy” is simply a nebulous number that has been imputed by values of other houses in the vicinity. It’s not as if a home owner has earnt that equity through productive endeavour. The market has risen basically due to speculation and expectation of future capital gains, not to mention inflation. Any equity is simply a product of a rising market.

    And that’s fair enough because that’s what markets do sometimes. But markets can also fall due to the same reasons (in reverse of course). The problem is that expectations of increasing capital gains in real estate have become so accepted as gospel that the economy has built itself around them assuming it’ll go on forever – just take a look at the banks. You see this with the urban myths of property doubling in price every 7 years etc. Not to mention people who’ve tapped their equity for a reno or an overseas holiday, as Greg says, believing that that equity is their hard earned plaything. Now we cannot allow the market to go in reverse or it all implodes. So now we have a government that is sh*t scared of the monster that has been created and will do almost anything to keep it afloat.

    Afterall, Australia doesn’t actually produce much these days – we dig stuff out of the ground and buy and sell houses to each other. Pretty much everything else is small scale. So, I imagine that as long as the majority of the population continues to see price increases in non-productive assets as one of the primary means of wealth creation, I think government intervention will remain. The risks of a house price collapse is just too much to imagine.

    I can imagine the Liberal election ads now – “under the Coalition, houses went up 250% in 11.5 years, but fell 10% in 3 short years under Labor”. And that’s not to mention the interest rate ads. It doesn’t take Einstein to figure out who’s going to win that race. At least if house prices stay high, but interest rates go up, the public will still have their equity to be able to fund their lifestyles even if they complain about higher mortgage repayments.

  • 89 Ned S // Sep 9, 2009 at 11:22 am

    Which all says that none of us are believers in the fundamentals for Oz housing. But I’m not a believer in the fundamentals for stocks or bullion either. Although I am a believer in the commitment of policy makers to encourage growth. And the commitment of banks to make a profit.

    So investing is pretty much a matter of “pick your poison” with regard to what percentages of your resources you want to allocate to which particular asset class bubbles in a buy and hold fashion or to trade. With each of those asset classes having their own specific attractions to different people at different times for different reasons.

    And providing we have inflation, there is huge incentive for investors to play the game. With the banks providing an absolutely critical flow of loans to do so. And countries like the US and the UK that have become very heavily reliant on this game, even being willing to print money to keep in all going.

    That’s the basics of the business model – With no real sign that policy makers have a commitment to changing it. Or even the knowledge of how to do so in a way that would be acceptable I fully suspect. So the game continues. With there being some concerns that it could all fall apart in a rather spectacular way – Through any of several causes that we can guess at. And even some we haven’t of course.

    With Oz housing being fairly exceptional to date in that it has held up very nicely – For lots of identifiable reasons. But with no absolute guarantee that it couldn’t. Because we can all imagine things that could bring it unstuck. And also have to allow for the possibility it could come unstuck through something we haven’t foreseen.

    Cheers to all!

  • 90 Ralph // Sep 9, 2009 at 11:58 am

    Good thoughts, Ned.

    The whole system is flaky and requires all sorts of props to keep it going. The fundamentals for pretty much everything are flaky, in that everything is built on unsustainable leverage and continued inflation. We’re suffering the effects of too much leverage and it’s being cured by even more leverage.

    Pick your poison is a great analogy. Some people pick housing, some pick shares, others gold and so on. And because of politics, some asset classes are supported more than others, which is what we now see with housing. All one can do is make a judgement as to which asset classes are moving in which direction and hope that you don’t get the rug pulled out from under you by a government looking to change the rules.

  • 91 Pete // Sep 9, 2009 at 1:14 pm


    I pretty much agree with all of your points there, particularly in regards to equity. I know several people who were so excited to get some equity so they could do renovations…in order to get more equity and go on holidays and so-on. All the while their mortgage is skyrocketing, but they think it is all okay because they can manage at ~6% interest.

    I feel sorry for them, it is like the credit card trap where people start to treat credit cards as ‘their money’ even though it most certainly isn’t.

    However…my opinion diverges on how much the Government can support the housing bubble. Some seem to think that there is infinite potential. I disagree with that.

    My reasoning is:
    – there is a limit as to how much people can pay for property. This limit is roughly along the lines of WAGES (after tax) + LIVING EXPENSES MUST BE LESS THAN HOUSE PRICE x INTEREST RATES.*
    – the Government does not have an unlimited money supply **
    – confidence in the property bubble cannot be enforced. This applies to price rise expectation too. This country cannot force people to borrow or spend ***

    * (This is not including tax breaks) Eg, a person on a 50K (after tax) wage with 20K in living expenses can afford 30K p/a in interest rates. Therefore in the current market at say 6% interest rates, that person could afford a 500K house with interest only. At 10% interest that person could afford a 300K house at interest only. Note that this is the maximum a person can afford. And remember that new buyers need to be constantly coming to the market to buy to keep the bubble afloat.

    ** The more money the Government borrows, the higher risk it becomes and the higher interest rates will get. If the Government prints money the same will happen – and inflation will rise, pushing up interest rates (although this then gets into Inflation vs Deflation territory, which is another topic altogether).

    *** Only partly true. The Government can force people to spend by using monetary policy, such as inflationary tactics. This will increase interest rates. A lot of people think that inflation vs debt is a good thing. Well, banks are not stupid, they will increase interest rates to incorporate the inflation rate into them (otherwise they are losing profits, which is not their business). One major problem with an inflationary environment with high unemployment is that wages are not likely to increase at the rate of inflation. This means less purchasing power, less ability to pay off debt, etc.

  • 92 Greg Atkinson // Sep 9, 2009 at 2:34 pm

    I think the Government will regret pumping extra money into the housing market. It seemed a pretty silly thing to do when interest rates were at very low levels. Now they run the risk of scaling back support for first home buyers (and the housing market) at a time when the RBA may be raising rates.

    I still don’t see house prices crashing, but now the impact of just a modest correction will be more of a shock to people because they don’t expect it. The Australian public (thanks to dubious media reporting) think the recession is now safely behind them but this is simply not true.

    If housing prices did correct down say around 10-15% over the next year or so then retail sales figures are going to take a dive. Then things will get nasty, unless the government sends out more cheques! We better hope our exports pick up again….and fast!!

  • 93 Ralph // Sep 9, 2009 at 3:26 pm

    It’s all very concerning, isn’t it. I’m inclined to believe Pete in that the government must be coming up against some limits. We like to be cynical and think that Kevvie will continue to max out the national credit card, but surely he can’t be that stupid.

    I think it’s almost certain that the FHB boost will be scaled back in October – the government has not been out making statements, so I think they hope it will quietly pass in the night. There is also not the same degree of hysteria from the RE industry, compared to budget time in May. That says to me that it’s sucked nearly all of the FHB into the market that it’s going to. I’m sure it’ll bring a few more stragglers in, but the heat is going out of it. So it’s probably close to the best form of stimulus that the government could have hoped for. Will the government let the FHB boost end as planned in December? I’m thinking it’s likely, although I wouldn’t be surprised at an extension. I also think that the government loses credibility if it looks like they’ll keep on extending the FHB boost indefinitely – why buy now if it’s always going to be there. Perhaps they’ll now focus on ways to minimise the fall rather than actively looking to pump it up a bit more.

    So I think Greg is right in that we might see a modest decrease, possibly in the order of 10%. I think an outright crash of say 40% is probably unlikely if only because it would destroy the economy and the banks and devastate confidence and send us spiralling into a depression. If it comes to that, I think we’d see the government step in and take drastic measures – such as sending out more cheques, forced revaluation of houses to preserve equity, suspension of accounting conventions to prevent banks from taking massive losses and introducing legislation forcing banks to go easy on “struggling” home owners. Who knows, but if it comes down to the market taking its course and the banks going under, the government will favour the banks.

  • 94 Ned S // Sep 9, 2009 at 3:52 pm

    I fully expect the RBA is having some serious doubts about the wisdom of government having specifically hit housing with a heart starter when it very well may have only experienced a quite liveable correction if the RBA’s view that the economy is not going to suffer too badly turns out to be correct.

    The housing “shortage” and affordability issues could certainly be resolved in various ways – If government wanted to resolve them. But what government wants is to see the issues addressed on its terms – Namely by people continuing to take on debt to buy property thereby supporting the banks.

    Where does that leave them? A combination of two options perhaps:

    1) Continue to support housing generally in various ways, and

    2) Specifically encourage the development of comparatively low cost starter/retirement accommodation – One and two bedroom dwellings with a small combined kitchen/dining/lounge area without attached car accomodation perhaps?

    Expect to see more of both I imagine.

  • 95 Pete // Sep 9, 2009 at 3:55 pm

    Yes I pretty much agree with both of you (Greg and Ralph).

    Although, I am not so sure that our RE market can weather a 10% drop.

    A 10% is enough to cause what I would think would be a chain reaction of issues.

    For instance, 10% of a 400K loan is 40K! That is enough to put a lot of FHB’s into negative equity (including some negatively geared speculators). If this includes high interest rates, then surely banks will foreclose. Can they afford not to? It is one thing to give people mortgage holidays if they are in positive equity (the bank can still come out ahead) but every day of mortgage holiday for someone in negative equity will put them even further into negative equity.

    Then of course the price rise expectation can work in reverse. And it does. Price decrease expectation. Less buyers, because they are waiting for prices to drop further. The only way to combat this is for the Government to start offering incentives (with time-limits) that buyers can’t refuse.

    I think there is a habit of treating property like shares in a theoretical sense. We might think that a 10% drop is okay, and then things will rebound. But the property market is different. Imagine if everyone on the share-market had margin loans. It would be havok.
    The property market is not so liquid and therefore is slow to change tragectory. It goes up…slowly and steadily. It would come down, slowly and steadily. Buying and selling houses does take time (valuations, inspections, financing, etc).

    That’s typically bearish take on things. I do generally agree with what Greg and Ralph have said recently, I just suspect that if things turn, the bubble will pop good and proper (although it will deflate slowly).

  • 96 Greg Atkinson // Sep 9, 2009 at 4:36 pm

    Pete I suspect if home prices drop too far and the first home buyers get into trouble then there will be a special relief package put together to help them out. Maybe Ruddbank #2 will swing into action where the Government will take over distressed loans. Maybe they will go further and set up a Fannie Mae sort of bank?

    Sounds crazy I know, but so does setting up a Government company to build a broadband network 🙂

  • 97 Ralph // Sep 9, 2009 at 4:50 pm

    I’m with you, Greg. The government will surely step in if things get too bad. It’s just a matter of what sort of negative equity or mortgage stress is deemed politically acceptable.

    It’s not just a matter of whether someone can pay back their negative equity mortgage. It’ll be a case of the sense of impoverishment in our great land if people no longer have their hard earned equity to draw on. So many people are used to using their equity to fund their renovations, their kids private school tuition, new 4x4s, trips to Europe and so on. I reckon people will feel so violated that unless the government steps in and ensures that their hard earned equity, there will be riots in the streets (well almost). You can guarrantee that one of the major parties will offer it up as their re-election platform.

    We can ask whether the government can afford to go into more debt to do it. But when it comes down to it, I don’t think they’ll blink twice. It’s that or not get re-elected. So they’ll run up more debt and damn the consequences.

  • 98 Greg Atkinson // Sep 9, 2009 at 5:16 pm

    Ralph, sadly you are right about what people expect these days. When I was growing up in the suburbs many families did not have a car and many houses did not even have a garage. Even if families did have a car the old carport was common. As you can see I survived.

