Shareswatch Australia

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• 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 bubblepedia.net.au 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 shareswatch.com.au!

  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.
  Consider:
  *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 (http://www.housepricecrash.co.uk/mediawiki/images/1/17/Bubble-lifecycle.jpg -- 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 smh.com.au)

  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:

  http://dailyreckoning.com/the-unstoppable-second-mortgage-crisis/ ”

  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

  Ned:
  “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:
  http://www.budget.gov.au/2009-10/content/overview/html/overview_40.htm

  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”:

  http://www.demographia.com/dhi-ix2005q3.pdf

  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:

  http://www.jenman.com.au/news_alert.php?id=104

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

  Or this:

  http://www.jenman.com.au/news_subscriber_item.php?id=21&Section=Reports#brisbane

  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.”

  http://www.debtdeflation.com/blogs/2008/11/26/parliamentary-library-vital-issues-seminar/

  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 shops..so 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???):

  http://www.news.com.au/couriermail/story/0,23739,26029964-5011140,00.html

  http://www.news.com.au/couriermail/story/0,23739,26027894-5011140,00.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

  Ned,
  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

  Ralph:

  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?”

  Me:
  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

  Ralph:

  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

  Senator13:

  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.”

  http://www.news.com.au/couriermail/story/0,23739,24485656-5003402,00.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

  Ned:

  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.

  Ralph:

  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

  Ralph:

  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

  Ned:

  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.
  Cheers!

• 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:
  (link)

  (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

  Ralph:

  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 ***

  Explanations:
  * (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)

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