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blue skies

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  1. Steve Keen Housing nears the precipice Last month I argued that "The next two months’ data on home lending should be enough to confirm which way things are going" (The home lending dive will continue, May 18) – and the first of those two instalments, the ABS lending data released yesterday, does nothing to change my view that we are well past the turning point in the deflation of the great Australian housing bubble. Previously I highlighted the fact that the only group increasing their borrowing for housing was investors – owner occupiers have been backing away from borrowing since mid-2009. As Adam Carr noted yesterday, on an annual basis the number of new loans is down 25 per cent since June 2009, while at the same time the number of loans made to investors has risen 26 per cent. There are plenty of ways to slice up this data, but the telling figure is the rate at which owner-occupier buyers are leaving the market (see chart below). In both number and value terms the people who actually want to live in houses are increasingly sceptical of taking on massive debt to buy a home. In trend terms, the number of loans for all borrowers excluding refinancing of existing home-loans has fallen in nine of the last 10 months. In value terms, it's eight of the last 10 months. (Also nine and eight out of the last ten months respectively in seasonally adjusted Investors, as described last month, continue to increase their borrowing – which is masking some of the departure of owner occupiers in the aggregate figures. This line from the ABS release says it all: "In trend terms, the total value of dwelling finance commitments excluding alterations and additions decreased 0.8 per cent. Owner occupied housing commitments fell 2.4 per cent, while investment housing commitments increased 2.0 per cent." So the Great White Hope for the housing market is the White Shoe Brigade of housing investors. But here yet another reality check is required: even with the growth in investor lending of the last decade, the national debt stock, worth about $1.1 trillion in total, comprises $770 billion to owner occupiers and $330 billion to investors – so a lot more investors would have to jump into the market to counterbalance the owner occupiers who are bailing out. What these figures represent is the enduring belief amongst investors that "prices will always go up" for properties, even as potential home-buyers send the clear message "not if we have to borrow that much to buy them!" Expect this lending data to take some time to bite in terms of capital city auction clearance rates and prices – but bite they will. Next month's data should give some indication of how soon this will happen.
  2. What has actually happend to the market? I know I should read all 2000 posts but in a nutshell, has it come off the boil? Does it look like Ireland or the UK Now the worm turns! 10% drop by Christmass. We are all doomed
  3. House Prices at Maximum Risk Tuesday, 8 June 2010 – Melbourne, Australia By Kris Sayce * House Prices at Maximum Risk * Market News This Week ............................................................................................................................................................................. At least a third of your wealth is under imminent threat...But these two urgent evasive investments should protect you from the China collapse... Click here to find out what they are, right now. ............................................................................................................................................................................. There's almost no need for us to write anything in response to this article by Ross Gittins at The Age: "How Keynes, not mining, saved us from recession" We'll simply say that what Gittins doesn't appreciate is that Keynes' theories have helped pushed national economies - including Australia - further into recession or even depression. Our guess is that over the next twelve months references to Keynes and his diabolical theories will be fewer and fewer as more people realise how illogical and just plain dumb they are. But a search of "Keynes" using Google shows that perhaps the enthusiasm for the man and his crazy ideas are already waning: Keynes Google Search Click to enlarge Source: Google After reaching a peak last year as the stimulus money flowed, we're certain that all but the bolted-on Keynes groupies will begin to abandon ship through 2010 and into 2011. But you only have to read the following article that had slipped past our attention last week, so see just how ingrained the spending for spending sake belief is among many: "Kevin Rudd's BER bungle may have saved Australian economy" That's according to Daily Telegraph journos Andrew Carswell and Alison Rehn. The following two quotes from the article are a perfect example of what we wrote about last week. That the mainstream press has this bizarre notion that the private sector is full of lazy good-for-nothings, while the public sector is full of white knight heroes: "IT HAS been condemned as failure but the Rudd Government's Building the Education Revolution may have saved the Australian economy from posting a negative quarter of growth." "What was also clear from the Australian Bureau of Statistics figures was the continual drag business is having on the economy." What a drag all those entrepreneurs and private sector businesses are. Unlike the public sector which can spend, spend, spend using other people's money. We've been waiting for the commentary that argues wasteful spending is good for the economy. And by that I mean, not just commentary stating the benefits of building stuff, but commentary that sees overpaying for stuff as a boost to the economy. In reality they had to make that argument in order to remain consistent. And we're glad it's finally been made, because it helps to show what a crazy attitude these people have. But anyway, recently we wrote how quiet the property spruikers have been. Quiet? Well let's now change that to comatose. There's clearly something wrong with the poor little dears. They're usually so rabid with their views on the housing shortage, or never-ending house price rises that you can barely shut them up. But not recently. We've hardly heard a peep from them. Maybe they've read this article from yesterday's Herald Sun: "Oversupply slows Melbourne auction sales" [Gulp!] According to the article, "Up to 600 homes were usually up for auction each weekend in May and June, but now it was more like 800-900 - or 30 to 40 per cent more, he said." The "he" is Real Estate Institute of Victoria spokesman Robert Larocca. Can you believe it? An extra 200-300 homes up for auction and already there's talk of an oversupply of housing. Imagine what would happen if the 200,000 homes that comprise the so-called housing shortage were suddenly available. What would that do to prices we wonder? But the fact is, the housing market doesn't need 200,000 homes to come onto the market for house prices to plummet. In fact, all it needs is a small increase. An increase that gives buyers more choice. It will only take a tiny increase for buyers to think, "Well, we've missed out on that one, let's try for the other one round the corner." Or, even worse for the spruikers, "There's no rush, there's plenty of houses available, we'll take our time." The tiny increase in properties for sale has already started, and it looks like there will be more to come. We note the recent research from Moody's Investor Services, which according to The Australian: "Non-conforming mortgage delinquencies greater than 30 days continued to rise to 13.02 per cent from 12.13 per cent." Wow! That's a stat that hasn't been mentioned much. The spruikers have been eager to point out that prime mortgage arrears are miniscule, but we've heard stuff all about the subprime mortgage delinquencies. Make no mistake, 13% is a massive figure. Thirteen in every hundred of these mortgages is in real mortgage stress. And if you add in those that are only just managing to make the repayments then we're sure the mortgage stress is much, much higher. The error the spruikers and mainstream make is they believe the subprime market is detached and isolated from the rest of the market. What they fail to appreciate is that buyers don't care whether they're buying from a distressed seller or a happy seller. If the distressed seller is prepared to sell at a lower price it will have an impact on the prices of other properties. The only issue then is whether other sellers are prepared to hang in there and wait for buyers to pay more, or whether they also decide to sell for fear that prices will fall further. That's the psychology of buying and selling houses. It's no different to the psychology of buying and selling shares or buying and selling plasma TVs. If you think the price is going to rise then there's urgency for the buyer to buy now. But naturally there's less urgency for the seller to sell now. Hence the reason the housing bubble has been fuelled to such a high level. But if the attitude of buyers and sellers change and they believe prices could be lower, then sellers will be more keen to sell sooner rather than later and buyers will be prepared to bide their time. As is obviously happening now with the increase in the number of properties up for sale, and the lower clearance rates. Even if buyers and sellers believe that house prices will plateau (We love that theory. They thought the same thing in California you know!), odds are this will create more selling pressure than buying pressure. I mean, why buy now if you believe house prices will be the same in twelve months? You may as well save a bigger deposit. If you're renting, your rental payments are likely to be much lower than mortgage repayments. And if the house price is going to be the same in twelve months, why not wait. But as a seller why would you hold on if prices aren't going to be any higher in twelve months? Especially if you're downsizing. That's twelve months of interest payments that you'll make when you may not receive a better price when you sell. And the seller would also see that it makes more sense to rent for lower monthly payments rather than sticking with the higher mortgage repayments, when the house price will not have grown. A plateau-ing housing market in terms of the thought process of buyers and sellers is actually bearish for prices. It certainly isn't going to provide the breathing space the spruikers claim they want prior to the next leg-up in house prices. The fact is, the housing market is looking just as sick as the stock market at the moment. The only difference is that stocks are already going through the process of purging the unrealistic price gains they've picked up over the last twelve months. Stocks could have further to fall, we're not claiming this is the absolute bottom. But after a 13% drop in just a couple of months I'm certainly prepared to say that it's worth a punt, providing you're comfortable with the risks. As for house prices? We know house prices are just as risky as shares. Yet house prices are yet to fall. Given that, you'd have to say that buying an overpriced house right now with a mega-mortgage represents a bigger risk than buying shares without leverage. Cheers, Kris.