    These days a family of three believes it is their god given right to have a 4 bedroom home with rumpus room. Don’t see too many carports, a double garage seems to be common and two cars are standard issue for any respectable family. In fact why have a car when you can drive around town in 4WD? The ideal urban vehicle for picking up a carton of milk!

    My concern has been for a while that even a moderate recession would be too hard for many people to handle because we have had it too easy for too long. Rudd & Co know this and will keep giving us candy even though it is bad for our teeth. But at some point we will have to see the dentist and he will have some bad news for us!

  • 99 Ned S // Sep 9, 2009 at 5:36 pm

    Pete – Without some other specific event that causes people to become hesitant or unable to buy property, the liklihood of seeing a significant downward correction, surely must be low.

    And even though the FHOG is winding down, it is quite possible we’ll actually get an across the board “stimulus” in the form of the removal of stamp duty before too long. In many ways offsetting the impact of interest rate rises.

    As to parents going guarantor – Expect to see more of it. It’s a natural enough thing for parents to do if they can. And not at all out of the question for many nowadays with family sizes being smaller than in the past perhaps?

    I simply can’t see 10% drops here affecting the market in the way they did in the US where the gains had not been nearly as great as here and there are no non-recourse loans. And even if the drops were considerably more, the banks here won’t panic and foreclose now if it is their expectation that they will be bailed out. (Not that there is a specific indication we are going to get drops anyway?)

    I’m not sure it is possible to get good stats. But either way, I suggested to an RE agent around November last year we could be in for drops – She was NOT especially impressed by my comment and blurted out that it wasn’t likely because we’d already had a 10% fall and the market had recovered. (That was in Brisbane.) Her logic wasn’t at all rational for mine? But irrespective it does suggest that a 10% drop can happen with those on the ground being aware of it but noone much else blinking an eye – Here and then anyway.

  • 100 Ned S // Sep 9, 2009 at 6:05 pm

    “In many ways offsetting the impact of interest rate rises.” – Please read as “In some ways helping to offset the impact of interest rate rises.” (Smile)

  • 101 Pete // Sep 9, 2009 at 6:10 pm


    My post #91 covers my thoughts on this pretty well.

    Even so, let’s think about some Gov costs:

    – $20B p/a for cutting stamp duty
    – who knows how much for more stimulus
    – decreasing taxation revenues if companies go under or unemployment rises
    – increasing welfare payments

    How much budget does the Gov. have left? Oh sure it can borrow, but it needs to justify borrowings.

    It cannot go on indefinitely, (unless it receives some sort of extra funding, such as huge profits). Something has to give.

    – New buyers have to come to the market constantly in order to prop up prices.
    – Prices cannot grow forever, unless wages do (proportionately).
    – If prices stagnate, will that not send a signal to buyers? Especially those expecting capital gains?
    – If parents are required to go guarantor, would they be quite as willing if they know they are risking their home? FHOG is one thing, risking the family home is another.

    I do agree with comments that if there was a 10% drop the Gov. would probably try and intervene. However, how much will that cost? More debt! The Gov is already paying interest on the debt it has now. Every year the interest will be more and more. Every year the cost to prop up the bubble will be more and more.

    There are only three ends that I can see to Government borrowing on this scale:
    1) Resurgent, sustainable boom(s) provide Australia with very significant taxable revenue. We are talking Gorgon x 20 (v. unlikely IMO)
    2) Using a combination of inflation and profits, Australia manages to bungle its way through to a state whereby inflation eats away at the real (not nominal) capital gains of property and essentially raises the prices of everything. Therefore in nominal terms, house prices don’t crash, but lots of money is lost in real (inflationary) terms (possible, but very hard to manage).
    3) Bubble cannot be maintained, Government runs out of support options. Banks nationalised, quantitative easing (money printing) is needed, international investors exit, interest rates skyrocket, economy suffers greatly (unfortunately more likely than #1 IMO)

    Basically, my question to anyone who thinks that the Government will always step in and save the day is: Where will the money come from?

    It just seems to me that we can be pretty vague and suggest that the Government being the controlling, rule-making entity it is, is somewhat more powerful than it is. Even the US government could not stop it’s real estate slide, and they are far more corrupt than ours. It is worth considering the actual value of bailouts rather than just expecting them. If you were the Government, how would things look from your perspective?
    Governments still have budgets, but they can get revenue from alternate sources. Those sources are not limitless, and the cost to use them is future prosperity.

    Also don’t forget that at the same time, they need to manage bailouts for the retail sector (more stimulus?) and create jobs* through building infrastructure.

    *The Gov should not be in the business of creating jobs, IMO.

  • 102 Ned S // Sep 9, 2009 at 7:38 pm

    Pete – I’ll comment on each question you raise:

    “How much budget does the Gov. have left?” A real lot given its ability to borrow against the future and the resources we have in the ground plus collect tax here and now – The more pertinent question (to me) is “How much political payoff does government perceive it will obtain from its spending?”

    “If prices stagnate, will that not send a signal to buyers? Especially those expecting capital gains?” Yes it will. No different to prices going up and/or prices going down send messages to people. And to the housing industry and to the banks and to government and to the RBA. But that does not allow us to predict with any particular certainty what will happen to Oz house prices when these varying parties get these messages (and other currently unknown ones) at some future and unknown time.

    “If parents are required to go guarantor, would they be quite as willing if they know they are risking their home?” Across the board, I suspect not. But providing there are no large declines in house prices, I expect the practice to increase regardless.

    “Where will the money come from?” As stated above – The future and the resources we have in the ground plus collecting tax here and now.

    “If you were the Government, how would things look from your perspective?” If I was a democratically elected government in a country where the citizens have a huge proportion of their wealth tied up in housing and all of my most learned and esteemed economists were advising me that bailouts were necessary to prevent the economy crashing catastrophically, I fully imagine I’d do bailouts.

    I suspect one major difference between us is that while you say “It cannot go on indefinitely”, I say “I don’t know how long it can go on for.” And that you quite reasonably look to achieve a higher return on your assets than me perhaps?


  • 103 Pete // Sep 9, 2009 at 11:11 pm


    “How much budget does the Gov. have left?”

    (I know I am quoting myself there 🙂 )

    I mean, we can say borrowing locally and internationally, and borrowing against resources…but how much?

    For instance, lets play with some very vague figures.
    Total Australian budget ~$335B ($55B over budget)

    Let’s break down how that is spent:
    – social security/welfare $110B
    (expect this to increase)
    – government services $80B
    (expect this to decrease slightly)
    – health $50B
    (expect this to remain at similar levels, possibly increasing)
    – community services and culture $12B
    (expect this to decrease due to recession)
    – education $35B
    (expect this to increase)
    – defence $20B
    (expect this to increase slightly)
    – industry and workforce $13B
    (expect this to decrease)
    – infrastructure, transport and energy $14B
    (expect this to increase)

    This year there was an overspend of ~$55B

    Where does the Gov get it’s money from?
    – individuals taxation $122B
    (expect this to decrease)
    – company and petroleum resource rent taxation $56B
    (expect this to increase in the short-term at least)
    – sales taxes $44b
    (expect increase or decrease depending on exports. So far looks like decrease)

    Okay so now we have a decent picture of the budget. We can expect fluctuations in income (taxation), but we can still assume the budget figures might hover around $290B.

    Let’s have a look at the expenses and things the Government might cut:
    – social security/welfare
    very unlikely
    – government services
    they are cutting this already, but don’t expect major changes. Typically this means jobs, and high unemployment is not what the Gov wants.
    – health
    possible, but very unlikely. In fact there may be even more spending put towards this.
    – community services and culture
    cuts are likely, this is usually the first thing to be cut in a recession. However savings will be minimal.
    – education
    expect more spending here thanks to Gillard, etc.
    – defence
    more spending likely as the Gov. has already committed to this from my understanding.
    – industry and workforce
    expect more spending to keep people in jobs. Change would be marginal anyway.
    – infrastructure, transport and energy
    expect more spending, thanks to stimulus plans.

    Overall, my summary is that there will be more spending. Probably in the order of $10B-$50B, depending on how conservative they are with it. We already had a $55B overspend this budget. Expect similar for next budget too.

    So by the end of this financial year the Government will have borrowed: $135B
    Next year they predict to add $60B to that making it ~$195B in the red.

    You can see the stats for yourself anyway.

    So, how do bailouts affect us? Let’s have a guess at some values and see how they may affect our borrowing:
    (note that some may be partly accounted for in future deficits)

    – ~$20B p/a for cutting stamp duty, permanently added to budget deficit.
    – ~$10B if we had a 10% increase in people claiming social security (note that this does not imply 10% unemployment of course)
    – ~$30B (or much more) to keep the retail sector stimulated if Australia doesn’t bounce back quickly
    – ~$20B for infrastructure stimulus, probably include commercial property incentives?

    Guesstimate total: $80B
    So even if some of that was accounted for, lets say it is $50B.

    So if things don’t turn around quick-smart in Australia, this is how things could look – a potential $50B increase in debt each year.

    Now, in regards to property, what happens after the stamp duty incentive wears off? They need to add more to the bubble to prop it up. Lets just guess that something of similar value is then required to prop up the bubble, so another $20B, permanently added to the deficit.

    That is, over the next 3 years (I dare not go further), if the Australian Government was persistent with stimulus and bailouts as they have been, without a recovery to the expected levels of 2007, the deficit would be growing by between $50B-$70B more than expected.

    Let’s be conservative and see where that puts us in 3 years (also being very conservative and using treasury predictions, even though I think they are way off the mark).

    In 3 years, treasury predicts a deficit of $268B

    Add $50B for the first year, $60B for the second year, $70B for the third year.
    That puts the projected deficit at $448B.

    At that rate, expect each year to cost an additional $100B. In 5 years time it could be nearly $700B.

    I very much doubt that any of that factors in the interest required to service that debt. $500B of debt at say 5% interest (special rates?) is $25B.

    The printing press could do wonders here. It would also destroy our credit rating, push up rates hugely and stop people lending to us.

    The more debt the Gov gets into, the higher risk it becomes. If the Gov chooses to guarantee the states loans this will also increase interest rates (higher risk). Guaranteeing the banks, especially if it is showing it has to keep propping up the housing bubble, will also make it a higher risk.

    If a bank requires nationalisation or a bailout for some reason, the Government would also need to fork out money for that.

    So a conservative estimate is that propping up the bubble(s) in Australia will cost us ~$50B a year once stamp duty is removed. A less conservative estimate could put this much higher, over $100B a year.

    Without dragging on too much longer, how can Governments get money?
    – taxation
    – bonds, selling them locally and internationally (loan)
    – direct borrowing (loan)
    – money printing
    – stimulus from IMF? (an unknown)
    – selling hard assets to China (eg, buy this mountain range from us)*

    Without something nifty like IMF stimulus or money printing, we are left with borrowing.

    But borrowing is a slow killer if a recovery is not just around the corner. The money accrues interest. It has to be paid back. If it gets significantly big, it is an economy killer.

    Money printing is a very fast killer, especially if you already have debt. Lenders will not be kind if you print money. The rates of return they expect will greatly increase. Credit will dry up.

    From my understanding so far, those people banking on the Government bailing them out need to hope that a significant economic recovery is right around the corner.

