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blue skies

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  1. Is it all “Supply & Demand”?

    Published in May 11th, 2010

    Posted by Steve Keen in Debtwatch

    43 Comments

    As we head towards the federal election, the term ‘housing shortage’ will be trotted out again and again by politicians. Their rhetoric will rely on the deeply ingrained received wisdom that Australia has a ‘housing shortage’, and no politician will want to do the hard work of differentiating between a genuine shortage in housing stock (which we don’t have) and a shortage of ‘affordable housing’ which we do have.

    And why won’t they acknowledge this distinction? Simply, because admitting that it is only the prices of houses that are dysfunctional, and not simply the supply, would be too much even for their loyal voters.

    Once groupthink has infected politicians and media commentators, reason goes out the door. That’s why I find it infuriating to hear constant reference to Australia’s soaring prices being simply a product of a ’supply and demand’ imbalance.

    The supply-demand argument is easy to sell. The reasoning goes that there are too few houses being built, and the housing market is just like any ordinary commodity market, so the price rises.

    This pricing model is superficially appealing at the level of everyday consumer items – corkflakes, for instance (though even here it’s a flawed logic, as I explain in these two [1] [2] rather technical papers). But the model breaks down completely in asset markets. If the price of corkflakes rises due to supply constraints, consumers switch to complementary goods. They don’t rush to the supermarket to buy more cornflakes at the higher price.

    But in asset markets, consumer behaviour is turned on its head. Instead of being more reluctant to buy an asset that is rising in price, buyers reason that they’d better get in quick and buy while the asset is still within their reach. So higher prices actually stimulate demand, and this behavior often reaches a fever pitch a short time before an asset bubble deflates.

    In other words, prices have a perverse impact upon asset markets, and it is simplistic to interpret how asset prices behave simply on the basis of “supply and demand” analysis.

    It’s also rather hard to sustain the “supply and demand” argument on the basis of the data alone—because it if were true, house prices should have been falling (relative to the price of other goods) for most of the last thirty years.

    Firstly it’s obvious that real house prices have been rising in real terms. The next chart deflates the ABS’s index for established houses (ABS 641601 and 641603) by the CPI. Houses are now two and a half times as expensive—relative to other goods—as they were in 1986.

    And yet for most of that period, we’ve been building accommodation at a faster rate than population has been growing—so on “supply and demand” logic, house prices should have been falling for all but the last couple of years.

    Have a look at the chart below. The average number of people living in each dwelling in Australia in the year 2007 was around 2.6 (the black line)—and it was higher in earlier years. To keep the ratio of people to dwellings constant, we would need to build a new dwelling for every 2.6 new people. In fact, on average between 1986 and 2009, we’ve been building a new dwelling for every 1.8 new Australian residents. Only in the last couple of years—after the GFC hit—has population grown more rapidly than we’ve added accommodation.

    This is where neo-classical economists’ ’supply-demand’ arguments fail the common-sense test. If we’ve consistently built more new dwellings than required by the number of new people in Australia, and if “supply and demand” explained everything, then real prices should have been falling for all but the last couple of years (in the past two years a new dwelling has been built for approximately every 3 new people – see chart).

    News last week that Sydney has just recorded a six-year high in building approvals (http://www.smh.com.au/business/property/big-surge-in-number-of-new-homes-approved-20100505-uas8.html) will be welcomed by politicians and commentators wanting to argue that the ’shortage’ is being addressed.

    But if ’supply and demand’ cannot explain the rise in house prices over the past quarter century, then this additional supply—when it comes online—may have an equally perverse impact: it might accelerate a downturn caused by the end of the great expansion in household debt that has been the real force driving house prices up. The new spike in approvals may actually create an oversupply after the great inflation caused by rising debt has already ended.

    We need to bury the ‘housing shortage’ myth, but to do so requires a shift in thinking. Economists follow a model of the economy that is as realistic as the view that the Earth is the centre of the universe, and the Sun, Moon and planets revolve around it. It took the GFC to expose just how unrealistic this model is—a model that ignores credit and pretends that everything happens in equilibrium. We instead live in a credit-driven world which is always in disequilibrium. Until economists and policy makers recognize this, we are likely to have policies that address symptoms but not causes, and ultimately make the problem worse rather than better.