  4. Ready for a fall June 7, 2010 - 12:53PM Rates are on hold but the housing fire could already be out. THE Reserve Bank decided to keep interest rates on hold during the week, much to the relief of many a home owner, citing concerns about European economies along with satisfaction with current inflation levels. "Consistent with that outlook, and as a result of actions at previous meetings, interest rates to borrowers are around their average levels of the past decade, which is a significant adjustment from the very expansionary settings reached a year ago," Governor Glenn Stevens said. Advertisement: Story continues below But the damage to the housing market could already have been done, with some signs of moderation already emerging. The RP Data Rismark Hedonic Home Value Index released last week showed signs of softening in April, rising by just 0.2 per cent over the month, after 16 months of strong gains. A graph of the index's rolling quarterly capital gains highlights a distinct pull-back in April after a peak in December. Interest rates have jumped from 3 per cent to 4.5 per cent in as little as eight months. Unsurprisingly, that has had an impact on the number of loans approved, with housing finance falling for six consecutive months. After dropping a cumulative 14 per cent from October to March, housing finance is now at its lowest level since February 2009. The majority of this fall is due to owner-occupiers pulling out of the market - down by 24 per cent - as the first home owner's grant was reduced, while investors rose 9 per cent. The argument for why Australia didn't experience the collapse in property prices seen in the US and other parts of the world has always been that the supply of accommodation here was limited while the demand continued to grow. The stronger lending practices of our banks are another factor. We didn't have as many loans going to property buyers who obviously couldn't afford to pay them back. The NINJA loan (no income, no job and no assets) was non-existent here. But international commentators rightly point out that it is rare for bubbles in any kind of market not to burst. The renowned value investor and founder of global investment management company GMO, Jeremy Grantham, says both the British and Australian housing markets should decline by about 40 per cent. If they don't, he says, it will be the first time in history that a bubble has not behaved in such a way. We should be fortunate enough to avoid a property crash of the magnitude of that in the US but prices in any market rarely go only in one direction. They do fall, so don't be surprised if property values start to soften.
  5. Thinking of your comments a word comes to mind: Bigot
  6. ONE in four architects surveyed are now making less than €20,000 a year Almost two out of three are earning less than €45,000, according to the Royal Institute of Architects of Ireland (RIAI). It said more than half of architects surveyed are unemployed, working part time or working for themselves on small projects. Director of the RIAI John Graby said architecture was never a high-paying profession but in the last year salary rates have collapsed. He said evidence shows there seems to be a demand for architects. The organisation had a massive response to a recent initiative when just under 1,000 people availed of consultations at the RIAI Simon Open Door Weekend where members of the public booked one-hour consultations with an architect in exchange for a €50 donation to Simon. "A thousand consultations over a weekend strikes me as indicating that there’s a big pent up demand for smaller projects that could bring many of our members back from the dole," said Mr Graby. RIAI members said they are seeing a "definite increase" in the black economy with cash passing between client and builder. The organisation is proposing a VAT amnesty to builders for smaller projects. "This VAT holiday has been used in both Belgium and France and with builders paying income, PRSI and corporation taxes, the move was greatly tax positive for those states. "We’ve seen the success of the car scrappage scheme. We believe a similar scheme for household projects could have the same success," said Mr Graby. The RIAI also met with Government officials recently to discuss converting empty offices, apartments and houses into school buildings to replace portakabins. "Far from costing extra money, good design saves money, even on something as simple as having a design that allows for the use of a school as a community centre outside of school hours – something that is standard in Nordic countries. "Our members are confident that they can transform existing buildings into first class facilities, possibly giving NAMA its first social dividend," said Mr Grab Yer right Max Keiser coined a frase that i like "Peak Credit"
  7. First up : No minimum wage increase at all last year , reason GFC 20% increase in property in 2 years 5% increase in minimum wage in 2 years inflation running at 3% ? a year. Hummm sounds like the servants and behind again
  8. the fight against the misinformation spread by the mainstream press is an ongoing battle. So large is the battle that we're thinking of giving the Fairy Ruddfather a call. We'd like to know if he can spare a few million dollars of taxpayer money - $38 million should do it - to help support our campaign against the property spruikers. We'll let you know how we go... Meanwhile, what happened to the housing shortage? You know the one I'm talking about. The "chronic" housing shortage. The one where Australia is short by 135,000... sorry, 200,000 homes. The housing shortage which will reach - what is it - 400,000 homes by 2020. I'll tell you what's happened to it, it's gone up in a puff of smoke. We've final proof that it never existed. And as far as we can tell, barring a man-made or natural catastrophe, there won't ever be a housing shortage. I don't think I've laughed so much in a long time as when I read the headline in yesterday's The Age: "Flood of property listings to hit Melbourne market." "Flood". That implies a lot. It's the opposite of a "drought". A "flood" is a lot. According to the Microsoft Word dictionary, flood is a synonym to deluge, torrent and overflow. On the other hand, a "drought" is nothing. Hope you've got that. According to the story, "The Real Estate Institute of Victoria is predicting 1210 auction listings over the next two weeks..." But here's the bit that had us rolling on the floor in laughter, "A 50 per cent increase of new home listings expected over the next three weekends comes as auction clearance rates begin to falter on pricier home loans and weaker buyer confidence." In other words, despite the housing shortage of 200,000 homes, the property spruikers and mainstream press have had the crap frightened out of them by an extra 605 houses hitting the market over the next two weeks. Or to put it even simpler, if we average those numbers out, an extra 302.5 houses hitting the market next weekend is considered a "flood". And it's causing panic because it's seen as a "flood" of supply. Are these people insane? One week they're saying with a straight pen that there's a 200,000 housing shortage and the next week they're worried the whole market could topple over due to an extra 302.5 homes being offered for sale in one week. Doesn't make sense does it? By our calculations, 302.5 homes equals around 0.15% of the number of homes needed to address the so-called housing shortage. We'd have thought the spruikers would be cheering that the supply has increased. After all, with a shortage of 200,000 homes, surely an increase of just 302.5 properties isn't going to burst the bubble. This is the capacity increase they've been waiting for. Isn't it? Of course it isn't. The housing shortage has been the biggest myth, furphy... and dare we say it, lie so far in the twenty-first century. It has never had any factual basis to it. All they had to do was say it enough times and people would believe it. Now they're panicking. And I'll tell you why they're panicking. They're panicking because they've known all along that the housing shortage claim was just a massive hoax. And now it's been exposed. Of course, we've known all along that the housing shortage argument has been just a great big tissue of lies. We could see it from a mile off. Spread by every vested interest going around - the real estate industry, the property spruikers, the over-leveraged property investors, the over-leveraged banks, those allied to the property industry. You name them, they've all had their nose in the housing shortage trough. Conning buyers into paying top-dollar for a super risky asset. But still the excuses come. That's all they are, excuses. Nothing the spruikers or bankers come up with has any basis in fact or logic. It's a constant stream of excuses. They know that each one only has a limited shelf life and so they have to quickly think up another. The latest comes from the ANZ Bank. Assistant editor Shae Smith referred to the report in Money Weekend, so yesterday we glanced through the report for ourselves. And glanced is the word. Four pages it is. So short