    * Selling hard assets to China will get us revenue in the short-term. Which can be helpful, but won’t be particularly good for Australia later on. ‘Support a deflating housing bubble by selling your mineral assets’ doesn’t sound too intelligent to me.

    Can someone please let me know if they think my calculations were messed up, I hope I didn’t make a glaring error.

  • 104 Senator13 // Sep 10, 2009 at 9:25 am

    Hi Pete, I just had a quick glance at your figure and I remember doing some quick calcs my self a few months back that painted a similar picture. Even if you are off by a few billion or missing something – the conclusion I can come to from your calcs and the ones I did a little while ago is that this debt problem (what ever the exact bottom line is) is one that is going to linger for decades, not years.

    We are also not going to be getting 300bn (or what ever the peak number is going to be) worth of value. As you said, our interest bill is going to be a massive drain on every single budget for years and years to come.

    At the time, I actually thought if a big fall of the RE market, if ever it was going to occur, would have been around late last year. This did not really happen and it has plodded along ever since. Now I know that interest rates are going to rise and unemployment go up and it is going to make things very very tight for a lot of people. But is it enough to tip things over – I don’t know, but I don’t think so – mainly, because as I think we have picked up from what everyone has said above the government will pretty much do anything to prevent this from happening. The result would be very much one that they want to avoid. There would be intervention that would take form in many ways. A few have been listed above.

    What do people do at the present time? It comes down to the individual. From an investment point of view, I think we have to distinguish between people that are buying because they want somewhere to live and people that are buying for investment purposes. How the market plays out to affect these two groups differently. How these two groups react could be very different too. But as has been said on this blog before, there are some very determined special interest groups that have a massive vested interest in seeing that the RE market does not fall in a heap.

    If ever there was a time to let the market fall it would have been back late last year I feel. Mainly because it probably needed to and it would have also been politically justifiably (just blame the GFC like they have with everything else). But now, they may have left it too late and backed them self into a corner. They have also set a precedent of intervention. Very hard to back away from those things now I think.

    As with most things, the macro and micro economics of these things are both different as well. Knowing all of this, I still feel personally that if I bought in the near future I think it is manageable. But everybody has a unique situation and their still could be a lot of pain for a lot of people. I would rather be in real estate then small business at the moment that is for sure. Lots of new legislation coming in that is going to really hurt those poor guys. They are going to be doing it really tough.

  • 105 Ralph // Sep 10, 2009 at 9:46 am

    Pete – you lay it all out pretty logically. You would think that there has to be limits to how much debt the government will rack up. As bad as Kevvie and Goose are, surely they aren’t going to send us broke. But I just don’t know.

    We have a situation of the government wanting to (and feeling the need to) support property prices at whatever cost. But then we have the flipside of that where it comes down to how much money the government can or will throw at it.

    As we know, confidence is everything and seems to be mainly a product of government stimulus filling everyone’s pockets. When the stimulus runs out, confidence will probably go with it, unless the fundamentals shore up between now and then (unlikely?).

    Part of me thinks that the government is very worried about the amount of debt it is running up. The Libs are on their case and I suspect a large minority (perhaps 40%??) of people are against going into more debt. As the debt grows, I think that minority will grow with it. To that extent, I think that the government has to be a little bit nervous about going over the top with public borrowing to save things like house prices. If sentiment turns enough, it could cost them the election – that’s what they really care about.

    Then I think of the money printing side of things. I agree, printing money will be insane. Technically, there is nothing stopping them from printing as much cash as they need to smooth things over. It’s technically not borrowing, but it will lead to chronic inflation if done in a big enough dose. The government has to think about whether the public will accept that and still vote them back in. I reckon we’ll see a moderate amount of money printing if things get dire and the public will just have to cop it.

    Finally, there is the case of the US. They have a stupendous deficit and even that couldn’t stop the rout. So perhaps it is trying to hold back a wall of water. They’ve done well so far.

    All this assumes that the fundamentals don’t return anytime soon. And given that the world economy is built on excess credit propped up with more credit, I don’t have much confidence that the fundamentals will come good anytime soon.

  • 106 Ned S // Sep 10, 2009 at 9:47 am

    Pete – I guess the big picture you are presenting is similar to something I’m pretty sure I recall Glenn Stevens indicating about the next cycle not being based as heavily on debt.

    Maybe? But that sounds suspiciously like him saying “Trust me, I won’t destroy the value of your money through inflation anywhere nearly as quickly as I have in the past.” And I’m afraid I don’t trust him at all in that regard. It’s simply a matter of whether he and the rest of the world’s mainstream economists do it really quickly or less quickly. IMO?

    With each of us having different opinions and preferences about different asset classes in such a scenario.

  • 107 Ralph // Sep 10, 2009 at 10:07 am

    Senator – I’m pretty much in your position as well. I have a good deposit sitting in the bank ready for a house, with a bit in shares as well. I’m also thinking about gold but haven’t gone there yet. But I don’t think now is a good time to buy a house. I just don’t feel like it’s good value for money. Then again, if it’s a place of residence and not an investment, the capital gain shouldn’t be the key. But once more, I don’t particularly want to pay an overinflated amount for some shelter – a basic need.

    Personally, I’m going to hold off until early 2010, when the FHOG boost has come off (assuming the gov’t doesn’t extend it yet again). I’ll reasses if the government keeps the boost going. I would expect to see at least modest falls once the boost drops off. If prices don’t look like falling once the boost wears off, then I’ll have to rethink again.

  • 108 Greg Atkinson // Sep 10, 2009 at 2:07 pm

    Pete have you factored in the $43 billion for the NBN?

  • 109 Pete // Sep 11, 2009 at 8:20 pm

    Good comments everyone. Here’s some replies:

    The market didn’t fall because it was propped up by:
    – price rise expectation
    – FHOG
    – very low interest rates
    – availability of credit (that same old reason)

    Look for changes in those, particularly credit availability (which is already changing) and interest rates (which are next on the agenda).

    You can’t have high debt and money printing without disaster, unless you have a real special deal going on. The US is doing it now, but has been avoiding disaster thanks to its influence over its lenders (China, etc) and their persistence in staying with the “export stuff to the USA so they can buy it with credit” model.

    Britain is well and truly (profanity) because of money printing. They have already started, but they have nothing particularly useful to offer lenders. This means that their interest rates will rise (depending on level of global borrowing) and the debt will get worse. Britain is a weird one though because the entire EU is in trouble, therefore it is not alone, and may not look so bad just yet (although it is headed into a big hole).

    Australia on the other hand only has resources. If we start money printing, our lenders will charge a lot more to lend to us. The dollars value will drop a lot. Bond rates will skyrocket. The Gov would have a lot of trouble getting new debt, and importantly, the banks would have even more trouble. This means mortgage rates would rocket up due to increased rates and lower AUD value.

    I don’t trust Glenn Stevens either. Everyone at the RBA speaks some strange kind of language that is neither true, nor false. Smoke and mirrors really. I trust the RBA even less than the ABS.

    It’s a good point, no I didn’t factor in lots of stuff. The numbers I tried to come up with were very conservative. And my point in doing that was to try and stay somewhat credible (can’t make too much up) but to also draw a picture of what seems like the best case scenario.

    The reality is that if the Government persists in bailing things out, a much worse debt problem could exist within the next few years.
    And high Gov debt means high interest rates for all.

    If the Gov / RBA (let’s not pretend they are independent) decide to venture into money printing/inflation to bring down consumer debt, this will not be a good thing. Inflation is a terrible thing. I think there are some common misconceptions about inflation, such as:
    – wages do not necessarily increase at the rate of inflation (this often depends on demand for skills/employment and any competition for wages)
    – debt is not necessarily reduced effectively by inflation (unless you have a fixed rate, banks will charge more interest to factor the inflation rate into their mortgage)
    – assets do not necessarily increase at the rate of inflation (even though they may increase, they may not match the rate of inflation, therefore making a net ‘real’ loss).

    I think inflation makes everyone lose. Higher costs of living, higher costs of credit, higher import prices…there are a lot of reasons that inflation is really bad.

    Or there is deflation. Which is also bad in our current environment, as the house prices will deflate, retail prices (and profits) deflate, jobs get lost, credit dries up (by nature of a credit deflation).

    Overall I just can’t see how the Gov will balance all of this, regardless of whether it continues with bailouts or not.

    On a slightly different topic though, here are some interesting articles in Wikipedia, about resources:

    Resource curse
    Dutch disease

    I started to think about Dubai. It has resources, it also has (well had) a crazy property boom. Are we doomed to a similar future?

    (Yes I know we aren’t a desert country with oil, I am looking for a comparison)

  • 110 Greg Atkinson // Sep 12, 2009 at 6:30 pm

    Pete, fair enough not to add the NBN and keep the estimates conservative.

    Interesting links thanks. I think Australia certainly suffers from the “Resource curse”. The Gorgon Project for example is a joint venture between a swag of non-Australian companies. Australia will provide the bulk of the workers and local services but the ships that transport the LNG will not be Australian, most of the technology used will not be Australian and much of the equipment used will be imported. We are simply not moving up the value chain.

  • 111 Ralph // Sep 14, 2009 at 9:38 am

    Pete – yes, good links. I think you must be right about the sheer weight of numbers stacking up against the government. I guess it depends on how desperate they get. I reckon that, for the time being, the government and banks are working nicely together. The government is poking the market with increased grants, while the banks are offering relief to struggling home buyers to prevent the losses from hitting their books. To the extent that this can be continued, I can see a general stagnation in property prices, if not a slight rise. But if the merry go round can’t continue, then I think we’ve all got as good a guess as anyone as to what the gov’t will try next.

    Not sure if any of you saw 60 minutes last night. Had a story about poor gold miners in the Congo being royally f*ckd over and that the country was dirt poor, despite having all sorts of minerals in the ground.

    Australia is merely a more developed and ‘civilised’ version of the Congo, Angola, Nigeria, Venezuela and so on. Perhaps it’s because we came reasonably late to the mining game, having already built our economy off the sheep’s back, as they say. And perhaps it’s because we are primarily a digger and seller of dirt that our secondary industry is now selling houses.

    As Greg says, we’re not moving up the value chain.

  • 112 Pete // Sep 15, 2009 at 10:49 am

    Yeah the LNG deal may not be all it is cracked up to be. I see you have written an article 🙂

    I did see that Four Corners episode about the Congo actually – gold and tantalum (coltan?) mining destroying their country. It is really sad to see people live like that, where corrupt military types control everything and leave people poor and starving.

    And I agree with the one of the speakers that probably the only way it will get better is by a large, committed international Government intervention. So maybe now they just need to find enough Oil in the Congo for the US to be interested…

  • 113 Pete // Sep 15, 2009 at 11:04 am

    On a counter argument to myself (a bit strange) – I am starting to feel that our housing bubble is becoming less significant compared to global financial issues.

    It seems that Governments and central banks ‘may’ be willing to try and stimulate their way out of everything – regardless of the impact.

    And I know I have covered that, but particularly for Australia, this may mean:
    – US and Chinese stimulus meaning higher commodity prices (another bubble)
    – stimulus ending up in Australia as ‘investments’
    – Australia seeing a resurgent (and short-term) resources boom as commodity prices surge again
    – Australian bubble problems getting even worse

    Now, I don’t think this means that house prices will necessarily go up. But it may well mean they don’t crash either, for a long while. Interest rates may play havoc, but in the name of ‘stimulus’ the Gov will probably try and curb those for a while.

