Category Archives: Property

Monetary policy is failing Australia, just like it has for other countries

Australia’s central bank, the RBA, like all central banks, are artificially lowering interest rates to manipulate the marketplace. Australia’s housing market bubble is one of the few in the world which hasn’t popped spectacularly yet. Some of this is due to the RBA lowering interest rates, Government’s offering home owner grants and other manipulations, but above everything is foreign buyers coming to the market and China reinflating the commodities boom after the GFC hit in 2008.

Australia’s housing market:
As most money in the economy is created through fractional reserve banking, that is, when people get new loans at a bank, central banks will continually tinker with the rate of interest to manipulate people’s decisions to get ever-higher loans. In particular, the RBA wants to get more home loans signed. As the following chars show, house prices have really only taken off again in Sydney and Melbourne. The rest of Australia has a flat housing market or a contracting housing market. House prices in Hobart have contracted for over six years; Adelaide’s prices has flat-lined for the same period, as has Brisbane. Most parts of regional Australia haven’t fared much better.

So here’s one of the big faults of having a central bank manipulating interest rates. If Tasmania, South Australia and Queensland were independent countries, the RBA would be halving the current interest rates to try to stimulate those housing markets. Whereas, if Victoria and NSW were independent countries, the RBA would be lifting interest rates right now to try to take the wind out of their property markets. In essence Tasmania is quickly becoming the Greece of Australia. Tasmania’s employment prospects are weak (really only 4 major manufacturers left in the State) and this reflects in its housing prices.

Under the managed economy Australia has there is little the States can do to stimulate investment in their economies. They can’t lower the company tax rate. They can’t alter the GST rate. They can’t manipulate interest rates. These are all managed at a national level. As such, the states earning all the wealth, such as Western Australia heavily subsidise the underperforming states such as Tasmania. For instance, in 2011-12, the Commonwealth derived $49.5 billion from W.A., while expenditure back to W.A. totalled only $29.5 billion, a difference of $20.0 billion. I think most Australia’s take for granted the amount of wealth and taxes that flow from Western Australia to the east coast.

Eventually the wealthy states get tired of bailing out other regions after a while. This has been the cash in Europe for centuries, and now several regions are looking for a way out. Barcelona is doing the heavy economic lifting in Spain, and Venice want’s to be out of Italy (Venetians pay 61 bn euros in tax and gets 21 bn euros back from Rome for services).

How much evidience does one need to show that central planning doesn’t work and leds to inefficient big government?

household_financesHousehold debt has peaked which is a huge warning sign to the RBA that people are more unwilling to take on larger loans.

housing_saving_ratioPeople are tighting their belts as economic uncertainty increases job insecurity. Households are holding onto cash even though the 9 members of the RBA board think interest rates should be low and people shouldn’t be increasing savings. Low interest rates punishes savers.

The RBA can’t manipulate interest rates and get away with it forever. People are waking up.

Australian houses worth less than loans on them

In February 2009 I wrote on my previous blog that:

Housing prices, just like the sharemarket go through cycles between boom and bust. However, in Australia I believe we have become very complacent. We think property is a sure fire way to wealth. We believe its normal for prices to increase 5 percent or 10 percent per annum (just like we believe we are recession proof because we haven’t had one since 1991). Throughout history house prices have always busted after times of major credit (debt) expansion. A crash will come to Australia soon – its just a matter of timing. Timing is everything.

Last week the Daily Telegraph reported:

Houses worth less than loans on them

    * Since 2008, the number of mortgages written each month has fallen by 15,000 properties.

    * More than one third of those who bought a house in 2008 now owe more than the house is worth.

    * Queensland is the state worst affected, with NSW house prices holding up the best.

    MORE than 35 per cent of homebuyers who purchased the properties after 2008 are facing the prospect of being in negative equity.

    And analysts warn that those homeowners with negative equity – their house being worth less than they owe on it – are likely to stay in that scenario for up to six years as property values remain “soggy” for some time to come.

    The damaging JP Morgan report, released yesterday, comes as the Reserve Bank released the monthly minutes from its October meeting, which points to further rate cuts on Melbourne Cup Day.

    The report shows large numbers of aspiring buyers are being locked out of the market as banks lift their lending requirements post-GFC. The level of new monthly mortgages being written has dropped from about 60,000 pre-GFC to about 45,000 this year.

    Digital Finance Analytics principal Martin North warned house prices are likely to remain weak for years to come and may even fall as they are still at historically high levels compared to the average income.

    The report defines negative equity as any house that has seen its value grow by less than 10 per cent – below inflation – in the past four years.

    Queensland is the worst hit state, with 54 per cent of properties purchased since 2008 in negative equity. NSW is least affected with just 24.5 per cent of homes affected.

    Since 2008 the national average home price has risen almost 10 per cent from $375,000 to $412,000, according to RP Data.

    But in the same period the national level of negative equity jumped almost six-fold, from about 6 per cent of homes bought before 2008 to a whopping 35.6 per cent of homes acquired in the past four years.

    JP Morgan banking analyst Scott Manning said despite the Reserve lowering interest rates to their lowest level in three years borrowers are finding it harder to get funds.

I called the debt cycle over back in 2008. Trillions of dollars, yen, euro, yuan etc (assets covered in debt) are yet to be liquidated. The Federal Reserve system and its banks are still covering up trillions of dollars of toxic derivatives. The Sub Prime meltdown was only just one small part of the picture. More people are slowly waking up and moving into precious metals. It’s not too late, just yet, to preserve wealth. There is a massive wealth transfer coming from debtors to savers.