is the report that the disclaimer on the last page contains more words than the report it's disclaimering for! It would seem the aim of the report is to show there isn't a property bubble. That house prices have risen mainly because interest rates are lower. So because of that, there is no bubble and houses aren't over-priced. It's just rather a shame that after all the [cough] work they've put in, their own evidence points to how irrelevant their argument is. Let me explain... ANZ Bank head of property and financial system research, Paul Braddick starts off his report by getting on the front foot: "International comparisons of house price to income ratios have been widely used to suggest that Australian house prices are significantly overvalued. These analyses are not only dangerously simplistic but explicitly ignore a key component of the housing affordability equation - interest rates." [Gasp!] Who'd have thunk it, interest rates impacting house prices. As our French buddies would say, "Zut alors! C'est tres amazement!" Although it's funny because one of the other arguments put forward by the spruikers is that interest rates don't impact house prices. Funny old world innit? But Braddick continues: "In Australia, the house price to income ratio rose from an average of around 3 in the 1980s to an average around 5 since late 2003. That is, the median house price in recent years represents 5 times the average household's annual disposable income compared to 3 times in the 1980s." Okaaaaaaaaaaaaay, you've got us interested. Tell us more Paul... Ooh, a chart. We love charts: Interest Rates Averaged About 14% in the 1980s, and Only About 7% in the 2000s. There's the proof. Interest rates averaged about 14% in the 1980s, and only about 7% in the 2000s. But what strikes you about the chart? No rush, take your time. Well, I'll tell you what strikes me about the chart. If the chart is supposed to be the justification for high house prices, or rather that house prices aren't high, that they are just normal, how come house prices in the US and the UK fell? I mean, if a lower rate of interest justifies higher house prices and therefore not a bubble, why did this not prevent the house price slump overseas? ANZ subheads the report, "Debunking house price to income mean reversion." From what we can see it hasn't debunked it at all. It's just floated another excuse. Another excuse that has been immediately debunked with its own evidence. The fact that US and UK house prices fell suggests the price to income mean reversion must have occurred - at least to some extent. The ANZ hasn't debunked anything. It hasn't provided one jot of evidence to prove that there won't be a reversion to the mean. It shouldn't have needed us to point that out. It's fine for economists to come up with their little theories, but to then argue in favour of something which has already been disproved is a little rich. Of course, we've got no proof that there will be a reversion to the mean in Australia. But contrary to the claims in the report, ANZ doesn't have any proof that there won't be. In fact their own report does more to justify the case that there will be a reversion than it does to disprove it. But the following bit from the ANZ report really tickled our fancy more than you can imagine: "However, the major reason for this has been a structural (read permanent) reduction in interest rates." Wow! You heard it from ANZ first. Interest rates will remain permanently low. That means forever. Interest rates will never go back up. Ha, ha, ha... It's typical mainstream thinking. You know, the old levers and buttons theory. That the Reserve Bank of Australia (RBA) can pull levers and push buttons to manipulate the economy as it sees fit. And now you've got the banks making bold claims that they know for a fact that interest rates will be permanently low. Love it. But laughter aside, let's play ball with the ANZ. Let's pretend that they're right. I know that means suspending reality for a moment, but stick with me on this. If interest rates remain permanently low, is that a good thing? Well, the simple answer is no. Not when interest rates are being kept artificially low by the central bank and their banking buddies. Because the only outcome of cheap debt and money creation is that it will inflate the banks to wealth while simultaneously inflating the population to the poorhouse - Dickens style. With an artificially low interest rate the population is hoodwinked into thinking the interest rate will never go up. Simply because they've been told there's been a "structural (read permanent) reduction in interest rates." They're fooled into believing their wealth is increasing when in fact it's decreasing. But here's the real visible impact of what the ANZ claims. And it's another simple schoolboy error. The ANZ Bank has ignored the power of leverage. In my opinion that's a terrible mistake to make. Let's explain with an example... A loan of $100,000 at 14% interest equates to $14,000 in interest. An interest rate increase to 15% means $15,000 in interest on a $100,000 loan. In other words, the interest burden has increased by $1,000. A loan of $500,000 at 5% interest equates to $25,000 in interest. An interest rate increase to 6%, means $30,000 in interest on a $500,000 loan. But what if the interest rate - as predicted by some - increases to 9%? On a $500,000 loan the interest expense increases to $45,000. That's right, the interest burden has increased by nearly double. A similar sized move from 14% to 17% on a $100,000 mortgage would have just added $3,000 to the mortgage burden. Of course, according to the ANZ, an increase to 9% won't happen because interest rates are now permanently low. But look, I won't get too tied up with this ANZ report, because it really is just another excuse from the banks to try and prevent the inevitable. The Ponzi housing market is creaking at the seams. And the vested interests are doing everything in their power to keep it together. But the simple fact is that house prices can't go on rising forever. Goodness know how many times we've written that. But we're yet to see a well thought out argument to suggest it can. All we've seen are badly formed and argued excuses. There is a housing bubble, and that's a fact. And contrary to what Dr. Luci Ellis from the RBA claims, it's a credit-fuelled housing bubble. Anyone who takes a minute to view the RBAs own statistics on residential loans can see that. As we've pointed out several times before, the facts are that residential borrowing now stands at $938.8 billion. That's a 50% increase over just three years. And if you look at the chart below you'll see how it's gone ballistic over the last thirty years: The credit-fuelled bubble is real The Credit-fuelled Bubble is Real It's the debt that's done it. House prices aren't high because Australians love their houses more than anyone else - that's the craziest of all the arguments we've heard. And they certainly aren't high because of an actual housing shortage. House prices are high because of a credit-fuelled binge. You've seen the consequences of what happens when the Ponzi credit market screeches to a halt. It ends in disaster. As I pointed out last week, the credit market has hit top speed. It can't go any higher. Those that can afford to borrow have borrowed. Even those that can't afford to borrow have borrowed. In order for the credit Ponzi to keep going up it needs an ever greater increase in credit. And I can tell you that won't last. Any market, whether it's shares, houses, or cars is the same. It involves human interaction and human emotions. Up until recently the Ponzi has been allowed to grow because of the belief that someone else will overpay for the house that you overpaid for. The greater fool theory. But eventually the Ponzi ends. And when it does it's carnage. Owners realise their mistake and they start to sell. That's when you get the real flood of sellers, not the piddly 302.5 extra ones Melbourne will get this weekend. Sellers who are eager to get out before everyone else has the same idea. You see this kind of price action on the stock market all the time as sellers leapfrog to get out of a position. They do the same to get into a position. That's how the bubble forms. The rush to get out pushes the prices even lower until the price is oversold. The only - and it is the only - difference is that because housing is less liquid than share trading it takes longer for this effect to occur. It doesn't happen on a second-by-second or minute-by-minute basis like the stock market. It happens over the course of many months. And perhaps, just perhaps, the first stage of the flood is beginning. You can see the impact that just 302.5 extra house sales is having on the psyche of property spruikers, just wait until that trickle becomes a real flood. The property spruikers have gone quiet. Very quiet. They must be building an Ark waiting for the flood. Cheers, Kris.
  9. The self called Doctors reasoning was incorect about hyperinflation in the Weimar Republic and housing prices. With 25% of the population killed in the Great war who is gona need to build ?