    But I think within 5 years we will see a crash, but not just of the property market, of much bigger markets – to the extent that we will seem insignificant.

    Incidentally, one ‘idea’ that someone else had was that the Gov may allow people (possibly FHB’s) to use Superannuation to pay for deposits (etc) on their homes. There are some issues with that:
    – FHB’s probably have no super worth mentioning
    – what do you use to retire with if you eat into your super?
    – if people only have houses and not super, what happens if the housing bubble crashes? Everyone on pensions? This would make the bubble even more important for Gov’s to prop up
    – Super fund managers would be livid

    Anyhow, everything economic seems to be more and more complicated every day. I am going to focus much less my views on the housing bubble and (selfishly) more on what I can do to survive this mess that our Gov’s are getting us into.

    Incidentally, there is a great article about stock markets and high inflation here:
    Can stocks hedge you from price inflation?

  • 114 Ralph // Sep 15, 2009 at 11:53 am

    Pete – It seems you’re finally coming around to the reality of the situation. Sure, it would seem that the sheer size of the task ahead of the government to keep the debt-fuelled bubble going is too big for the government to hold back. If we were anything like a true free market economy, market forces would take care of things, debts would reduce and asset prices would fall.

    But I don’t think there is any doubt that the government will attempt to stimulate their way out of this, whatever the consequences. It’s a sickening thought, but I think that’s the reality. A recession virtually guarrantees a change of government, so Kev and Swan aren’t going to give us that if they can possibly avoid it. At least until we get through the next election, I think the gov’t will be prepared to increase debt as much as necessary to buy a result. People losing their hard-earned equity and insolvent banks is not an option.

    I think the most realistic outcome for house prices will be slight increases at less than the rate of inflation. There will be continued gov’t intervention to ensure that this is the case. I agree, Pete, it’s a disgraceful situation. But that’s just the world we live in.

  • 115 Pete // Sep 15, 2009 at 2:48 pm


    I’m not even sure what will happen to house prices anymore in the short-term. I have an idea what should happen, and as you say, won’t because it is not a free-market environment.

    I stand by my calculations that the Gov could not borrow its way to maintaining the housing bubble though. The problem is, it occurs that there are other things to consider.

    See, it is one thing for our Gov to stimulate our economy. They have a very limited arsenal for doing that, without resorting to money printing (which is disastrous).

    However, when we factor in the stimulus of other countries it all becomes really complicated.
    For example, if China tries to raise its interest rates to combat internal bubbles forming, it will attract a bucketload of US speculation money (due to the carry trade advantage) and cause even worse bubbles. If we do the same here in Australia, the effect could be much different (due to the lack of parity between AUD and the USD).
    The point I am making with that example is that with so much stimulus floating around, it will not all go to the places it should (repaying debts) but a significant amount may well go into more speculation – on stocks, commodities…real estate.

    None of those are sustainable, but they do really mess the free-market thing up a lot. And with all this global financial turbulence, adding extra stimulus will just create even more turbulence – and the effects could well be even more extreme.

    Imagine super-bubbles or environments where bubbles are created and deflated within a matter of months. That is not a good place to be living.

    And if we get some interesting stock-related bubbles in Australia, I expect that a lot of money from the property markets will flow into that instead. Simply, if stocks are offering 50% returns whilst property is offering less than 10% returns…you can see where the money might go.

    That is, assuming that speculative stimulus money won’t also go into property. But, due to the fact that property is generally bourne by the cost of credit (its generally tricky to buy a $10,000 portion of a property) and is affected by interest rates (which will rise during inflationary times), property looks less promising.

    In the longer run, you would probably be better off with property than to buy into a stock-market bubble, unless you know how to trade it.
    Not to recommend property, it might just be a bit safer to hold than volatile stocks.

  • 116 Ned S // Sep 16, 2009 at 11:52 am

    Bernanke reckons the recession is over. Perhaps – a double dipper I’d suspect? But not for a while with Obama’s stimulus timed to peak in 2012 when he is up for re-election. Although my accountant reckons Europe is looking real brittle now. And he still doesn’t like all that other Yank debt one little bit – Credit cards, mortgages, commercial property loans.
    Either way it has been interesting. And I guess in many ways many of us have lost something.
    I own the house I live in – Purchased last year. And one I purchased in 1996 as an investment. It was negatively geared for a while but as I went to work overseas a few years later and had virtually no Aussie income to negatively gear against, that didn’t work out well. But either way it still was a gold mine of course – Price has increased over 5 times since from $83 k to maybe $460 k – Crazy eh? Plus one in the name of my superannuation fund – Also purchased last year. And have cash in the bank.
    I live on the bank interest and the income from the investment house. Plus some sporadic casual work which may or may not come my way – Perhaps.
    In a bad year I can maybe rely on $25,000 BEFORE tax. And in a good one maybe $48,000? From which I try to make heavy superannuation contributions.
    What have I lost? More a case of what I’ve gained I suspect – In that I’ve gained an understanding that our system relies on central bank driven debt and inflation masquerading as growth. But with the upshot still being that something has to give. Because despite Oz having been in such growth over the past decade I’ve never previously found it so hard to get ahead.
    But, as said, something has to give – In my case it’s the choice to have kids. I’m not bringing kids into this sort of system. Too unreliable unless one turns themself into a welfare case – Or a government employee. With neither of those options being palatable to me.
    Sent my fiancee an email to that effect just before – No kids for us Love! (Not at all sure I’ll still be engaged when we speak? Maybe – She’s a good sensible lady. But really does want a child – So we’ll just have to see.)
    With other Aussies, I guess it’ll be the hope for home ownership that goes out the window – I’m very fortunate in that regard of course. But as I said, in many ways, many of us have lost something.

  • 117 Greg Atkinson // Sep 16, 2009 at 12:23 pm

    Getting a start in the Australian housing market could be made a lot easier via a few simple steps:

    1. The establishment of well connected satellite towns/cities. For example I have ranted on about a high speed rail link between Sydney – Canberra many times and if such a link was to be built government supported townships could spring up along the way. This would open up thousands of more affordable housing spots for people willing to commute says 30-40 minutes in a high speed train to either Sydney or Canberra.


    2. Stop the State and Local Governments pushing up development costs. It seems pretty silly to me to hand out money to home buyers on one hand while State and Local Governments push up housing costs via increased cost to developers, stamp duty etc. If councils need more money, then they can increase rates out in the open, not rake money in by stealth. Perhaps they could even charge higher rates for new homes for say a few years to cover development costs? But at the end of the day they should be welcoming growth, not trying to kill it off.

    So instead of running around building halls maybe it would have been better to address the issues I have raised above?

    If school halls gave builders something to do, imagine what a new town would do?

  • 118 Ralph // Sep 16, 2009 at 3:31 pm

    I somehow doubt the recession is over yet. I reckon Bernanke will be eating his words. We have a world economy running on borrowed and printed money. And it seems that the most valuable commodity these days is not iron ore or coal, but confidence. If we Aussies are confident, we can continue to go into debt and will the recession away. As I’ve said before, the key will be what happens when the stimulus runs out.

    I think we’ll see the first signs of that in a few weeks when the FHOG boost is halved. The reaction to that will be a good predictor of how the gov will respond. If the RE industry wails about possible price falls, Kevvie will surely be tempted to go back in there with more cash. This is where we’ll see whether Pete is correct and the gov is limited in the amount of money they can keep throwing away.

    Should be interesting times over the next few months.

  • 119 Ralph // Sep 16, 2009 at 3:55 pm

    Was just thinking again about this. Short of a major international economic shock to the system, the government is going to have a very tough time selling any new stimulus. Yes, let the existing stimulus roll on, there’s little doubt that will happen. But announce NEW handouts, NEW cheques and NEW bailouts?

    The public is now fully believing that we’ve dodged the recession and it’s all apples from here. Swan and Kevvie are continuously gloating about it. And for that reason, I think the general public thinks that we’ve had enough of a handout. And then we have the Liberals continually in the media saying that the stimulus should be wound back. Imagine the outcry if the gov comes out and announces that they are going to rack up even more debt.

    So I think any more outright stimulus (pork barrelling) won’t wash, unless there is a major turn for the worse. In that context, I’m thinking that Pete could actually be right and that the government might be running out of ammo, even if only for political reasons.

  • 120 Ned S // Sep 16, 2009 at 7:24 pm

    The most fundamental problem would seem to be the cost of the land Greg. You won’t often hear it mentioned by government of course – Because that would effectively be an admission that government has caused the problem. Much safer to just rabbit on about the unaffordability of “housing” – What twaddle!

    But as you indicate, there are ways that could be addressed.

    And relaxing some of the planning and OH&S restrictions wouldn’t hurt either of course – Aussies were quite clever enough to manage to build their own houses last century. I and my father and one of my grandfathers all managed to do that – Despite the fact that none of us were ever employed in the building game. And the houses didn’t fall down and kill anyone. And none of us killed ourselves in the process. Although the industry used to disparagingly refer to such houses as “jerry-built” I believe. Smile!

    And there is all the spare housing capacity already in the cities. A country that wanted to see that used would certainly give people a choice on whether capital gains tax accrues on spare main residence capacity that is rented out – Claim the deductions and cop the tax exposure; Or don’t claim the deductions and remain CGT exempt. Your choice! But that would not encourage as much new debt and building so your ideas are more palatable from the system’s perspective I fully imagine.

  • 121 Ned S // Sep 16, 2009 at 9:57 pm

    15 to 20% falls in housing prices would be politically acceptable IMO Ralph. Cheered by some. Tolerated by the majority in the expectation they’d recover. Plus not catastrophic to the banks given we do not have non-recourse loans.

    On the off chance things should look like doing that, then expect stimulus I think. Which will be tolerated and even desired(?) by the majority because it keeps their house prices up. And the others will be grateful for their little 15 to 20% windfall. All without damaging the banks.

  • 122 Pete // Sep 16, 2009 at 11:00 pm


    15 to 20% falls in housing prices would be politically acceptable IMO Ralph. Cheered by some. Tolerated by the majority in the expectation they’d recover. Plus not catastrophic to the banks given we do not have non-recourse loans.

    I disagree with this. Any significant falls will put a lot of people into negative equity. Negative equity is a bank killer.

    I see it as a house of cards. Even a 5% drop could easily see one of the foundations removed and pave the way for even higher falls.

    I guess we’ll wait and see anyway. It is an unfortunately sad state of affairs actually. There are just so many people with a stake in our housing bubble that a crash means a lot of potential financial stress and pain.
    The only up-side I can think of (and it is significant) is that future generations won’t have to sign up to a life of debt-slavery to buy a house.

    But for the here-and-now thinkers, that is too far off to be a concern.

    I agree about better transport between cities. Fast, cheap and available transport is a huge growth factor.

    I guess we’ll see what the Gov does huh? With all the officials tending towards a ‘recovery’, as you say they hardly have any excuses left for stimulus. That makes it really hard to sell.
    They can put on brave faces and say everything is fine, but if their actions seem contradictory, then what will that do to ‘confidence’ (I laugh at the notion that they think it is all about confidence anyway. If only confidence made a countries economy tick. You can’t export it, you can’t eat it or use it to build anything. It is just a fickle feeling that can be here one second and gone the next).