    If we are to address the real causes of the GFC, then policy makers have to confront the problem of an out of control credit system that drove mortgage debt up by a factor of five and turned the Australian housing market into the world’s last surviving Ponzi Scheme.

    Then again, it is most likely too late – the current frenzy of house buying and house price growth is completely decoupled from any sense of scarcity in the market, and has all the signs of a balloon about to burst.

  2. If you aren't Bardon your knees should be getting rather chafed by now.

    Bardon and Aussie Boy are one in the same that is the conclusion I have.

    Bardon lives on this computor.

    Having 2 names makes it look like he doesnt spend every minute hear

    Also gives a advantage when taking opposite view because he loves to try to destablise people.

    He has put down many people who are undeserving.

    Steve Keen for a example he felt the need to call him amoungst other things of oxygen waster, then months later claims he does not hate him.

    In all probablity his life style is pure fiction

    Really it is hard to feel any pity for him though he is worthy of it.

  3. Irish ten-year yields head towards 6pc tipping point

    Country facing funding pressure as extreme risk aversion hits markets

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    By Emmet Oliver

    Friday May 07 2010

    Ireland is facing serious funding pressures if stresses should continue in European bond markets as traders desert Irish government bonds for safer alternatives.

    Irish 10-year bond yields were heading towards the symbolic tipping point of 6pc last night as extreme risk aversion swept through the markets. A bond auction by the National Treasury Management Agency (NTMA) in this environment is unthinkable.

    Short-term money was also escalating in cost with Irish two-year government bond yields hitting 4.3pc, a rise of 78 basis points in just one day. The worry for the NTMA and the Government is that Ireland, apart from Greece, was being singled out for special attention, with a large-scale sell-off in Irish two-year bonds.

    Despite concerns about their fiscal deficits both Italy and Portugal were spared the scale of sell-off that afflicted Ireland.

    All eyes will be on the markets today to see if yesterday's market drops are sustained.

    Ireland has no immediate need to raise money having pre-funded more than 50pc of its requirement for 2010. It also has cash balances of about €20bn to fall back upon. However, a disruption to its series of auctions is not welcome and the continuing focus on peripheral economies of the eurozone makes for nervous times at the NTMA.

    Ireland has received complimentary coverage from bond strategists and fixed-income specialists in recent months, but when risk aversion sets in the sell-off tends to hit smaller economies worse. Most treasury managers and bond strategists are not mandated to hold Irish government securities, whereas they generally must hold some level of US Treasuries, German bunds and UK gilts.

    The last period when Irish government bond yields reached these elevated levels was March of last year, when some market commentators talked about a potential IMF intervention.

    The Government's budgetary adjustments brought relief on that occasion, although the situation was also helped by positive comments from the then German finance minister, who said weaker eurozone members would be helped if they got into trouble.

    A eurozone-wide solution to the current crisis is likely to benefit Ireland. A Eurobond or a bout of quantitative easing would lower Irish government bond yields and possibly reduce the debt to GDP levels.

  4. Moody's warns UK banks 'at risk of Greek contagion’

    Emily Ford

    UK banks are at serious risk of falling victim to “contagion” from the Greek debt crisis, the credit rating agency Moody’s warned today.

    The sheer size and “vulnerability” of the Britain’s banking sector would present a threat to the economy if the UK’s sovereign creditworthiness was called into question after Greece and its banks were downgraded last week, the ratings agency said in a report.

    While Portugal is at the forefront of investor concern over the level of its debt, the UK was in greater danger of sovereign contagion from exposure to the Greek banks, Moody’s said.

    Banking assets represent the equivalent of more than 400 per cent of GDP in the UK, compared with 150 per cent in Greece.

    “Each of the six banking systems Portugal, Spain, Italy, Ireland, Greece, the UK... faces different challenges, but the contagion risk could dilute these differences and impose very real, common threats on all of them,” Moody’s said.

    The warning fuelled concerns that the Greek crisis might engulf other debt-laden eurozone economies, as the euro slid to a one-year low against the dollar.

    The euro fell to $1.2780, with the report from Moody’s arguing that the Greek debt crisis could infect the economies of the UK, the Irish Republic, Italy, Portugal and Spain.

    However, markets bounced back as the Greek Government prepared to pass a vote on austerity measures that would enable it to accept a 110 million (£93.3 million) bailout package.