– Scott

Cool Housing Charts – Aus, US, International


The following housing/property charts caught my eyes over the last three months (presented by Alan Kohler on ABC News)

Australian Housing

Property bear markets tend to last a long time, typically 15 to 20 years. Real house prices indicate many bad years ahead in Australia (price wise).

Per capita real wealth been going down for 7 years.

US Housing

International House Prices

Housing bubble? Singapore and Hong Kong place a stark contrast to the bubbles in Australia and China.

Steve Keen sees housing gloom


Professor Steve Keen lays down the facts of the current decline in Australia housing… His full analysis can be viewed >here<

Australian house prices have now fallen 6.1 per cent from their peak, and have been falling for 21 months, which is the longest downturn in nominal prices ever recorded by the ABS – the previous longest being the 12 months from the beginning of the GFC (which was terminated by my favourite government policy of all time, the First Home Vendors Boost).

I’m sure the usual spruikers will come out with why this is now the bottom, and it’s a good time to buy, and there wasn’t an Australian house price bubble, and the shortage will drive up prices, and…

So let’s put the current data in the context of the bursting of acknowledged overseas house price bubbles.

Firstly the inflation adjusted data: in real terms, house prices have now fallen 10 per cent from their June 2010 peak, and are back to a level they first reached in late 2007.

Now let’s compare the Australian experience to date with the Japanese and US experiences – where no one, not even Alan Greenspan, denies that there was a housing bubble.

The Japanese bubble peaked in June 1991; the US bubble peaked in May 2006; and Australian house prices peaked in June 2010. Figure 3 shows the three declines from the peak, and while the Australian experience so far is clearly better than the US’s, it’s only a whisker better than the Japanese experience to the same date after the peak.

The motive force behind Australia’s bubble was the same as in the US and Japan: accelerating debt drove rising house prices during the boom. Now in both those countries, decelerating debt is driving house prices down.

And even though the actual level of mortgage debt is still rising, it’s doing so at the slowest rate ever recorded by the RBA.

The odds are that the rate of decline will accelerate in the next year – since as Leith van Onselen pointed out yesterday, many baby boomers are relying on rising house prices to secure their retirements. Now that house prices are falling, and have been doing so for almost two years, many of these boomers – 74 per cent of whom earn less than $80,000 a year, with the average investor losing over $9000 a year on these “investments” – could decide to get out rather than continue to absorb losses. The unwinding of their leveraged positions could push mortgage growth below zero, and of course accelerate the house price fall.

Why Does Land Cost the Earth?

A thought provoking video on the Australian housing market – Why Does Land Cost the Earth? by Prosper Australia.

Quite well made, but the producers have omitted any critical analysis of the Reserve Bank of Australia (RBA) and how it manipulates interest rates. Monetary policy is the key structural issue to the housing bubble. Money is created every time someone gets a new mortgage from a bank. A top-down approach is needed.

Real Estate 4 Ransom from Real Estate 4 Ransom on Vimeo.

Steve Keen interview on Australian Housing Market

A decent interview with Steve Keen on the Max Keiser Show about the Australian debt (housing) bubble.

Chinese real estate market down 34% since June 2011


A compelling chart by Alan Kohler – the Chinese real estate index down 34% since June 2011. Kohler – “If anything, the slide is accelerating. I seem to remember something like that happening in the United States in 2007″

Fourteen months ago I discussed the Chinese real estate bubble in some depth on my previous blog. This post can be viewed here and part 2 here.

One quote from my article:

James Chanos sums up the current situation rather nicely. James is best known for seeing the problems of Enron and shorting its stock up until its collapse. He recently warned that China’s hyper-stimulated economy is headed for a crash, led by its housing bubble.

Its become very apparent… that China has embraced capitalism to keep the socialist elites entrenched, while more lately in the West we have embraced socialism to keep the capitalist elites entrenched. It’s a little bit of the opposite side of the same coin.

and of course a slow down in China will ultimately affect Australia’s resource boom in a big one (one of the few parts of our economy that has been doing well).

~ Scott

US property prices see drop of $1.7 trillion in value in 2010

Bloomberg: U.S. home values are poised to drop by more than $1.7 trillion this year amid rising foreclosures and the expiration of homebuyer tax credits, said Zillow Inc., a closely held provider of home price data.

This year’s estimated decline, more than the $1.05 trillion drop in 2009, brings the loss since the June 2006 home-price peak to $9 trillion, the Seattle-based company said today in a statement.

“It’s definitely going to continue into 2011,” Stan Humphries, Zillow’s chief economist, said in an interview on Bloomberg Television today. “The back half of 2010 looked horrible and 2011 should look like the mirror image of that.”

The drop in home values pushed more buyers underwater, meaning they owe more on their mortgages than their homes are worth, Zillow said. The percentage of homeowners with mortgages with so-called negative equity reached 23.2 percent in the third quarter, up from 21.8 percent at the end of 2009.

Housing demand has slumped since the start of the year as the government tax credit expired and unemployment hovers near 10 percent. Sales of existing homes in October fell to an annual pace of 4.43 million, compared with 5.98 million a year earlier and an annual average of 5.81 million over the past decade, the National Association of Realtors said Nov. 23. The median price was $170,500, down from $172,000 a year earlier….

“We think appreciation will be after 2014, essentially,” Humphries said.

Tax Credits End

More than $1 trillion of this year’s decline in home values occurred in the second half, Zillow said. Federal tax credits of as much as $8,000 for qualified first-time homebuyers and $6,500 for repeat buyers required a sales contract by April 30. ….

As many as 8 million homes are in some stage of default or foreclosure, known as shadow inventory, and may be offered for sale over the next five years, according to Morgan Stanley. The looming supply will combine with tight credit and questions about housing-finance regulation to reduce prices 6 percent to 11 percent from current levels, the analysts said.