    The RBA is the same as the Gov I think. All this talk of interest rate rises, yet I really doubt they’ll do it. Losing FHOG and increasing rates at the same time? Suicide? They’re all talk, and I don’t think they are worth listening to. I’d even go so far as to bet that the RBA’s next step would be to lower rates, except that I don’t think lowering rates would actually achieve anything. Banks wouldn’t lower mortgage rates, and if things were getting bad enough for the RBA to lower rates, then overseas lenders would be likely to raise their rates. So it is a catch22 for the RBA and I think they will probably leave them. Guess we’ll wait and see.

  • 123 Pete // Sep 16, 2009 at 11:21 pm

    Incidentally, on Lateline Business tonight they had some fellas from the Australian Property Institute saying the standard lines, but the following ones I found interesting (being the property bear I am):

    The API’s 2009 survey found that (and I hope I remember these correctly, please correct me if I am wrong):
    *- 90% of people thought the sharemarket would outperform the property sector next year
    *- 70% thought the end of the FHOG would cause a fall in house prices

    And interestingly, one of the guys said at the end (not an exact quote, in fact it is probably way off but the point is the same):

    “The downside of the FHOG is that FHB’s will be the most stressed mortgage holders if interest rates rise, however this negative is balanced by the fact that they kept the market up”

    (it’d be great if someone managed to find the real quote, but it doesn’t matter).

    Basically, he casually admitted that we could be sacrificing the youth to support a housing bubble, but that it is okay because the main thing is that prices didn’t fall.

    What a strange world we live in.

  • 124 Greg Atkinson // Sep 17, 2009 at 9:20 am

    I don’t think a 15%-20% correction in home prices would cause a bank like CBA to run into problems. For anyone who is interested I think this CBA presentation is well worth having a look at.

    UBS Eighth Annual Australian Financial Services Conference – presentation by David Craig

    It seems the CBA has some faith in the housing market and sees no reason to panic. But are they reading the housing market correctly?

  • 125 Ralph // Sep 17, 2009 at 10:29 am

    That’s a fascinating little presentation, Greg. Thanks.

    A 15-20% fall would be interesting. For recent buyers, it would be disastrous, plunging them into negative equity. But for people who’ve had a mortgage of between 5 and 10 years or more, they wouldn’t probably still have a bit of equity left in the tank. I don’t think people in this situation would mind a great deal. They would have less money to withdraw from their equity ATM, but they’re still ahead overall, so that’s ok. So on balance, I reckon the banks will survive despite a few nerves as long as they don’t actually have to realise any losses – cue mortgage holidays etc.

    I think the banks see no reason to worry right now. Prices are not crashing, they are well supported by government intervention and the government is sitting in behind them with the deposit guarrantee. And they probably feel like it’s going to continue that way. Perhaps they’ve been given some assurances from the government. Nevertheless, I’ve read somewhere (can’t produce source) that about 49% of CBA’s assets are housing loans – that’s a pretty big exposure if that’s true.

    As Ned has alluded to a few times, perhaps the next form of housing support will come from the Henry tax review. The gov’t can’t come out and announce new spending measures without earning the ire of both the Liberals and the public. But they can tinker with tax regulations to make housing more attractive and keep the bubble inflated. I’m thinking that they might grandfather negative gearing in some way – bring forward some investors so that they can take advantage of negative gearing before it goes.

  • 126 Pete // Sep 17, 2009 at 10:42 am

    I wouldn’t trust a presentation from CBA. Too biased. And of course they will say the housing market is solid – because they desperately want it to be. For a bank to suggest otherwise would affect the market negatively.

    I don’t think a 15%-20% correction in home prices would cause a bank like CBA to run into problems.

    I totally disagree with you there. How much reserve ratio do our banks have? 5% reserve? 10%?

    Even at 10% it only takes loss of ~10% of all money lent out to completely destroy a bank. Yes, they have the Government guarantee, but that means two things:
    1) the Government will have to pay to support our banks (uh-oh deficit)
    2) smaller non-banks without the guarantee will crash and burn even harder than the banks, with no support.

    Things to ponder:
    – 95% of new FHB mortgages have been made by the big four banks (not sure about overall percentage).
    – FHB’s are a group that is at a very high risk of negative equity with even 5% falls in the property market.
    – FHB’s are a high risk of default
    – people who negatively gear property (investors/speculators) and pay interest only are at very high risk of negative equity, as equity is solely achieved by capital gains on the market, not by paying off the mortgage. Many people do this to avoid tax. What would the banks think of this negative equity, without any provision to pay off the property?
    – people currently on mortgage holidays are slowly eating into their equity, even whilst property prices remain stable. If there is a property price drop, they will be eating into their equity at an even greater rate. Negative equity.
    – many people have overextended themselves in their mortgage thanks to the “equity” ideal. This means that people who bought their place 5 years ago may have used “equity” for other purchases such as renovations (usually adding some value), holidays, cars, boats, furniture, etc – reducing their current equity level. Combine this with a drop in house prices and they are at risk of negative equity too.

    I keep talking about negative equity. But how does that affect banks and the market? Perhaps we could say, “so what” to negative equity and assume that we could ignore it and just wait until prices rise again?

    I see a few problems with that:

    – Firstly, if you owe more on your house than what it is worth, and have no other assets, you may well consider bankruptcy. I am not saying all people would, but it doesn’t take many of those to significantly add to the supply of houses on the market, assisting price falls.

    – Secondly, banks don’t like negative equity, and understandibly so. Every bit of negative equity for the banks is a potential loss waiting to happen. And the more prices fall, the more the banks will lose if they don’t sell early. For instance, 5% negative equity may be something one of the banks would tolerate in the short term. But what happens when that gets even higher? The probability of the mortgagee defaulting/bankrupting gets higher and higher.

    – Thirdly, banks are not in the real estate business. The foreclose, they sell. They do not hold assets like houses and rent them out and play the property game and wait for prices to go up again. No, they sell the house at the best price they can at the time.
    For instance, in the US I read about many times where banks would drop the price of a house every single week until it was sold. Week one, $500K. Week 2,$480K. Week 3, $460K. Etc. This adds to the price fall expectation of the public. They see prices falling, and quickly. The banks end up being their own worst enemies, but they have no choice in the matter.

    ‘Officials’ say that our banks are well capitalised and in a great position…but they are wrong. Our banks are in an increasingly precarious position, due to:

    1) the fact that they keep on lending to risky customers (eg FHB’s), even though the economic climate would suggest they try to recapitalise instead. Why? Because they have to! All four are so alike and so competitive (profits to shareholders) that they cannot afford to lose any ground. Even if that means providing loans they know they shouldn’t.

    2) the prime/subprime argument. What is a prime loan? A subprime loan? It all comes down to risk. Risk of default, or negative equity. So a sub-prime might be someone with 5% equity. And a prime might be someone with 10% equity. What happens if we experience a 5% drop? A bunch of people just got reclassified from prime to sub-prime. And whilst a mortgagees classification of prime or subprime doesn’t affect their loan or ability to pay their loan, it does affect the way ‘officials’ rate our banks. My point is that if price falls occur, our banks ratings could very quickly go down the toilet. Overseas interest rates will rise for those banks, which may well push house prices even lower.

    Personally I see that for the forces that push house prices up, there are just as many that can work in reverse and push them down. And once they start falling, I think that it will be a self-perpetuating loop that will push them further and further down (price fall expectation, credit becoming expensive, increased supply on the market). But, this does not factor in Government intervention (which is a big variable, and will probably ruin the country).

    Anyhow…i’ll leave it at that. I talk too much.

  • 127 Pete // Sep 17, 2009 at 10:57 am

    Incidentally, I have to laugh at the CBA’s presentation. Here’s their ‘strengths’: (and my comments below each)

    -AA credit ratings
    (can easily change)
    -All rated in top 20 global safest banks
    (can easily change)
    (can very easily change)
    -Well capitalised
    -Conservative/focus on core business
    (actually, they focussed on home lending)
    -Continuing to lend
    (and that is because they have to, to remain competitive as I mentioned above. Every $100 lent would be about $12 less capitalisation)
    -Effective rate pass-through
    (yes, because rates are low at the moment)

    The presentation goes on to use the “GDP growth” stats compared to other countries (even though we know that’s dodgy) and to highlight growth in loans, such as home loans and personal loans and credit cards. Not exactly the safest loans…

    Anyway, that is what I would expect from a bank.

  • 128 Ralph // Sep 17, 2009 at 11:35 am

    yes, the government intervention is the great unknown. It’s a frightening thought that the government is prepared to ruin the country for the sake of avoiding two consecutive negative quarters of GDP growth. In times gone by, we would have simply accepted the tough medicine and got on with it. These days, the government is prepared to go all out to ensure that no one has to take any medicine.

  • 129 Greg Atkinson // Sep 17, 2009 at 12:07 pm

    Pete I think it is fair enough for the bank to outline their strengths as they stood at the time of the presentation. Yes things could change..but also for the better not only for the worse. We can of course question how well they have their loans covered etc. but the fact is our banks have held up well during this crisis and so for all their faults, they (and APRA) must have been doing something right…yes?

  • 130 Pete // Sep 17, 2009 at 1:14 pm

    Yes you are right that it is fair that the banks present their strengths as they see it. What I question is the validity of those strengths. It is a bit like saying that Lehmann Bros was in a strong market position just before the GFC. Sometimes the situation ‘now’ just doesn’t cut it in the future.

    And I cannot dispute that our banks have held up well on paper. But the problem is that we are relying on them to provide the information in the short-term. The banks may well have a survival strategy in place whereby they avoid declaring losses as much as possible in order to attract shareholders (and hence better share price). The question is, how long can they avoid declaring losses? Are they hoping that it will all clear up by next year? Just like the notion of these mortgage holidays, all it is doing is putting off the inevitable. But if we take what they say as true and honest, then we haven’t learned anything from the past – because banks (and other financials) are the masters of creative accounting.

    As for the banks doing something right – i’d say that is more to do with Government intervention than anything else. The banking guarantee, the bailouts of toxic assets, increasing FHOG, subsidies and protections – without those I don’t think we’d have any of the big four left.

    So whilst they have the right to say things as they see it, personally I’d take anything they say with a whole cup of salt.
    (figuratively speaking of course)

  • 131 Ned S // Sep 17, 2009 at 8:32 pm

    I come back to the one point that we all do seem to be agreed on which is that the world economies are based on bubbles. Policy makers seem to indicate some desire for those bubbles and the debt that drives them to decrease. But their actions indicate an effective commitment to the opposite.

    And America is printing money – Which really is a pretty big deal. And is borrowing some pretty worrying amounts. To keep the entire system propped up – Not just the financials, but also their health care and their pensions and their jobs. So I think policy makers are telling me fibs. And that the bubbles and busts will continue.

    Which still leads me to the view that long term, Oz housing will do OK. In an intentionally inflationary environment. And in what is quite possibly the world’s major future growth region. With the general question for those who have the skills in trading them, being can they do better from things like stocks?

    The Henry tax review – Pete is correct – Swann certainly seems to have knocked the concept of doing away with dividend imputation on the head. For now under this administration. Although if Treasury has looked at it and thinks it is a good thing, then it is probably just a question of when.

    A lot of the review will be like that I expect. Some recommendations that will be taken up immediately. But a lot of others being an indication of where we are likely to go over the next 5, 10, 15 and even 20 years. Which is still handy knowledge.

    It concerns me that we’ve seen so little stated about housing. It’s a central issue in Oz. Property is very easily taxed. Yet there are significant affordability issues – Regarding the type we’ve traditionally lived in with the same proximity to jobs anyway. And the working classes are making choices like “a kid or a house”? Or “a kid or keep working until I’m 70 – Or older”? And the banks have heavy exposure to the property market. And it is a core part of our economy.