  10. Experts say a flood of new properties coming on the market in the Australia's hottest markets could lead to a fall in house prices over the coming months. The comments come as new Real Estate Industry of Victoria figures reveal the number of properties on the market is growing despite clearance rates dropping from over 80% to around 73% in just a few weeks. SQM Research founder Louis Christopher says more owners are looking to sell their properties, especially in Melbourne, in order to take advantage of extreme price growth during the past year. "We are noting an increase in the amount of listings in all capital cities, and it's definitely up on the 2009 levels. I believe that more and more vendors are looking to sell their properties," he says. New figures from the REIV show 924 auctions were reported over the weekend, with another 900 auctions expected next weekend and a record 1,000 expected in two weeks' time, after the Queen's Birthday holiday weekend on June 12-14. "I think vendors are realising this is as good as it gets, and if they want to get a good price then they need to sell now. Normally during the period of winter you see volumes drop off, so if we were to continue to see these types of results in June, that would be abnormal." Additionally, Christopher says prices could drop as vendors realise demand has dropped and buyers aren't willing to pay as much as they used to. "Vendors aren't realising this at the moment, they don't understand what is happening and think demand is still high. I would argue that over the next few months, so many more properties will come on the market and vendors will start to understand and adjust those prices." David Airey, president of the Real Estate Institute of Australia, also says there could be some corrections over the next few months as vendors start to realise demand isn't as high as they would like. "The lowering of clearance rates over the past few weeks shows that demand is tapering off and prices aren't meeting buyers' expectations." Airey also said more sales are expected in Melbourne, where property owners hope to make the most of 20+% price increases over the past year. "It's always difficult to know what motivations are for selling, but it could be quite likely sellers think the boom can't go on forever and want to take the money and go. This could be the case due to the high number of auctions." The REIV figures show 924 properties were put on the market over the weekend, with a clearance rate of 73%. At this time last year, 667 properties were put up for sale with a clearance rate of 82%. The total value of auction sales reached $497.27 million, with the total value of private sales reaching $322.03 million. In Sydney, the biggest property market in the country, 259 properties were put on the market with only 181 selling, indicating a clearance rate of 64%. Total sales reached $133 million. Brisbane had just seven properties sold at auction out of 18 on the market, with total sales reaching just over $2 million. Adelaide saw 10 properties sold, with a clearance rate of 42% and total sales worth $3.8 million Related Items: * House prices up just 0.2% in April as demand continues to fall * Housing market slowdown worse than official auction data suggests: Expert * Expert warns housing prices could fall if borrowers stay away from property * House prices rise 1.4% during March * House price growth moderates as first home owners stimulus disappears
  11. Debt deflation Crowd at New York's American Union Bank during a bank run early in the Great Depression. Crowd gathering on Wall Street after the 1929 crash. Main article: Debt deflation Irving Fisher argued that the predominant factor leading to the Great Depression was overindebtedness and deflation. Fisher tied loose credit to over-indebtedness, which fueled speculation and asset bubbles.[16] He then outlined 9 factors interacting with one another under conditions of debt and deflation to create the mechanics of boom to bust. The chain of events proceeded as follows: 1. Debt liquidation and distress selling 2. Contraction of the money supply as bank loans are paid off 3. A fall in the level of asset prices 4. A still greater fall in the net worths of business, precipitating bankruptcies 5. A fall in profits 6. A reduction in output, in trade and in employment. 7. Pessimism and loss of confidence 8. Hoarding of money 9. A fall in nominal interest rates and a rise in deflation adjusted interest rates.[16] During the Crash of 1929 preceding the Great Depression, margin requirements were only 10%.[17] Brokerage firms, in other words, would lend $9 for every $1 an investor had deposited. When the market fell, brokers called in these loans, which could not be paid back. Banks began to fail as debtors defaulted on debt and depositors attempted to withdraw their deposits en masse, triggering multiple bank runs. Government guarantees and Federal Reserve banking regulations to prevent such panics were ineffective or not used. Bank failures led to the loss of billions of dollars in assets.[18] Outstanding debts became heavier, because prices and incomes fell by 20–50% but the debts remained at the same dollar amount. After the panic of 1929, and during the first 10 months of 1930, 744 US banks failed. (In all, 9,000 banks failed during the 1930s). By April 1933, around $7 billion in deposits had been frozen in failed banks or those left unlicensed after the March Bank Holiday.[19] Bank failures snowballed as desperate bankers called in loans, which the borrowers did not have time or money to repay. With future profits looking poor, capital investment and construction slowed or completely ceased. In the face of bad loans and worsening future prospects, the surviving banks became even more conservative in their lending.[18] Banks built up their capital reserves and made fewer loans, which intensified deflationary pressures. A vicious cycle developed and the downward spiral accelerated. The liquidation of debt could not keep up with the fall of prices it caused. The mass effect of the stampede to liquidate increased the value of each dollar owed, relative to the value of declining asset holdings. The very effort of individuals to lessen their burden of debt effectively increased it. Paradoxically, the more the debtors paid, the more they owed.[16] This self-aggravating process turned a 1930 recession into a 1933 great depression. Macroeconomists including Ben Bernanke, the current chairman of the U.S. Federal Reserve Bank, have revived the debt-deflation view of the Great Depression originated by Fisher.[20][21
  12. The National Asset Management Agency (Nama), which was set up to cleanse the banking system of toxic debts, has been revealed to be solely a bailout for builders and developers. The stark truth of the agency's core objective emerged this weekend as the Government's banking strategy lurched towards outright nationalisation. The deepening crisis in European stock and currency markets forced the Educational Building Society (EBS) into state control as it failed to find private investors, and now market analysts say that AIB, the country's largest bank, will be effectively nationalised by the end of the year. The unravelling of the Government's banking strategy -- which was designed to avoid nationalisation -- came as Frank Daly, the chairman of Nama, announced that its "core objective will be to recover for the taxpayers whatever it has paid for the loans in addition to whatever it has invested to enhance property assets underlying those loans. It is expected that Nama will have a lifespan of seven to ten years and when it has achieved its core objective, it will be wound up". Nama will buy loans worth €81bn from Ireland's main banks, but will pay just over €43bn for those loans. Mr Daly's comments suggest that the borrowers -- including the 10 largest property developers who owe a staggering €16bn -- will be expected to repay half of what they owe. Mr Daly said that due diligence by his staff had discovered remarkable flaws in the legal agreements that developers had signed to secure their loans. He said that "much of this lending was carried out in haste and inadequately secured and documented", making it difficult to pursue developers for the personal guarantees that many had offered to secure their loans. In effect, Nama has become the bailout for developers that the Government always claimed that it would not be. The creeping nationalisation of Ireland's banking also represents a major reversal of government policy. The latest bailout of the struggling EBS will cost taxpayers €875m -- €100m for a controlling stake in the company and a further €775m to cover its losses and repair its balance sheet. The move follows the nationalisation of Anglo Irish Bank last year and the effective nationalisation of the Irish Nationwide Building Society this year. The State also holds large minority stakes in AIB and BoI, plus warrants that could convert into a further 25 per cent holding in both banks, and is expected to increase its holdings further if they also fail to secure outside financing to meet rules on the reserves that they must hold against future losses. While market analysts expect BoI to keep the State at arm's length, AIB is likely to be majority State-owned by the end of the year. Of the six independent banks guaranteed by the State in September 2008, only Irish Life & Permanent is now free of State investment or control. BoI managed to raise €1.5bn by issuing new shares at a deep discount to its existing shareholders this month and got the deal away just before the markets crashed. AIB faces the prospect of raising €7bn, but the total value of the bank on Friday was just over €900m. "It just can't be done in these conditions," said one investment manager yesterday. "AIB will be nationalised unless there is a dramatic and unlikely recovery in the stock markets this summer." EBS's failure to secure outside investment was not unexpected as its hopes of staying independent were effectively dashed by the chaos in the financial markets caused by the collapse of confidence in the euro and the failure of a Spanish regional bank. But the EBS's inability to raise cash represents another blow for the Government's policy, which was meant to avoid nationalisation of the banking sector. The Government has pumped tens of billionsinto the banks to keep them solvent and is raising another €40bn to buy their property loans through Nama. Even though his building society has just received a €100m bailout from the taxpayer, EBS chief executive Fergus Murphy believes there can be no Nama-style rescue for distressed mortgage holders. "I don't think it's workable. I don't think it's there. I think moral hazard would make it very, very difficult. I don't currently see that structurally as something that could happen. Banks need to fund their balance sheets," Mr Murphy told the Sunday Independent when asked about the issue on the margins of his society's AGM last Friday. The EBS chief's response is sure to anger the thousands of homeowners struggling to meet their monthly repayments in the face of falling wages, rising interest rates and the ever-present threat of redundancy. According to the latest statistics, 33,321 mortgage accounts -- 4.1 per cent of all private residential mortgages in the State -- were in arrears for more than 90 days at the end of March. Total arrears for these distressed mortgages amount to €464.5m. Hmmmm me thinks Ireland is toast