    The FTSE 100 rallied to 5,36.51 in mid-morning trading after losing 1.3 per cent at the market’s opening, with investors still jittery over the uncertainty surrounding the general election and suggestions among traders that lending between European banks was tightening.

    Other European markets opened down this morning before rallying later, with the Paris CAC 40 index falling by 1.44 per cent before regaining ground to 3,641.42 points, while the Frankfurt DAX 30 climbed 16.71 points to 5,975.16 points.

    In Asia, the Nikkei in Japan recorded its biggest one-day loss since March last year, falling 3.3 per cent to a two-month low of 10,695 as the markets opened after a public holiday. Hong Kong’s Hang Seng lost 221.47 points, or 1.09 per cent, to 20,106 and in Shanghai the Composite index fell to 2,808.3 points, down 1.7 per cent.

    The cost of insuring Portuguese debt rose to a record high yesterday after Moody’s placed Portugal’s credit rating on a three-month review, suggesting an imminent downgrade.

    Meanwhile, the mood in Greece was sombre as the banks there closed out of respect for the three bank workers who died in protests yesterday.

    The Greek Government is expected to pass a vote today on the austerity measures attached to the financial bailout package.

    Greek unions called today for more protests at the public sector cuts.

  5. The great Greek bailout ruse

    Investors have decided that the Greek bail-out package is about as credible as Bernie Madoff’s business model, and that while the $US147 billion being pumped into the country might keep the game going for a bit longer, in the longer-run the numbers just don’t add up.

    The hopelessness of the situation is made even more apparent after the violent protests that erupted in Athens overnight, which resulted in three people being killed during demonstrations.

    There’s now a growing consensus that a major restructuring of Greek debt – where lenders are forced to take a haircut and write off some of their loans to the country – is pretty much inevitable.

    Citigroup’s chief economist, Willem Buiter, takes this argument one step further. He argues that Sunday’s decision was not so much about “rescuing” Greece, as about escorting the country to a safe house so it can undergo the massive debt restructuring exercise.

    In a note out overnight, Buiter, who was a member of the Bank of England’s Monetary Policy Committee before joining Citi, said that the eurozone has already made the decision to restructure Greece’s debt.

    He says the decision to restructure Greek debt, and to force lenders to take losses on their loans “became unavoidable when the euro area decided not to lend to Greece at something close to the risk-free rate, but at 300 or 400 basis points over the swap rate.”

    But if a decision on a Greek debt restructuring has already been made, what’s the point of giving the country a $US147 billion bailout package?

    Buiter argues that there’s a huge political advantage to delaying the Greek debt restructure, because it makes it less likely that the French and German governments will have to pump capital into their banks.

    Greece only gets the bailout package if it implements brutal spending cuts and tax increases. If Greece meets these conditions, the country will be running a primary budget surplus in 2013, even though the Greek government’s debt will have climbed to a whopping 150 per cent of GDP.

    The official eurozone plan at that point is that Greece will be able to wean itself off eurozone and IMF funding. Instead, the country will go to the market and borrow money at an interest rate of 5 per cent.

    But Buiter points out the problems in this thinking. Even if Greece is able to borrow at an interest rate of 5 per cent in 2013, the country would still be faced with a crippling interest rate bill. Greece would be doomed to perpetual stagnation as each year 7 per cent of total GDP would go towards paying interest on its debt. It is, he says, “disingenuous” to say that Greece’s debt levels will have stabilised at that point.

    But, of course, that’s not really the plan. Instead the idea is to get Greece into a position where the country’s tax revenues cover government spending, and the country doesn’t need to borrow money to cover the day-to-day spending of its government.

    Greece will then be in a position where it has a huge debt, but no primary deficit – which Buiter points out is “the exact circumstances that makes a default individually rational for the debtor”.

    When Greece’s bailout package runs out at the end of 2012, there’s no way the country will be able to borrow at reasonable interest rates, because markets will be worrying that Greece will take the default option. So that would mean that the EU-IMF bailout package would have to be rolled over.

    That leads Buiter to suspect that a restructuring Greece’s debt is likely to be made next year.

    Of course, there is a strong logic to restructuring the debt immediately, because the sooner it’s done, the smaller the losses will be.

    Buiter estimates that if the debt were restructured today, lenders would probably have had 30 per cent of the value of their debt wiped out. The problem is that this would have left the French and German commercial banks staring at huge write-offs. And there would have been huge embarrassment in Paris and Berlin if French and German governments were forced to step in and recapitalise their banks.