    I wouldn’t say I’m expecting any bombshells in the current environment – But I am expecting an indication of direction.

    There is also a possibility that the concept that taxing the income from investments is unreasonable could pop up – In that the money was taxed when originally earned.

    Reading stuff Henry has said, the indications are that he compares us to other OECD nations and sees that our rates of taxation on personal income are low and that our rates of tax on companies and investments are high. Not that the current government will necessarily like hearing that right now perhaps? But the boomers will be retiring over the next 5 to 10 years. And are voters of course.

    My accountant is strongly of the view that having the top personal income tax rate align with the company tax rate would remove a huge amount of complexity from the system – He is undoubtedly correct. And part of the thrust of the review is supposed to be to simplify the system. But it is difficult to see that getting particular consideration given the other things Henry has said.

  • 132 Greg Atkinson // Sep 18, 2009 at 8:00 am

    Pete I would agree that the steps taken by the Government have helped the major banks and I do worry about how much exposure they have to non-performing loans. If housing prices were to fall and loan defaults rose that would cause them some pain, but even in recessions it seems Australian non-recourse loans hold up pretty well so the big four banks would see a decline in profits, but live to fight another day.

  • 133 Pete // Sep 18, 2009 at 9:51 am

    Good post.

    Unlike the US, Australia cannot print its way out of debt. The US borrowed money in US dollars, meaning that every dollar printed is capable of repaying debt.
    Australia does not borrow money in Australian dollars, therefore every dollar we print affects both our exchange rate and the interest rates that overseas lenders charge us.

    Also Australia does not have a symbiotic relationship with China like the US whereby they produce for the US to consume (well thats the old model they are clinging to anyway). The fact the US has (had) this model, allows them a lot of flexibility with their debt to China – eg, China buying lots of US gov. bonds (but they are stopping that).
    Australia does not have such a relationship, other than the fact that we provide them with some resources. Keeping credit flowing in Australia is not in the interests of China. In fact I would think the opposite is true, because the more credit starved Australia is, the more open we are to foreign investment in our resource companies.

    My point is that we do not have the luxury of printing money without severe repurcussions.

    However a possible counter-point to the above may be that if we print money, our dollar will fall, increasing interest rates and import costs but also increasing exports. The question is, what is going to have more effect on our economy? More exports or higher interest rates? I strongly suspect that it would be higher interest rates and import costs.

  • 134 Pete // Sep 18, 2009 at 10:53 am


    If housing prices were to fall and loan defaults rose that would cause them some pain, but even in recessions it seems Australian non-recourse loans hold up pretty well so the big four banks would see a decline in profits, but live to fight another day.

    Why do you say that? Are you referring to the 80’s/90’s recession?

    See, the difference here is that people are really overextended in Australia. As I mentioned, people borrowing using equity, FHB’s, all sorts.

    We might not have non-recourse loans, but we do still have bankruptcy provisions, most of which are being revised (or were revised recently?) to enable them to be even nicer to people claiming it.

    If you had a mortgage for $500K and your house was only worth $450K (10% drop), how keen would you be to pay that extra $50K?

    How about if you had 4 negatively geared properties, and they were all ~10% underwater, how keen would you be to hold onto them, knowing that they are costing you money (especially if interest rates rise) whilst not beating the inflation rate? Suspecting that over a five year period you wouldn’t even break even?

    I don’t expect that all people who go ‘underwater’ (negative equity) with property will declare bankruptcy and ditch their loans. But, it is an important consideration. Particularly if people can see that the loan they got was actually too much for their income if interest rates rise. Eg, first home buyers get a mortgage they can barely service at 6%, but interest rates rise, house prices fall and they just don’t see themselves getting ahead in the foreseeable future. I know what I would do in that situation.

    I hear the non-recourse argument a lot. The “it’s different here” argument all over again. Think about other countries that don’t have non-recourse loans that have also had significant falls in house prices. Yes, non-recourse makes things a bit easier, but it does not stop people ditching their loans.

  • 135 Ned S // Sep 18, 2009 at 11:08 am

    I haven’t got my head around the concept of Oz printing money Pete – But suspect the world would roll around on the floor laughing if we tried that on? We’d probably just be better off going to the IMF cap in hand in such circumstances and having a good think about how we might do better in our next financial reincarnation?

    There are two main difficulties with the Ken Henry tax review as I see it. Firstly it is trying to change an existing system. With all the unknowns that can come of that. And with quite a bit of what they would like to do appearing to be contradictory. Given what we already have in the existing system at least. Then secondly there is the difficulty of what is politically acceptable at this time.

    The GST is a good example. We were always going to get it. But I suspect John Hewson regretted lots of things about being the first bunny to really champion it. (Against Keating who’d originally proposed it but was astute enough to do as he was told and drop the idea.)

  • 136 Greg Atkinson // Sep 18, 2009 at 1:57 pm

    Hi Pete, when I said home prices should hold up okay in a recession I was basing this on what happened in the early 1990’s.

    As for your other questions:

    If you had a mortgage for $500K and your house was only worth $450K (10% drop), how keen would you be to pay that extra $50K?

    I am not sure many banks will give allow $500K mortgage for a $500k house but in any case if the value of your home drops 10% why would you need to pay $50K? In many cases people have no idea what their house is really worth at any point in time anyway. You only really know when you put it up for sale.

    How about if you had 4 negatively geared properties….

    In that case I guess the person owning the money would be in some trouble, but that situation is hardly the norm. Most recent home loans for example have been for owner occupiers.

    The banks also have loans spread over many years so even if prices fell by 20% most properties on their books would still be be in the black. A 40% fall I guess would cause some trouble but even then if people hang onto their jobs they can still hold onto their homes. Why would a person sell out of a home they liked and take a loss just because homes in the area fell 40% if they could keep up repayments?

    As I mentioned in: Australian home prices, spending trends and statistics for many people owning and buying a home is not some spreadsheet exercise. Many owner occupiers will hold onto their home until the bitter end and for emotional, not economic reasons. This may not fit into the models Steve Keen uses but it is a factor that should not be overlooked nonetheless.

  • 137 Pete // Sep 19, 2009 at 1:32 am

    For your first point:
    You can value your house by what the neighbours value theirs as. An educated guess is pretty easy to do. But I was making a simple example, and you are right, most people wouldn’t still owe $500K on a $500K house. But with a deposit rate of say 5% in recent times (ignoring the 100% loans out there), it is still significant.

    Unless they tapped into the equity (this is fairly common, although unlikely they ate up all the equity, I don’t think the banks allow that).

    Or unless they have other debts, like personal loans, credit cards, car loans, or harvey norman “50 million days interest free” loans (a lot of FHB’s get buy a house and then get right into furnishing it using Harvey Norman interest free deals. An FHB I know spent $7K on bedroom furniture recently 🙁 ). These debts will add to the total household debt. Which you would hope is not much greater than price of the assets…

    I can agree that people will own their home and not want to move. Totally agree. But I know that if I had bought a home and knew I would struggle with interest rates, yet I can see house prices coming down and that I am in negative equity – I’d ditch that thing real quick.

    The reason is that yes, you won’t be offered credit to buy a home again in a hurry, but you also won’t have to pay an extra 10-20% or whatever it is on your mortgage. Eg, 20% of a 500K mortgage is 100K which is a lot of money to pay off – just to break even. Yes, some people would pay for their house regardless of how far underwater they are. But the more stress financial stress people are put under, the less ‘hope’ they will have of getting value for money.

    And everyone hates not getting value for money. It’s like going to a shop and buying something, only to find out it is 30% off the next day. Yes, you bought it because you wanted it, but you still feel like a fool anyway. Other than the convenience factor, I don’t see why people would feel so differently about house purchases. Ultimately people don’t want to pay any more than they have to.

    Plus we should factor in the short-termist nature of westerners. We think short-term, and love things that enable us in the short-term, like easy credit and interest free from Harvey Norman. So many of those who are underwater may well be thinking short-term like “oh no I have to pay all this extra” rather than “it’s okay, in the long run we’ll keep the house”.

    If you consider that people would still want to keep their home knowing they are paying significantly more for it than they should be, also consider that if interest rates rise people will be paying more mortgage interest each month. That seems extremely obvious, but one of the real driving forces behind property purchases has been low interest rates (also obvious). People compare their interest payments on a mortgage to their rental payments and say “For a bit extra I could be buying a house instead of renting!”. I have heard that everywhere. If interest rates got to 9% for instance (and knowing that rentals won’t follow*), people would realise that it is much cheaper to rent than to pay off the house.

    Many owner occupiers will hold onto their home until the bitter end and for emotional, not economic reasons.

    Is that any different to the other countries that have suffered significant falls in property prices?

    Overall I think your points are still valid, I just don’t think they are particularly strong factors for keeping the bubble alive or saving our banks.

    *I’ve covered this before: rents don’t rise when interest rates do.

  • 138 Ned S // Sep 19, 2009 at 8:49 am

    Henry tax review – The following sounds quite authorative and comprehensive – As an initial taster. But I can’t see any official version???

    Happy reading!

  • 139 Pete // Sep 19, 2009 at 6:07 pm

    Interesting article Ned.

    From the article:

    The review won’t recommend an end to real estate stamp duties for as long as the capital gains tax exemption remains, and even it is unlikely to have the courage to recommend an end to the exemption.

    There goes that idea then…

    The review believes mining companies have been treated too generously. In an earlier discussion paper it noted that as mining profits raced ahead during the commodities boom, the revenue to the nation whose resources were being mined failed to keep pace. It will recommend a higher resource rent tax or a switch to a resource profit tax.

    Would the Government have the guts to implement that? Imagine the flack they’d get.

    Taxing income from capital gains in the same way as other income would have an economic rationale as well as recovering some of the revenue to be lost from a lower company tax rate.

    Interesting and massive change to CGT?

    It has discovered we are living longer in unpredictable ways, meaning that private insurers have stopped lifetime annuities – a role it wants the Government to perform so that retirees can be certain of getting a monthly cheque for the rest of their lives no matter how long they live.

    Government footing the bill for retirements more? Is that a better idea? I think we need a lot more detail to judge this though.

    Land tax, another favourite of economists, will get some sort of endorsement but the committee has found that its benefits aren’t as straightforward as claimed. It’s often hard to distinguish the value of land from the value of the purposes for which it is used.

    Interesting idea…and it would be bad for the housing bubble me thinks. Who knows though, more detail needed of course.

  • 140 Anon // Sep 21, 2009 at 3:13 pm

    Australia makes up some of the most expensive house prices in the world.

    Out of the 50th least affordable housing in the world Australia ranks:
    6th Mandurah
    7th Sunshine Coast, Queensland
    11th Sydney
    19th Perth
    22th Melbourne
    24th Rockingham
    28th Bundaberg, Wollongong
    33rd Bunbury
    35th Adelaide
    36th Brisbane, Cairnes
    40th Geelong, Hobart, Newcastle
    45th Townsville
    46th Mackay

    Australia represents 19 of the top 50. If this is not a bubble about to burst – I dont know what is!