  13. The REIV reports there were 756 auctions, with 562 selling. Which is indeed a clearance rate of 74%. Although we are interested to know what happened to the other 89 auctions which last week the REIV said were planned for this past weekend? Because if you add those auctions that obviously didn't happen into the mix, the clearance rate drops to just 66.5%. And based on the numbers from Australian Property Monitors (APM), as reported by News Ltd, "just $93.3m in property sold over the weekend, down substantially from $239.3m the previous weekend." Not to mention the big drop just two months ago when the press was going bonkers over the $1 billion worth of sales in Melbourne back in March. Of course we'll accept that's not comparing apples with apples as there's bound to be a difference due to seasonality. But we have received a number of emails from people who used to be in the real estate game suggesting that agents wouldn't report all of the auctions that failed to sell, giving the impression of a robust market. Whether this practice still happens, who knows? It would make sense though. Then there was this fab article sent in by JW: "Residex figures show 5347 Sydney streets now on millionaires' row" The article comes from The Daily Telegraph. It explains: "Boasting an address in millionaires' row used to be the preserve of Sydney's elite. But thanks to the property boom close to one-in-five Sydney streets can now claim the same bragging rights." And it's not just Sydney, apparently Melbourne has 4,222 streets with a median price above $1 million per house, and even little ol' Hobart has 13 streets with the median price above a million. We think that takes top billing as an example of Preposterous Property Spruiking. It seems pretty obvious to us that the Australian market is almost out of puff and therefore the spruikers - including the mainstream press - have to come up with any half-cocked statistic that makes it seem like buying property right now is a great idea. But is this genuinely the top of the market, just before the steep and scary decline? To be honest, we don't know. It looks and feels like it is. But something's holding us back from calling it. It just doesn't seem right. In our mind there are still too many people who agree with our view of a property bubble. For a contrarian that's an uncomfortable feeling. We prefer be stuck out on our own with no company but for the Goldbugs and stock market bears. In fact, privately we'd always thought the signal for the top of the housing market would be when the number of abusive emails into the Money Morning mailbag went off the chart. The type of email that would say, "We didn't buy a house because of you and now we never will because we can't afford it... you [email protected]#$%^d!" But that hasn't happened. In total we've only received about three emails of a similar nature over the last eighteen months. In other words, what I'm saying is that while all the signs shout "Housing Bubble", odds are the pop will happen when we least expect it. When no-one's looking. Right now there still seem to be too many people on the bubble-bursting bandwagon. Even so, a collapse in 2010 still looks to be the odds on favourite, but if we're honest we thought 2009 looked like an unbackable favourite at the time. We're often asked what will be the trigger for the collapse when it happens. While the banks are inseparable from the property market, our guess is the ultimate trigger for the collapse will come from the Reserve Bank of Australia (RBA). Just as the over-confidence of the government caused it to slash the wrists of the mining sector, thinking that because it had saved the economy it could do it again by killing the resources industry, so the RBA will suffer from its own bout of over-confidence. That's apparent from some of the recent speeches we've seen from the RBA, such as Dr. Luci Ellis' comments last week about there not being a credit-fuelled bubble in house prices. The RBA seems fond of pulling levers in its attempts to manipulate the economy, it's now just a case of when it will pull one lever too many. Stay tuned. The RBA meets for its monthly lever pulling session next week.
  14. Boy, 8, chained up by father and sold on the street child auction Passers-by break up the auction and hold onto the father until the police arrive AN impoverished father has tied his eight-year-old boy to a post and tried to auction him off to the highest bidder in China. Yong Tsui attempted to entice passers-by into making an offer with assurances that his son, Fai, was a hard worker, The Daily Mail reports. However, the auction came to a violent end after onlookers heard bidders asking how little they would have to feed the boy. Several people attacked Mr Yong, with one putting him in a headlock until police arrived. Mr Yong told officers in Wuhan, central China, that his wife had died three years ago and that he could no longer afford to take care of the boy. "He has no job, no home and no money. He says he wasn't interested in the money, just finding a home for the boy," said police, who have put boy into care. Mr Yong was reportedly inspired to auction his boy after reading about a rickshaw driver who chained his two-year-old son to a lamppost while he went out to work because he couldn't afford childcare Child abduction and child slavery is rife in China. Last week police in Wuhan freed two naked girls who had been locked in a basement for almost a year. They were rescued after a repairman found a note they had managed to smuggle out in a broken television. Well there you have it "the china economy" Yes they need our Iron Ore, to make chains to enslave there own.
  15. Why central banks are forced to raise interest rates in a currency crisis? May 25th, 2010 Share | We will continue from the currency crisis theme today. As we mentioned in our previous article, the threat of a currency crisis in Australia is not something we will dismiss out of hand. We rather be prepared for one and for nothing to happen than be unprepared and be caught with our pants down. Now, what can the government do if currency speculators launch an assault on the AUD? For one, the Reserve Bank of Australia (RBA) can use its foreign currency reserves to buy up its domestic currency in order to ‘support’ the AUD. This strategy works until the reserves are used up. Australia, being a chronically current account deficit country, does not rank well in terms of quantity of reserves for an advanced country. As you can see from this list, Australia has less than US$40 billion of reserves. Even tiny Singapore has 5 times as much as Australia. But what if the speculators’ assault prove to be too strong for the RBA to intervene? In that case, it would be forced to raise interest rates. As we quoted the Bank for International Settlements (BIS)’s 79th Annual Report in Bank for International Settlements (BIS) warning on stimulus spendings, External constraints could also bind for some countries. Particularly in smaller and more open economies [e.g. Australia], pressure on the currency could force central banks to follow a tighter policy than would be warranted by domestic economic conditions. When a currency is rapidly depreciates, it is a tempting target for hedge fund to short it. This can be done by borrowing large amount of money in that currency and selling it. In the absence of capital controls, the central bank, in its attempt to defend its currency, will have to raise interest rates to make shorting as expensive as possible. How does this work out in reality? For that, we managed to find this old 1997 article from the South China Morning Post. Why hedge funds cheer as Asian rates explode If central bank wins, funds make money in lending market and if it buckles they make hay in currency market, says Larry Wee If there were any doubts that hedge funds had a big part in East Asia’s currency chaos, the word in the market is that at least one major fund was behind the carnage in Hong Kong last Thursday when the key Hang Seng Index plummeted 10.4 per cent. The story goes that one fund professional—George Soros’s name is inevitably mentioned—had let it be known that he was heavily short on HK$. The reaction of the Hong Kong Monetary Authority (HKMA) was predictable: determined to defend Hong Kong’s peg to the US$, it forced interest rates sky-high. What the HKMA did not realize, however, is that this hedge fund had borrowed massive amounts of Hong Kong dollars in the money market. On top of this, it also shorted the Hong Kong stock market in a big way. So when overnight interest rates skyrocketed to 250 per cent, and stocks collapsed, the fund was overjoyed. The cruel irony is that, when HKMA governor Joseph Yam spoke with bravado last week that he would charge HK$ short-sellers punitive rates, the funds that had already loaded up with HK$ laughed all the way to the bank. This story explains just how the multibillion dollar hedge funds—the vast pools of money managed by the likes of Mr. Soros—have operated to get the best returns. Their blitzkrieg starts behind the scenes, in the money market where funds are borrowed and lent. The strategy is simple: Well before they mount an assault on a currency, the hedge funds borrow huge amounts of the very currency they want to bring down. Often they borrow as much as ten times the amount they intend to sell. When they start selling the currency, they know for sure that interest rates will spike up