    So Buiter says the plan must be to give the banks time to build up their capital reserves, or to shift some of their Greek exposure from their balance sheets onto the government’s balance sheet.

    If Buiter is right, the banks will probably come through the Greek debt crisis in fine shape. It’ll be the German and French taxpayers who pick up the brunt of the losses.

  6. Yes I’m afraid my parents were brainwashed about debt and ingrained in me that debt was bad. It wasn't until mid life when I realised the truth.

    At least my young boys are financially literate, I have broken the mould.

    Yes my poor old da getting around as a boy in shoes with the soals repaired from a tyre.

    He new about the hazards of debit.

    I didnt understand

    1999 I was paying of 2 houses and a block of land.

    Sold my nice car to by a $100 wreck.

    lucky I sold the block

    Debt is a double edged sword

  7. Are you suggesting no property investments because of what happened 120 years ago?

    I dont give finantual advice. I just give my humble opinion.

    What I am suggesting and Glen Stevens has hinted at is that Australian property prices in a bubble.

    Australian banks have something like 60% of there money in low deposite home loans, so if property prices were to fall dramaticly and unempoyment to rise, they will become insolvent.

    History has a way of repeating it self, mainly because the hard lessons learned are forgotten when that generation dies.

    So if we can not learn from the pages of history we are bound to repete the same mistakes, these are the words from a wise man but I dont know his name.

  8. UK budget deficit 'to surpass Greece's as worst in EU'

    European commission's spring forecasts put UK budget deficit this year at 12% of GDP – the highest in the European Union and worse than Treasury estimates

    * Katie Allen

    * guardian.co.uk, Wednesday 5 May 2010 16.26 BST

    * Article history

    Alistair Darling, April 2010

    The European commission forecast for the UK budget deficit is higher than Alistair Darling's. Photograph: David Levene

    Whoever wins the election must make sorting out the public finances the top priority, the European commission warned on the eve of the poll, as it predicted the British budget deficit would swell this year to become the biggest in the European Union, overtaking even Greece.

    The commission's spring economic forecasts put the UK deficit for this calendar year at 12% of GDP, the highest of all 27 EU nations and worse than the Treasury's own forecasts.

    The country's budget shortfall was the third largest in the EU last year but will overtake both Greece and Ireland this year, according to the forecasts. Greece's measures to tackle its public finances problems are projected to cut its deficit to 9.3% of GDP.

    Worries about Britain's public finances – in their worst state since the end of the second world war – continue to unnerve financial markets and analysts are divided over whether a hung parliament will have the clout to rapidly reduce the deficit.

    "The first thing for the new government to do is to agree on a convincing, ambitious programme of fiscal consolidation in order to start to reduce the very high deficit and stabilise the high debt level of the UK," said European economic and monetary affairs commissioner Olli Rehn.

    "That's by far the first and foremost challenge of the new government. I trust whatever the colour of the government, I hope it will take this measure."

    The deficit forecasts are an improvement on the commission's last outlook for Britain but they still paint a gloomier picture than the government itself.

    In financial year terms, the commission's forecasts are for a worse deficit than predicted by Alistair Darling at his March budget. In 2010/11 the commission puts the deficit at 11.5% of GDP, compared with Darling's forecast for an 11.1% ratio of public sector net borrowing – the gap between tax and spending – to GDP.

    The EU's executive did double its forecast for British growth this year to 1.2% from 0.6%, in line with a March budget forecast for 1-1.5%. But in 2011 it warns growth will only pick up to 2.1%, significantly below a Treasury forecast of 3-3.5%.

    It described "a slow start to a protracted recovery", highlighting pressures on private consumption, a key growth driver, from employment worries and stagnant wages.

    Darling pointed out that the commission expected the UK to grow more quickly than other major European countries next year – including Germany, France, Italy, and the Netherlands. "The European commission's report shows again that our judgment call to support the economy was right. Yet again George Osborne's flaky judgment is exposed. The Tories cannot be allowed to derail the recovery," he said.

    But opposition politicians seized upon the outlook as evidence that a new government was needed to get the economy back on track. "The day before the election the European commission has issued a damning indictment of Gordon Brown's economic record," said shadow chancellor George Osborne, claiming only the Conservatives would start dealing with Britain's debts on Friday.