    Mugs on the street are telling me houses are safe investments as “they always go up.” Our housing bubble is now worse than what America experienced.
    Some people are expressing that we wont correct substantially, go down, or have a soft landing. I believe we are going through the “indifference/denial” phase of the investor psychology chart —

  • 141 georgia // Sep 21, 2009 at 5:15 pm

    AMP & PTM

    Can someone provide insights as to why a Bank CEO may not want to bid for AMP? AMP has over 1,000 Financial Planners that can flog its’ (the new owners) products (FUM, mortgages, insurance, toilet paper etc). Not to mention the cost savings from merging Head Office costs. For example, I don’t see the sig’ benefits for NAB buying AVIVA, Challenger mortgages vs AMP. And why would Smith take ANZ to Asian markets when there is so much potential and synergies (and less risk) to obtain buying AMP?

    Why doesn’t Kerr Neilson make a bid for AMP? PTM has no debt (I believe) and the acquisition of AMP can save heaps of money (starting with the firing of those useless fund managers and the eco “guru” – Dr. Shane Oliver). PTM will have over 1,000 planners flogging their products with a 1.5% MER. BTW, why hasn’t PTM start an aussie fund? In addition to the money they could make, investors need a saviour from the incompetent fund managers such as Colonial First State!

  • 142 Pete // Sep 21, 2009 at 7:16 pm

    Probably the wrong article ask those questions.

    Who knows why anyone makes a bid on anyone until it is done?

    Companies in the finance industry do not show their true balance sheets or even outlook to the public. The deals you talk about go on behind closed doors somewhere.

    Besides, who needs a bunch of financial planners? There isn’t exactly a shortage of them out there.

    Sounds like you have a vested interest.

  • 143 georgia // Sep 21, 2009 at 8:40 pm

    Sorry – new blogging and to this website. Yes, ownership to the abovenamed. Planners are salespeople and they are good at moving financial products which in turn generate strong profits parent company.
    Who needs Planners? The majority of the population who are naive about investing and MERs etc. That’s why the largest fund manager in Australia has produced some of the worst returns.
    I would still like a sound opinion as to why the Bank CEOs (NAB to revisit) will not make a tilt at AMP and get rid of that useless economist?
    And why Kerr Neilson will not start an Aussie equities hedge fund? Doesn’t matter how well he / PTM runs their Int’l portfolio. At the end of the day, there are still many novice Aussies (and their SMSF) and retirees who want a sound manager that can give them sound dividends with some franking credits.
    And why doesn’t Kerr put some growth strategies to PTM’s lazy balance sheet? He could potentially double FUM within 3-5 years! That’s a lot of money @ 1.5% MER pa.

  • 144 Greg Atkinson // Sep 21, 2009 at 9:11 pm

    Georgia – no problems regarding the comment. I think I probably need to start up an area on this site where people can post comments/questions not related to blog articles. I am also new to blogging 🙂

    In regards to PTM I suspect that financial planning is not something they are interested in. They are fund managers not planners, and so they probably don’t see much benefit in getting into that area.

    I tend to agree with Pete re financial planners, I do think there are far too many in the market place at the moment.

  • 145 Ned S // Sep 21, 2009 at 9:33 pm

    Its a bad time to be singing the praises of financial planners – Be they government ones or private.

  • 146 Pete // Sep 21, 2009 at 10:10 pm

    Personally I think we are still in the greed-conviction part of the ‘investor psychology chart’. I think we need to have some momentum in price stagnation or falls to get to indifference (so that people have something to be indifferent about).

    However…I can honestly say that I thought we were at this stage in the past. It seems to me that every twist and turn (usually Gov induced) takes the cycle back a notch.

    Strange thing is, whilst Australia is a nice place to live, our wages and lifestyles hardly warrant prices that high over the entire country.

  • 147 Ned S // Sep 21, 2009 at 10:44 pm

    Two points about the chart – 1) It applies to Investors which many property buyers presumably aren’t and 2) It is pretty much out of whack even for investors I guess with everything that has been been going on – If I had to take a punt I’d say Oz property investors were at the fear stage late last year, panic never set in, the contempt stage has definitely not arisen and investors are now somewhere around the caution stage.

  • 148 Senator13 // Sep 21, 2009 at 11:23 pm

    Georgia – I am usually pro deregulation but one area that really needs tighter regulation is on financial planers. There are defiantly too many of them. Most are just cold calling telemarketers trying to flog anything from mortgages, CFD trading, insurance and anything else they think they can make a buck from. Not many would have a genuine interest in mapping out people’s financial future.

    Regarding AMP and PTM I figure that PTM are plodding along pretty well at the moment and don’t really want the hassle and their core businesses are slightly different and trying to do different things. PTM have been doing quiet well all this year just doing their own thing.

    Anon – Australia have always featured heavily in lists like these over the years. I have found it very hard to compare prices overseas with prices in Australia. I have found that there are too many different factors and at the end of the day have not found much point because it does not really help with what is happening on the ground in a particular area. Anything in Australia would seem unaffordable when using the Zimbabwean dollar for example. Also I think people have to ask them self after reading those lists if they would change their mind and put their money in other asset classes over RE? And what represents the best value for them for their needs. I think it is always good to be wary of people that make the comments “they always go up” – either relating to shares or RE because as we have seen both go up and down. Some faster then others.

  • 149 Greg Atkinson // Sep 22, 2009 at 5:31 pm

    Anon I remember digging into a worldwide housing list once before and the big problem is they seem to compare a large city like Sydney with small cities like Bunbury. That seems like a pretty odd way to compare house prices? What is the baseline exactly?

    Is the list you mention the same one that leaves out Asian cities?

  • 150 Anon // Sep 22, 2009 at 6:12 pm

    “Anon I remember digging into a worldwide housing list once before and the big problem is they seem to compare a large city like Sydney with small cities like Bunbury. That seems like a pretty odd way to compare house prices? What is the baseline exactly?”

    I am not sure what the baseline is. The survey was the “2008 Demographia International Housing Affordability Survey.” — Yes it leaves out other Asian cities. It focuses on: Australia, Canada, Republic of Ireland,
    New Zealand, United Kingdom and the United States.

    I got the original table from a secondary source: However, on inspection of the “Demographia
    International Housing Affordability Survey 2009” it appears theres data to suggest things may be even worse than my previous table:
    Top 60 Severely Unafforable Housing Markets (Page 12):
    1) Sunshine Coast, Queensland.
    3) Gold Coast, Queesland-NSW
    5) Sydney, NSW
    10) Bundaberg, QLD
    12) Adelaide, Australia SA
    12) Melbourne, Australia VIC
    14) Mandurah, Australia WA
    19) Wollongong, NSW
    23) Newcastle, NSW
    26) Perth, WA
    28) Brisbane, QLD
    29) Hobart, TAS
    30) Cairns, QLD
    32) Geelong, VIC
    34) Albury-Wodonga, NSW-VIC
    34) Darwin, NT
    34) Rockhampton, QLD
    40) Mackay, QLD
    41) Townsville, QLD
    42) Launceston, TAS
    42) Australia Maitland , NSW
    55) Australia Bunbury, WA
    60) Australia Canberra, ACT-NSW
    60) Australia Toowoomba, QLD

    There lots of data here, the source file is:

    Some other stats from the “Demographia
    International Housing Affordability Survey 2009” —

    “Least Affordable Markets: In a major change from previous years, most of the least affordable
    markets are outside the United States. Last year, the 5 least affordable markets were in the United
    States. This year, 3 of the least affordable markets are in Australia and only one in the United States.
    This change is, of course, the result of the steep housing price declines that have been experienced
    in some markets in the United States, especially California.
    The 64 severely unaffordable [housing] markets include 24 in Australia, 16 in the United States, 10 in the
    United Kingdom,10 7 in New Zealand, 4 in Canada and 3 in Ireland (Table 4).”
    All of the affordable markets were located in Canada and the United States, while most markets in
    Australia, Ireland, New Zealand and the United Kingdom are rated “severely unaffordable.”
    Note: NZ, UK and Irish housing markets have already declined or crashed.

    “Australia: The Median Multiple in Australia is 6.0, double the 3.0 historic maximum norm and well
    above levels of just a decade ago (Figure 1).12 Among the larger metropolitan markets, Sydney
    remained the worst, at 8.3 (down from 8.6). Median house prices dropped in Sydney and Perth.
    Perth’s Median Multiple dropped from 7.6 to 6.4, reflecting not only the price decline, but strong
    income growth. At the same time, Adelaide’s already serious housing unaffordability worsened, with
    its Median Multiple rising from 6.5 to 7.1.”

  • 151 Pete // Sep 22, 2009 at 11:09 pm

    Ouch, Adelaide would surely get hammered by this – being that their industry is suffering and its not really the best city to find a job in. Sounds like Perth and Adelaide are on opposite paths.

    There are only a few ways that things can go from here:

    Less affordability:
    – Decrease in wages
    – Increase in prices

    More affordability
    – Increase in wages
    – Decrease in prices

    Obviously there are unlimited shades of grey between those. But at the moment it doesn’t look like wages will be rising (except for perhaps WA in the short-term), so ‘affordability’ will probably be determined by whether house prices increase or decrease in price.

    Affordability can decrease in real terms such as circumstances where house prices meet or exceed the rate of inflation, yet wages are not increasing at the rate of inflation.

    So, essentially for house prices to become affordable (without crashing), we need wages to increase at a faster rate than property. That seems very unlikely.

    To state the obvious, I think that in terms of affordability there will either be no respite unless there is a significant fall in house prices.

  • 152 Pete // Sep 25, 2009 at 4:56 pm

    One thing that I have not particularly considered in the past is the role of international investors propping up the housing market.

    Eg this international article (marketing) is interesting:
    Survey finds Australia number one for property investment

    If the Government were to provide incentives for people overseas to invest in the Australian housing market, prices could be inflated without the Government having to spend much to do so. They could even provide incentives such as including Visa’s and the likes.

    However…to do so would make it even harder for Australians to buy homes. I don’t know if that is something they’d care about. Inflating the property bubble even more seems kinda dangerous.

    And this article is interesting:
    Wave of confidence brings flood of mortgages

    I find the attitude of the couple “we don’t want to do that forever” as interesting. Like property is a risk free ride to early retirement. Perhaps it has been…and perhaps it will be. But I think the risks are mounting, and the more prices rise, the more people will find it very hard to service their mortgage if events stress them financially.

    And of course it is worth noting that fixed rate loans are in decline. 95% of FHB’s are on variable rates anyway.

  • 153 Ned S // Sep 26, 2009 at 1:57 pm

    There isn’t the incentive to go on a fixed rate that there was before the GFC Pete – Firstly people know that any sharp contraction in the economy will be responded to with aggressive lowering of interest rates and secondly we know that we are looking at a cycle where governments will try to keep interest rates low. It will be many years before the RBA willingly pushes rates back to pre-GFC levels. Even now it is only talking about wanting to get the official rate up to about 5% over the next two years.

    And at lower interest rates at least some people (like the 26 yos in the link you give) are saying “Yippee – Buying houses is easy – It’s Party Time!” As opposed to at pre-GFC interest rate levels when things were more difficult – Perversely. So the RBA goes back to jawboning about “Please be careful or we might get a housing bubble.” Which they’ve been doing since 2002 that I know of.

    As to the Oz government caring or not caring about whether Australians can afford houses – Well at the moment they reckon housing is quite affordable. And if interest rates only go back up to 5% without huge increases in house prices they’ll still reckon they are affordable.

    Certainly the housing market hadn’t collapsed due to affordability issues even pre-GFC – Although it did seem (to me) to be cooling.

    We are in a pretty strange situation now. But if I take the broadest possible view of it that I can, I tend to say No recession = No major housing price declines?