as a result—often from below 10 per cent to well past 100 per cent. Lending at, say, 150 per cent when you borrowed at 7-8 per cent is a nice business; it yields huge profits when you’re lending in the billions. Often these funds—apart from Mr. Soros Quantum Fun, other big ones include the Tiger and Omega funds—corner all available liquidity in the money market, so they become the only major lenders of the currency they have attacked. The art in this strategy is this: Even if the central bank succeeds in defending its currency and inflicts forex losses on speculators, the hedge funds would have made many times more in the lending market. What if the central bank buckles and allows the currency to fall? Then the funds hit a double jackpot, and wins in the currency market too. When the baht was attacked this way in June-end—again said to be led by Mr. Soros—the major funds walked away with profits of up to US$1 billion (S$1.58 billion) each, sources say. Not bad for a couple of months’ work. Four months later, it’s the turn of the Hong Kong dollar. The question on many people’s minds is whether the peg to the US dollar will be broken. But whether or not it does, the hedge funds have already made a pile by now. Sources say the big funds entered the money market a month ago to borrow Hong Kong dollars at around 7 per cent; they are now on-lending those dollars at sky-high rates. Last Thursday, when the speculative attack was at fiercest, overnight HK dollars cost as much as 250 per cent to borrow. The benchmark three-month HK interbank offered rate (Hibor) was fixed at 17.3 per cent, while six-month HK dollars funds cost 33 per cent. So the hedge funds will surely wind up this Christmas with record profits for the year. But they leave in their wake Asian economies with mountains of bad debt, crippled stock markets and surging inflation. When interest rates explode with the force witnessed in Asian markets, the first to plunge are the stock markets. The next to come under pressure are the real estate markets. And if interest rates stay high, the whole economy slows down as companies hold back expansion plans and individuals cut back on spending. Inflation inevitably rises and we get what economists call “stagflation”—a sticky combination of economic stagnation and inflation. What comes next—as Malaysian Premier Mahathir Mohamad warned over the weekend—is the threat of recession, where economic activities not just slow down but actually shrink. There is a good reason why economies are invariably left wrecked: the hedge funds target economies with serious and often hidden structural imbalances. Their currencies are usually most vulnerable to a sell-off and will topple with a hard shove. And before they launch their currency attack, they short-sell the stock market too, knowing that other, less agile, market players will have to sell stocks to get their hands on local funds. This stock sell-off frightens genuine foreign investors into selling out too; when foreigners sell off, preferably in a frenzy, they have to convert their foreign currency for repatriation—which only starts another round of selling on the besieged currency. That’s how it all snowballs. That’s how currencies collapse. And that’s how hedge funds like Mr. Soro’s Quantum make megabucks. One thing to note: hedge funds don’t wake up one day and decide to attack currencies out of the blue. They prepare beforehand.
  16. Why central banks are forced to raise interest rates in a currency crisis? May 25th, 2010 Share | We will continue from the currency crisis theme today. As we mentioned in our previous article, the threat of a currency crisis in Australia is not something we will dismiss out of hand. We rather be prepared for one and for nothing to happen than be unprepared and be caught with our pants down. Now, what can the government do if currency speculators launch an assault on the AUD? For one, the Reserve Bank of Australia (RBA) can use its foreign currency reserves to buy up its domestic currency in order to ‘support’ the AUD. This strategy works until the reserves are used up. Australia, being a chronically current account deficit country, does not rank well in terms of quantity of reserves for an advanced country. As you can see from this list, Australia has less than US$40 billion of reserves. Even tiny Singapore has 5 times as much as Australia. But what if the speculators’ assault prove to be too strong for the RBA to intervene? In that case, it would be forced to raise interest rates. As we quoted the Bank for International Settlements (BIS)’s 79th Annual Report in Bank for International Settlements (BIS) warning on stimulus spendings, External constraints could also bind for some countries. Particularly in smaller and more open economies [e.g. Australia], pressure on the currency could force central banks to follow a tighter policy than would be warranted by domestic economic conditions. When a currency is rapidly depreciates, it is a tempting target for hedge fund to short it. This can be done by borrowing large amount of money in that currency and selling it. In the absence of capital controls, the central bank, in its attempt to defend its currency, will have to raise interest rates to make shorting as expensive as possible. How does this work out in reality? For that, we managed to find this old 1997 article from the South China Morning Post. Why hedge funds cheer as Asian rates explode If central bank wins, funds make money in lending market and if it buckles they make hay in currency market, says Larry Wee If there were any doubts that hedge funds had a big part in East Asia’s currency chaos, the word in the market is that at least one major fund was behind the carnage in Hong Kong last Thursday when the key Hang Seng Index plummeted 10.4 per cent. The story goes that one fund professional—George Soros’s name is inevitably mentioned—had let it be known that he was heavily short on HK$. The reaction of the Hong Kong Monetary Authority (HKMA) was predictable: determined to defend Hong Kong’s peg to the US$, it forced interest rates sky-high. What the HKMA did not realize, however, is that this hedge fund had borrowed massive amounts of Hong Kong dollars in the money market. On top of this, it also shorted the Hong Kong stock market in a big way. So when overnight interest rates skyrocketed to 250 per cent, and stocks collapsed, the fund was overjoyed. The cruel irony is that, when HKMA governor Joseph Yam spoke with bravado last week that he would charge HK$ short-sellers punitive rates, the funds that had already loaded up with HK$ laughed all the way to the bank. This story explains just how the multibillion dollar hedge funds—the vast pools of money managed by the likes of Mr. Soros—have operated to get the best returns. Their blitzkrieg starts behind the scenes, in the money market where funds are borrowed and lent. The strategy is simple: Well before they mount an assault on a currency, the hedge funds borrow huge amounts of the very currency they want to bring down. Often they borrow as much as ten times the amount they intend to sell. When they start selling the currency, they know for sure that interest rates will spike up as a result—often from below 10 per cent to well past 100 per cent. Lending at, say, 150 per cent when you borrowed at 7-8 per cent is a nice business; it yields huge profits when you’re lending in the billions. Often these funds—apart from Mr. Soros Quantum Fun, other big ones include the Tiger and Omega funds—corner all available liquidity in the money market, so they become the only major lenders of the currency they have attacked. The art in this strategy is this: Even if the central bank succeeds in defending its currency and inflicts forex losses on speculators, the hedge funds would have made many times more in the lending market. What if the central bank buckles and allows the currency to fall? Then the funds hit a double jackpot, and wins in the currency market too. When the baht was attacked this way in June-end—again said to be led by Mr. Soros—the major funds walked away with profits of up to US$1 billion (S$1.58 billion) each, sources say. Not bad for a couple of months’ work. Four months later, it’s the turn of the Hong Kong dollar. The question on many people’s minds is whether the peg to the US dollar will be broken. But whether or not it does, the hedge funds have already made a pile by now. Sources say the big funds entered the money market a month ago to borrow Hong Kong dollars at around 7 per cent; they are now on-lending those dollars at sky-high rates. Last Thursday, when the speculative attack was at fiercest, overnight HK dollars cost as much as 250 per cent to borrow. The benchmark three-month HK interbank offered rate (Hibor) was fixed at 17.3 per cent, while six-month HK dollars funds cost 33 per cent. So the hedge funds will surely wind up this Christmas with record profits for the year. But they leave in their wake Asian economies with mountains of bad debt, crippled stock markets and surging inflation. When interest rates explode with the force witnessed in Asian markets, the first to plunge are the stock markets. The next to come under pressure are the real estate markets. And if interest rates stay high, the whole economy slows down as companies hold back expansion plans and individuals cut back on spending. Inflation inevitably rises and we get what economists call “stagflation”—a sticky combination of economic stagnation and inflation. What comes next—as Malaysian Premier Mahathir Mohamad warned over the weekend—is the threat of recession, where economic activities not just slow down but actually shrink. There is a good reason why economies are invariably left wrecked: the hedge funds target economies with serious and often hidden structural imbalances. Their currencies are usually most vulnerable to a sell-off and will topple with a hard shove. And before they launch their currency attack, they short-sell the stock market too, knowing that other, less agile, market players will have to sell stocks to get their hands on local funds. This stock sell-off frightens genuine foreign investors into selling out too; when foreigners sell off, preferably in a frenzy, they have to convert their foreign currency for repatriation—which only starts another round of selling on the besieged currency. That’s how it all snowballs. That’s how currencies collapse. And that’s how hedge funds like Mr. Soro’s Quantum make megabucks.