    "He has left this country with the largest budget deficit in Europe – larger even than Greece – and projections for future growth well below his own forecasts."

    Liberal Democrat Treasury spokesman Lord Oakeshott said the EU report laid bare government overconfidence. "This shows the government has been far too optimistic," he said.

    "What matters now is a credible deficit reduction plan backed by the nation. If the Conservatives scrape home with barely a third of the vote and indulge in butchery behind closed doors, that just won't work. That's why the Liberal Democrats call for a council of fiscal stability with all three economic spokesmen, whoever they are, and the governor of the Bank of England to agree a credible deficit reduction plan."

    Economists warn that if the next UK government drags its feet in reducing the deficit it could spark a downgrade from one or more of the ratings agencies that have been so swift to reassess Greece and Spain's creditworthiness. The commission's forecasts fanned those fears.

    "From such a large deficit, we suspect that it will be hard for a hung parliament to establish a credible path back to fiscal sustainability," said Michael Saunders, an economist at Citigroup.

    London-based economists at BNP Paribas, have warned that the City is grossly underestimating the chance of a downgrade from the UK's current top-notch AAA status. They warn that an undecided Britain is heading towards a coalition government that would create distractions from repairing the public finances - something that would raise the chance of a downgrade to almost 50%, compared with a consensus estimate of 10% risk .

    That, they say, could cost the taxpayer at least £10bn because of higher interest costs on government borrowing.

  9. Australian banking crisis of 1893

    From Wikipedia, the free encyclopedia

    Jump to: navigation, search

    The 1893 banking crisis occurred in Australia when several of the commercial banks of the colonies within Australia collapsed.

    During the 1880s there was a speculative boom in the Australian property market. Australian banks were operating in a free banking system, in addition to few legal restrictions on the operation of banks, there was no central bank and no government-provided deposit guarantees. The commercial banks lent heavily, but following the asset price collapse of 1888, companies that had borrowed money started to declare bankruptcy. The full banking crisis became apparent when the Federal Bank failed on 30 January 1893. By 17 May, 11 commercial banks had suspended trading.

    And that was the end of the great Melbourne property bubble or was it?

  10. What advice would you all have, given the experience of the UK, to someone over 5-15 years, when we KNOW that sooner or later the party comes to an end. What would have been a successful strategy in the UK to end up with owning a good property that would be a long term family home given what we know now?

    Trying to learn from the failures in the UK.....

    HaveBee

    I think this is just the start of the down turn.

    This bubble in Australia can not possibly go on any more.

    Rent unless you want to become a property day trader (20% in one year)

    Who knows if the bubble will pop quick or slow.

    live with in your means.

    Or give up all hope and live in a van and travel.

  11. Rate rise to crush 90,000 families - and experts warn of more pain to come

    rate rise

    New homeowners Graham Burden and Emma Chenery are feeling the squeeze, with Ms Chenery looking for a second job to keep up with the mortgage repayments / The Daily Telegraph

    Source: The Daily Telegraph

    * Homebuyers expected rates to rise, but not this fast

    * Mortgage stress affecting nearly 40 per cent of recent buyers

    * Warning of 6 per cent rate by end of 2011

    MORE than 90,000 recent first-home buyers could be forced out of their homes because interest rates have risen faster than expected.

    They have been caught out by the Reserve Bank's increase in rates - yesterday's increase to 4.5 per cent was the third in three months and the sixth since October.

    The hike means repayments on a $300,000 mortgage will increase by about $50 a month to nearly $2000, and economists are warning that there will be more pain.

    Many believe that rates will hit 6 per cent by the end of next year.

    Exclusive data from leading financial services consultancy Fujitsu shows mortgage stress is affecting nearly 40 per cent of the 270,000 who have entered the property market since June 2008, The Daily Telegraph reported.

    The effect of the increase has forced some recent buyers to find second jobs.

    "Rates have gone up faster than we expected," real estate worker Emma Chenery, 24, from Sydney said.

    "Six in the past eight months - that's a lot."

    Tipping point

    Martin North, Fujitsu's consulting executive director, said that for 95 per cent of those in mortgage stress, selling was the only way out.

    He said there was a widely held view among participants in Fujitsu's research that rates would rise, just not this fast.