    What would drive Oz into a recession? A recession in Asia. (And most particularly in China we are told.) Which doesn’t seem that likely anytime soon given the size of their reserves and committment to growth. Throw in our own government’s unwillingness to see any marked correction in the price of housing and there are some huge buffers against significant falls in Oz housing prices. As I see it anyway.

  • 154 Pete // Sep 26, 2009 at 3:14 pm


    I pretty much agree with all you have to say there, except that I believe China/Asia is not particularly robust and that demand could fall easily. What China spends its reserves on could be resources from Australia…or could be anything. China buying up Australian companies doesn’t exactly give us the economic boom that we need (although it does provide a few jobs).

    I agree about fixed rate loans – there is no incentive. And banks won’t give them to FHB’s anyway.

    I guess my point is that Australia will be extremely sensitive to external shocks that affect interest rates, which are:
    – drop in the exchange value of AUD
    – increase in rates charged by overseas lenders
    – changes in Australia’s ‘ratings’ by ratings agencies, eg from AAA to B, etc (will push rates up)
    – increased borrowing by Government will make Australia seem more risky
    – if Australia prints money, external rates will rise (and internal rates if the Gov tries to sell bonds)

    My belief is that a lot of these factors tie in to each other. This means that we could have a compounding effect on interest rates (eg, increased external rates plus falling AUD).

    And I think our current market will be very sensitive to changes in interest rates, as I have mentioned before. This is one reason that the lack of fixed interest rates is of (slight) significance.

  • 155 Pete // Sep 26, 2009 at 3:37 pm

    And as I was discussing before, another article on international investment:

    Chinese buyers fuel top-end property boom

    I think it says something about the property bubble when they need to go overseas to find buyers (although the article does specify it was top-end property)

    …complaining they are being priced out by foreigners who have no intention of living in their new properties.

    A few critics go further, arguing Chinese money is now putting upwards pressure on interest rates.

    Overseas buyers ‘may’ add to the rental market. Increasing interest rates isn’t good though.

    Perhaps the latest Australian craze isn’t to sell our products, but rather to sell our assets.

  • 156 Ned S // Sep 26, 2009 at 8:52 pm

    Back in the 1980s it was the Japanese buying Oz property Pete. They had a special fondness for Queensland as I recall it:,9171,968024,00.html

    One of the things that has come through clearly to me from the GFC is the lack of diversification in the Australian economy and its potential to hurt if (or commonsense really says when) a recession does eventually hit.

    Forewarned is good I guess and people can at least be bearing it in mind as they consider things like their overall investment strategy, plans for retirement and such like. Balanced against the overall growth potential of being part of the Asian region.

  • 157 Greg Atkinson // Nov 7, 2009 at 10:02 pm

    Ned as you know I have been rambling on about the Oz economy being too focused on mining and farming for quite some time. Also Pete a while back posted some very interesting links about the Resource Disease/Dutch Disease which highlighted the risks that go along with being a nation blessed with abundant natural resources.

    Now it seems even the RBA and Treasury are starting to worry about the same things. See:

  • 158 Ned S // Nov 9, 2009 at 4:19 pm

    What do we do Greg? I know we aren’t smarter or harder working or more frugal than most. So competing in “honest” trade isn’t going to maintain our lifestyle. It’s resources and be grateful I guess – While we try and find some sane pollies who are willing to build up a surplus as the article suggests. But where to long term?

  • 159 Greg Atkinson // Nov 9, 2009 at 5:55 pm

    Ned I see a lot of worrying trends developing in Australia because resources seems to have saved us once again and people like me talking about the need for the economy to be more broadly based look out of touch.

    I see the real estate super bulls are now excited about talk of the Australian population reaching 60 million by 2050 (or thereabouts) and yet I wonder where the power or the water will come from to supply the extra millions? Sydney for example has chronic public transport problems already and is unable to maintain existing infrastructure in good order, goodness knows how the city will ever be able to take in a few more million people.

    I wonder if the rising costs of energy, land, materials etc. will start to act as an automatic brake on future house prices rises? (i.e. start to eat into disposable incomes) In addition maybe the only way we will fit more people in is to increase the amount of medium and high density housing in our cities and if this happens, what impact will this have on residential real estate prices?

    So many questions to try and find answers for 🙂

  • 160 Ned S // Nov 9, 2009 at 6:34 pm

    Gday Greg – As I said, no answers at all … But some facts – The migrants will keep coming. It’s “comparatively OK here!” And government wants/needs them – To generate growth and contribute tax dollars. So that’s a Fater complee (Apologies to all and any Frog listeners! 🙂 )
    Water – Nuclear is good – Our major cities are all coastal – No problem! Public transport in Sydney – To get to the CBD when noone with any brains wants to be within cooee of the place? We’ll just have to see I guess … But one hardnosed premier for a term is all it would take to sort that out.
    High density living – Has to happen. Cheers!

  • 161 Greg Atkinson // Nov 10, 2009 at 7:17 am

    Ned I have no answers either I am afraid. There seems to be so many reasons for house prices to keep rising it would appears a mugs game to even contemplate how they could fall. However I recall a similar situation developing in Ireland some years ago..GDP was on the rise, people were flooding into the country and it was labelled the “Celtic Tiger”. Nonetheless the economy did run into trouble and house prices did adjust downwards although who knows, this could just be a short term blip?

    Let’s just hope nobody labels our economy the “Pacific Tiger” 🙂

  • 162 Ned S // Nov 10, 2009 at 11:36 am

    I was working with an Irishman at the time Greg and he was telling me what was happening there. It seemed crazy to me – Why Ireland? But they were heavily into the banking/finances type stuff I’ve since gathered? There’s a lesson in that I guess.

    Oz house prices – I’ve given up making calls as I said. But the long term prospects would have to seem just fine regardless. That immigration is the biggy. I had no idea the projections were that high until quite recently. It’s a pretty sobering thought actually. Cheers eh!

  • 163 Ned S // Nov 25, 2009 at 9:16 am

    What do you make of this Greg? :

    In one way, it pretty much accords with my current view that “they” have figured out just what is the absolute maximum that we can pay for housing and are going to do everything that is necessary to preserve that in real terms. But at the end it says “”Census data show that the number of dwellings built has exceeded the increase in the number of households by a large margin.” The ratio of the number of dwellings to the number of households has been rising over time with 8 per cent more dwellings in Australia than households in 2006. “Presumably, most of this surplus reflects holiday houses and second houses,” Mr Battellino said.”

    That just seems weird??? Are they really asking us to believe that there are heaps of Aussies who are so flash for cash that they build houses at todays prices and don’t bother renting them out? If so, it would seem that whatever “shortage” there may be could be addressed at a pretty fast clip – If it wasn’t for that factor? Strange – It isn’t gelling with me at all – Your thoughts please?

  • 164 Greg Atkinson // Nov 25, 2009 at 6:27 pm

    Ned I am not entirely sure the RBA is the best source of information regarding house price trends and it sort of worries me that they seem somewhat obsessed with home prices at present.

    Maybe there are a lot of people out there with 2 or more homes, but does the RBA or anyone else really have enough reliable data to say this is a major reason behind any apparent oversupply? In any case I fail to see why holiday homes in Tasmania for example would have any bearing on home prices in other regions anyway.

    I think we just have to wait until next year when the impact of higher interest rates and removal of some first home buyers money starts to bite before we will have a clear indication of where home prices may be heading.

  • 165 Ned S // Nov 26, 2009 at 4:18 am

    I think if I was the RBA, I’d be embarassed by coming out with a statement like “Presumably, ” blah blah blah … It would be more credible to say “It doesn’t make sense to us either – Maybe we’ve got our sums wrong – Or maybe there is a reason for it that does make sense – Hang on, we’ll go and check!” The word “numpties” comes to mind?

    And we’ve also got Ken Henry sounding convinced Oz is about to enter its 40 year Golden Age – Could very well be true. But I’d like to see a bit of caution attached to a projection like that – As in “IF the world doesn’t collapse in a screaming heap because of all the bad debt that is out there which our central banker type mates are currently having a bit of an experimental fiddle with trying to inflate away!”

    I also notice he made the statement “That, incidentally, does not necessarily mean abolishing the states. COAG can show real leadership.” – I’m sure Anna Bligh will be pleased to know Ken isn’t “necessarily” going to abolish her – Although I can see considerable potential merit in doing so! 🙂


  • 166 Ned S // Nov 26, 2009 at 4:55 am

    Where the heck do Rudd and co reckon they got the mandate for all of this stuff – “incidentally” “not necessarily” “abolishing the states” ??? Or is it just a matter of Oh dear, Yank house prices went down a bit so we can do whatever we want! If it wasn’t so obviously a case of big frogs in little puddles one could get the impression King Kong was going on a drunken rampage in a nunnery.

  • 167 Greg Atkinson // Nov 30, 2009 at 2:28 pm

    Ned – Ken Henry really scares me sometimes. He and Glenn Stevens perhaps need to work outside the public sector a little and live overseas for a while because to me they look out of touch.

    I do wish they would ease up talking about house prices, it simply makes me nervous. However as of a few days ago I ceased to be a home owner in Australia as I parted with my apartment in Sydney.
    I did not sell because of any unique insight into the property market, I simply sold because I am here in Japan and the apartment is back in Sydney 🙂

  • 168 Ned S // Nov 30, 2009 at 6:56 pm

    You can put Kev Rudd in the same boat I think Greg – A cradle to the grave beneficiary of welfare and government – Nevermind; (We let) These things happen.
    As to your home ownership in Oz – I wouldn’t do what you’ve done – As in I’d always maintain my tie to the umbilical chord through at least one property.
    But you have skills (and even opportunities I’d guess?) that I surely don’t.
    So we each try to make the best of things in our own ways I guess? Cheers mate! Ned.

  • 169 Senator13 // Dec 1, 2009 at 8:01 pm

    We are in some very interesting times indeed. Many of the statements coming out of the RBA have been very concerning with their very narrow focus on housing along as their main justification for raising rates. I wonder what the small business community are thinking, specifically retailers, in the lead up to christmas with the latest increase to rates.

    Coincidentally and very relevant to this blog topic I have been very busy over the last few months with the purchase of my first home. Specifically, an apartment, that I have now moved into and living in for the last month or so.

    For me personally I believed that it was the right time for me. Obviously I’m going to have a biased in wanting prices not to plunge – and want them to rise – but I do believe that I have done a lot of research, done a lot of looking and am very happy with my purchase.

    I still reckon that rates will continue to go up in the new year but think I have bought into a stable area that will be able to hold its price and been conservative with my estimates not to over extend myself… But like with all things time will tell.

    Also, I did find this article the other day that I did find interesting in relation to the increasing size of Australian houses.,28323,26418362-5013951,00.html

  • 170 Greg Atkinson // Dec 2, 2009 at 1:55 pm

    A good reason why it does not make sense to compare house prices across countries or even over time.

  • 171 Ned S // Dec 2, 2009 at 2:41 pm

    I’ve got to admit I’m tired of reading It’s a bubble so it’s gunna crash; Can’t tell you when; Or by how much – But trust me, it will!!!
    Simple facts are Aussies dig holes in the ground and swap the dirt for overpriced houses. Not a real healthy basis for an economy perhaps – But what to do in a global world?
    In truth it probably does beat trying to compete with Asia in manufacturing. And America in manipulating financial systems. Or Dubai in building ski slopes in the desert.

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