  17. MADRID (AP) -- Four Spanish savings banks have announced plans to merge amid concerns over solvency in the sector. Cajastur, Caja de Ahorros del Mediterraneo, Caja Extremadura and Caja Cantabria said they had reached an agreement to form a group that would "strengthen solvency and assets of the participating banks." The move announced late Monday came after the Bank of Spain bailed out Andalusian savings bank Cajasur over the weekend, after merger talks with savings bank broke down. It was the second savings bank bailed out by public money, after the central bank took control of Caja Castilla-La Mancha in March 2009. The merged entity would have a total of euro135 billion ($167 billion) in assets, making it Spain's third-biggest savings bank after La Caixa and Caja Madrid and the country's fifth largest bank overall. Caja de Ahorros del Mediterraneo and Cajastur would hold 40-percent stakes each, Caja Extremadura 11 percent and Caja Cantabria 9 percent. The four would retain their management boards and branch networks but would combine operations such as risk control and credit assessment. Spain's banking sector has withstood the international financial crisis, owing to strict regulations that forced banks to set aside provisions during an economic boom fueled by construction and consumer spending. But smaller savings banks, heavily exposed to the real estate sector and burdened with a rising rate of bad loans have suffered considerably with the recession and the collapse of the building industry. On Monday, the International Monetary Fund issued a report saying the country's banking sector was sound, but "under pressure" and in need of consolidation. The IMF called on Spain to radically reform its labor market, saying its recovery from financial crisis was weak. Europe's top job creator two years ago, Spain now has the region's highest unemployment rate at just over 20 percent. The country is also applying reforms it hopes will bring its large deficit back from 11.2 percent of gross domestic product in 2009 to within the EU limit of 3 percent by 2013.
  18. By Dan Denning • May 25th, 2010 • But first, to Spain! Markets in Europe and America tanked overnight again and the euro weakened against the dollar. Investors still aren't sure – or have no idea – if the EU $1 trillion rescue package actually solves the big debt problems in Europe, or merely kicks the can down the road. A little can kicking can buy you some time, though, so it's not entirely a bad thing. In Spain, a bank in Cordoba owned by the Catholic Church – CajaSur – was seized by Spain's central bank after refusing a merger. Standard and Poor's estimates it will take €35 billion to rescue Spain's banking sector from a decade-long binge on housing lending. According to Bloomberg, housing loans account for half the assets of the Spanish banking sector. Hey! That sounds familiar. Over half of Australian banks' local lending is to the housing market. But of course, Spain had an irrational boom in property prices driven by credit and bank lending. Australia has a genuine property boom, singular in the world in that it's been driven by immigration, a housing shortage, a cultural preference for owing large sums of money to banks for long periods of time. By the way, the above comments were ironic. You know how we feel about the housing market here, built as it is on bedrock of debt.
  19. Whats really happening? Why sell good shares to have cash that get next to nothing in the bank? Can it be borrowed money getting out of the markets? All the money thats bein pumped in to the economies is going up in smoke. Will it bounce? Can the world afford a nother stimulas? So many questions no answers
  20. Deleveraging returns Published in May 25th, 2010 Posted by Steve Keen in Debtwatch 5 Comments Market economists have spent the past few months searching each major data release for confirmation of their hope that the economy is returning to growth and that a ’sustainable recovery’ is underway. Most currently argue that the fundamentals in Australia are good – low unemployment, a strong recovery in equity markets (notwithstanding the 14 per cent sell-off in the past month), a significant number of companies’ results beating expectations and so on. The same economists and commentators (none of whom actually saw the GFC coming) then argue that if the recovery from the GFC is derailed, it will be because of an external shock – a China-led commodities slump, the sovereign debt crisis, or an abrupt carry trade reversal when the Fed starts raising rates (though the recent slump in the $A implies this is taking place now without the Fed’s assistance). What these analyses overlook is the internal indicator which enabled me (and handful of other non-orthodox economists) to anticipate the GFC in the first place: the ratio of debt to GDP, and its rate of change. On this indicator, even if none of these other ’shocks’ eventuate, Australia still faces either a recession, or a return to the unsustainable trends that set the stage for the GFC. To understand why, we need to think back to the early 1980s when the Hawke/Keating government allowed foreign banks to flood into Australia, and when “Bondy” and “Skacy” were regarded as national heroes—rather than as the Ponzi merchants that subsequent events proved them to be. This public embrace of Ponzi finance gave official backing for what was in reality a debt-driven economic system, rather than one based on real economic growth. Rising debt became increasingly important for sustaining economic activity, and a culture of addiction to credit began that lasted (despite major disruptions such as the late-1980s interest rate blow-outs and the early 1990s recession) until 2008. Australians became increasingly comfortable with high levels of mortgage debt, because house prices were also rising; but their ‘comfort’ resulted from increases in asset prices that were themselves caused by even larger increases in debt. That process came to an abrupt halt as 2007 came to an end, and the sudden withdrawal of debt-financed spending is what really caused the GFC, both here and overseas. Australia then sidestepped the start of the GFC partly by fair means—a huge government stimulus, substantial interest rate cuts and a China-led export boost—and partly by foul—enticing households back into mortgage debt via the First Home Vendors Boost. This government policy temporarily reignited the debt culture, but the continuing GFC (and a series of RBA rate rises) has finally convinced Australian households to return to the pre-FHVB tendency to delever—mostly through a sharp decline in owner-occupier borrowing, as I discussed last week in “Mortgage Finance Falters” (the data in these charts doesn’t yet reflect the substantial drop-off in owner-occupier mortgage debt; this may be because these aggregate debt figures aren’t seasonally adjusted, whereas the ABS data on new finance for housing is seasonally adjusted). Small business borrowing has also seen dramatic declines. In fact, only one major group of borrowers – housing investors – continues to leverage up, based on current data. But even they seem to be reaching a plateau at about 25% of GDP—and as might be expected, the increase in investor mortgage debt was triggered by the FHVB. Prior to its introduction, investor mortgage debt was trending down from 25.6% of GDP towards 24.75%. It then started to rise as the FHVB-inspired bubble took off, and hits its new peak of 26.2% in March 2010. Widespread deleveraging is therefore the elephant in the room for economists hoping to find evidence of ’sustainable growth’ in company reports, and marginal changes to the unemployment data. If deleveraging gather pace, then unemployment will rise; if instead debt levels rise, then unemployment will fall, but based on an unsustainable trend in debt to income. In the chart below I have used RBA data to demonstrate why this is so (the source files are D02Hist, G07Hist, and G12Hist, which themselves repackage ABS data). The key reason is that the more Australians borrow in relation to incomes, the greater is the proportion of aggregate demand that is simply recycling of debt capital. While this causes a boom as debt levels rise, this process also works in reverse. I calculate the proportion of aggregate demand that is debt-financed by dividing the annual increase in debt by the sum of GDP plus that change in debt. From contributing nothing to aggregate demand at the end of the early 1990s recession, debt-financed demand rose steadily to hit a peak of around 19 per cent of demand in 2008. Now, as private deleveraging gathers pace, aggregate demand is plunging, meaning that nearly a fifth of Australia’s ‘income’ is in jeopardy because Australians are no longer willing to borrow to fund the additional spending. The First Home Vendors Boost—which caused the turnaround in private deleveraging that is evident in the data for 2009—and the increase in government debt stopped the debt contribution from turning negative (as it did in the USA). Continuation of that trend is unlikely this year—and even if it did continue, we would be basing our continued prosperity on a return to the debt-induced growth that caused the GFC in the first place. The final, disturbing aspect of the chart below is how closely unemployment correlates with debt-funded demand changes: since 1980, the debt contribution to aggregate demand explains 90% of the level of unemployment. While correlation does not prove causation—and there are more causal factors than just the change in debt—in this instance the causal mechanism that would lead to recession and high unemployment is so simple that only a neoclassical economist could contest it. Our economy is demand-driven; as debt’s contribution to demand falls, aggregate demand slumps, and the number of jobs that can be supported by aggregate demand will also fall. The odds are that Australia is headed for a very painful deleveraging-induced recession. We can only hope that the problem is not amplified by the “external shocks” from the still-extant GFC