    Most had also expected wage increases to cover the rise in repayments. Now they've been caught short - a forced sale their fate. More than 32,000 New South Wales households are in this position, Fujitsu's data shows.

    First will come increased reliance on credit cards, then attempts to refinance and reduce repayments.

    But this fixes the problem for only a few.

    "People who get in mortgage stress end up selling up. It's horribly predictable," Mr North said.

    So, too, that the numbers being forced out of their homes will rise along with rates.

    That would also result in mortgage stress seeping into the broader population, Mr North predicted.

    The tipping point, he said, would be if the RBA cash rate rose a further 1.5 percentage points. Which is precisely what many economists expect.

    "We are seeing a cash rate of 6 per cent by the end of next year," Macquarie Bank economist Ben Dinte, and others, said yesterday.

    Also predictable were the actions of the big four banks, which wasted no time in saying they would add the entirety of the latest increase to their variable home loan rates. The highest variable rate among the quartet's is Westpac's at 7.51 per cent.

    Westpac is expected to post a half-year profit of as much as $2.9 billion today.

    Opposition Treasury spokesman Joe Hockey said the Government had failed to keep interest rates down.

    "For everyday Australians this is the head-high tackle they did not deserve," he said.

    Pain in 2011

    There was some good news for borrowers yesterday.

    Economists interpreted comments by RBA Governor Glenn Stevens as meaning there would be no rate hike next month. There may only be a couple more this year.

    In a statement announcing the increase, Mr Stevens said that the RBA board "expects that, as a result of (this) decision, rates for most borrowers will be around average levels. This represents a significant adjustment from the very expansionary settings reached a year ago."

    ANZ chief economist Warren Hogan said: "We expect the RBA to sit back and observe how the economy plays out for a few months."

    But Mr Stevens had added a warning on the longer-term outlook.

    "Australia's terms of trade are rising by more than earlier expected, and this year will probably regain the peak seen in 2008," he said.

    "This will add to incomes and foster a build-up in investment in the resources sector."

    Economists took that to mean a string of rate rises were in store in 2011.

    Mr North's predictions of spreading mortgage stress were supported by RateCity analysis, which showed that should the variable mortgage rate rise to nearly 9 per cent, the average NSW household with a standard-size loan would face mortgage stress.

    Mortgage stress is generally defined as having to pay at least 30 per cent of income on home loan repayments.

  12. * House prices have, can and will fall. There were large house price falls in the 1990s, 1930s, and 1890s, associated with less spectacular house price bubbles. The rise has been larger this time and the falls may well be larger this time. There have been enormous falls after enormous rises at other times in other places.

    The price falls in 1990 were a direct result of extremely high interest rates.

    So it is a proven fact that high interest rates will drop house prices.

    It is allso a proven fact that low interest rates will cause high house prices.

  13. It's still a crazy idea to buy a house in Australia at the current prices.

    * By all measures of value, house prices in Australia are at or near the highest levels they have ever been.

    * Recent tiny house price falls are meaningless in the most overpriced housing market in the world - long term housing slumps can take years, or even decades.

    * Recent short term interest rate falls are also meaningless. Buying a house is for the long term, so it is the long term average real (inflation adjusted) interest rate that matters.

    * A typical Sydney house costs $400-500 per week to rent, or $ 1200-1500 to own. Buying at the current prices, you would have to have real capital gains of $800-1000 per week (or around 5% of the purchase price per year) just to not lose money. It may well be worth paying something for the pride of home ownership, but three times the price of renting? You can buy an awful lot of nice decorations for your rental property with a small proportion of the cost difference between renting and owning. See the ongoing costs of living in typical houses in other areas of Australia here.

    * House prices have, can and will fall. There were large house price falls in the 1990s, 1930s, and 1890s, associated with less spectacular house price bubbles. The rise has been larger this time and the falls may well be larger this time. There have been enormous falls after enormous rises at other times in other places.

    * Speculatorsexternal link who think they are investors lose money on purpose buying houses they do not want or need, dreaming of easy profits. You do not have fulfil their fantasies by paying even sillier prices. You do not have to be their "greater fool"external link.

    * Home owners pay far more than they have to, to live in poorer accommodation than they could if they rented, believing they will profit by doing so. At today's prices even home ownership has become a form of gambling.