  21. According to the Real Estate Institute of Victoria (REIV): "The clearance rate this weekend was 74 per cent, a result consistent with the last few weeks and signifies ongoing healthy demand for residential homes at auction." Oh, well, that's alright then. The REIV reports there were 756 auctions, with 562 selling. Which is indeed a clearance rate of 74%. Although we are interested to know what happened to the other 89 auctions which last week the REIV said were planned for this past weekend? Because if you add those auctions that obviously didn't happen into the mix, the clearance rate drops to just 66.5%. And based on the numbers from Australian Property Monitors (APM), as reported by News Ltd, "just $93.3m in property sold over the weekend, down substantially from $239.3m the previous weekend." Not to mention the big drop just two months ago when the press was going bonkers over the $1 billion worth of sales in Melbourne back in March. Of course we'll accept that's not comparing apples with apples as there's bound to be a difference due to seasonality. But we have received a number of emails from people who used to be in the real estate game suggesting that agents wouldn't report all of the auctions that failed to sell, giving the impression of a robust market. Whether this practice still happens, who knows? It would make sense though. Then there was this fab article sent in by JW: "Residex figures show 5347 Sydney streets now on millionaires' row" The article comes from The Daily Telegraph. It explains: "Boasting an address in millionaires' row used to be the preserve of Sydney's elite. But thanks to the property boom close to one-in-five Sydney streets can now claim the same bragging rights." And it's not just Sydney, apparently Melbourne has 4,222 streets with a median price above $1 million per house, and even little ol' Hobart has 13 streets with the median price above a million. We think that takes top billing as an example of Preposterous Property Spruiking. It seems pretty obvious to us that the Australian market is almost out of puff and therefore the spruikers - including the mainstream press - have to come up with any half-cocked statistic that makes it seem like buying property right now is a great idea. But is this genuinely the top of the market, just before the steep and scary decline? To be honest, we don't know. It looks and feels like it is. But something's holding us back from calling it. It just doesn't seem right. In our mind there are still too many people who agree with our view of a property bubble. For a contrarian that's an uncomfortable feeling. We prefer be stuck out on our own with no company but for the Goldbugs and stock market bears. In fact, privately we'd always thought the signal for the top of the housing market would be when the number of abusive emails into the Money Morning mailbag went off the chart. The type of email that would say, "We didn't buy a house because of you and now we never will because we can't afford it... you [email protected]#$%^d!" But that hasn't happened. In total we've only received about three emails of a similar nature over the last eighteen months. In other words, what I'm saying is that while all the signs shout "Housing Bubble", odds are the pop will happen when we least expect it. When no-one's looking. Right now there still seem to be too many people on the bubble-bursting bandwagon. Even so, a collapse in 2010 still looks to be the odds on favourite, but if we're honest we thought 2009 looked like an unbackable favourite at the time. We're often asked what will be the trigger for the collapse when it happens. While the banks are inseparable from the property market, our guess is the ultimate trigger for the collapse will come from the Reserve Bank of Australia (RBA). Just as the over-confidence of the government caused it to slash the wrists of the mining sector, thinking that because it had saved the economy it could do it again by killing the resources industry, so the RBA will suffer from its own bout of over-confidence. That's apparent from some of the recent speeches we've seen from the RBA, such as Dr. Luci Ellis' comments last week about there not being a credit-fuelled bubble in house prices. The RBA seems fond of pulling levers in its attempts to manipulate the economy, it's now just a case of when it will pull one lever too many. Stay tuned. The RBA meets for its monthly lever pulling session next week. Cheers, Kris.
  22. D' ho, The pot calling the kettle black! Retailers are at best middle men they dont produce any thing. At worst they are speculators driving up prices. Just what commission does a realestate agent charge?
  23. Debt kills off your survival options The common theme in pretty much every corporate collapse is that debt makes it extraordinarily difficult for a struggling company to survive. Like many of our fallen businesses, Clive Peeters tried to expand rapidly during the boom years, using debt to open new stores and take out some smaller competitors. Servicing that debt is fine when the economy is going well and consumers are buying plasma TVs, but when the downturn hits, that debt becomes a millstone. Ironically, the Government's stimulus payments in 2009, actually might have masked the true state of the company's fall for 12 months or so As we learn more about what actually went on in Australia's big corporate collapses, it is astounding to see that on most occasions some sort of "accounting irregularities" were rife. So it was with Clive Peeters, which was hit with an accounting scandal when a payroll officer allegedly stole $20 million and used the cash to purchase a property portfolio. Plenty of entrepreneurs would have sympathy with any business that gets hits by a rogue employee, but the lesson here is that the numbers are sacred. A culture that allows accounting irregularities of any sort to remain undetected, or that allows problems to be hidden from the view of auditors or shareholders puts itself in the firing line.
  24. * Foreigners buy $14.9b in property CASHED-UP foreigners snapped up $14.9 billion worth of houses and land in Australia last year, including $2.49 billion worth of existing homes. The Federal Government refused to release but they were in a Foreign Investment Review Board (FIRB) report that was quietly posted online last week. It shows the Government issued 4827 real-estate approvals to foreign investors last year for commercial and residential properties. About half the approvals were for temporary residents wanting to buy a house as their principal residence. A further 988 approvals were granted to investors to buy vacant land for residential subdivision or to build a houses, according to figures obtained by The Sunday Telegraph. The report shows Victoria is the most sought-after state by foreign investors wanting residential real estate, followed by Queensland and NSW. But the figures are incomplete, because the Government changed the rules in April last year so foreigners no longer had to notify the FIRB if the property was to be their principal place of residence. Under foreign investment laws, non-Australian residents can buy a dwelling for their principal place of residence. The Government has been criticised for relaxing foreign investment laws, blamed for driving up house prices. Although the Government announced last month that it would adopt a more stringent approval process, experts claim the latest changes will have little effect on the market. Opposition finance spokesman Joe Hockey said it was clear that foreign investment was having an upward impact on housing prices. "The Government has been all over the shop on foreign-investment rules in the past 12 months," he said. "What is clear is that their rules making it easier for foreigners to buy real estate have put upward pressure on housing prices." Immigration-law specialist David Stratton said the new amendments focused on penalties for non-compliance. "In one sense, little has changed: foreign residents can still purchase Australian properties and, in particular, people in Australia on temporary residence visas can still purchase existing dwellings," Mr Stratton said. Foreign-owned companies are allowed to buy second-hand dwellings to house their Australian-based staff. A developer can sell an unlimited number of dwellings, either off the plan or newly constructed, to foreigners, provided the properties are advertised locally. In 2007-08, the biggest foreign investment in both residential and commercial real estate in Australia was made by buyers from the US, Britain and the United Arab Emirates. The following year, Singapore investors topped the list, followed by the US and Britain. The Opposition has called for a comprehensive study of foreign real-estate investment. Hmmmmmmmm
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