    * Think it through. Even if house prices do not fall, rents have to at least triple for renting a normal house in an Australian city to cost the same as owning one. Half of renters already pay more than a third of their income in rent. Rents tripling simply cannot happen without large increases in wages, which implies high inflation and thus high interest rates over a prolonged period of time. Without their fantasy rent rises, or their fantasy price rises, long term ongoing losses will crush real estate speculators.

    * Without speculative demand for houses there has been significant excess building in Australia ( OverbuildingByLocation ). When the speculative demand is gone, there will be an oversupply of houses for living in. The " HousingShortage " is a shortage of gambling chips, not of human living environments. (You can help us map the 830 000 empty houses here)

    * Large numbers of Australians have borrowed more than they can repay to pay more than their houses are worth to buy them. The supply of greater fools is rapidly dwindling. You are under no obligation to join them.

    Who thinks it's not a crazy idea?

    * Members of the 17% of Australian households that already speculate overtly in real estate. Two thirds of them individually and the sector as a whole declare a loss each year. They need you to offset their losses.

    * Heavily indebted recent home buyers who bought their houses at speculative prices. They also need you to justify the crazy prices they paid. Without you to pay even more for the house next door, their house is worth what it saves them in rent less the cost of owning it.

    * “Experts†who all agree that there is a shortage of housing. They agree that house prices are unlikely to fall far, and that rents are going to rise. Who are these experts?

    o real estate agents and their representatives

    o people who sell reports telling real estate agents and speculators what they want to hear

    o employees of newspapers that have become totally dependent on real estate advertising

    o economists who make press releases for banks that "secure" most of their loans against inflated land valuations.

    * Investigate the author of any article proclaiming house prices will riseexternal link, and you will have no trouble finding their business interest in maintaining that fantasyexternal link for just a little longer.

    * Your relatives in the generations above you. They did well by buying a home when it was cheaper to own than to rent. They did well by spending less than they earned over a long period, and you will do well if you follow their wisdom and spend less than you earn, rather than mistakenly believing the house itself bought at any price magically made them well off. Some of them were even lucky enough to do well despite buying houses when it was a little dearer to own than rent in the lead up to the greatest house price bubble in history. Do you feel lucky enough to profit buying when prices are the highest they have ever been?

    Why do they say you should buy a house at any price?

    * Prices always go up

    This is nonsense. Prices have fallen significantly in Australia in the past eg 1890s, 1930s, 1990s and at other times in other places.

    * You'll miss out on owning your own home forever if you don't buy now.

    Will you? So if every one like you will miss out in this gloomy future, who is going to buy the houses?

    * Renters are poor

    Poor renters are poor. Paying more for their accommodation than they have to will only exacerbate that situation. Keeping your living expenses as low as possible will make you much better off, allowing you to both save more and spend more on other things if you chose to.

    * Rent money is dead money

    All money is dead. Interest paid or foregone, maintenance expenses paid, insurance and stamp duty. All of these add up to far more dead money than the rent you would pay to live in an equivalent house.

    * Everybody needs a home

    True. At the moment they can either rent the space to put it in from a speculator or buy it for three or more times the ongoing cost.

    * Your house can't go to zero like a share or even a bank account

    If you have a loan against your house, it can easily go to zero. It has become normal to borrow close to 100% of the purchase price which means if the price of the house falls at all, you owe the bank more than the house is worth. Even with a more traditional deposit when house prices become rational many people who bought at today's prices will owe more than their houses are worth.

    * There is a shortage of housing

    Between the last two censuses, the number of people in NSW rose by 3.8%, the number of dwellings rose by 6.1% and the number of empty dwellings rose by 13.3% to 9.5% of the total. Check the numbers for your area and list them here; OverbuildingByLocation . In fact the shortage story has been a feature of the bubble all around the world. The HousingShortage wiki page gives examples from around the world of similar claims of a housing shortage as we are seeing here. (Please feel free to add in others that you find)

    Once the speculative mania has waned, the significant oversupply will become apparent.

    * There is a shortage of land in Australia

    House prices in Japan declined 70% over the last decade and a half. The population density in Japan is more than twenty times what it is here. Australia is one of the least densely populated nationsexternal link on earth. Even if your imagination is good enough to believe that there is a shortage of land here, that will not stop the prices paid for it from becoming rational.

    * Rents are about to go through the roof

    The number of empty houses has increased significantly. Rents have tracked inflation very well over the long term. Here are the numbers for each capital city according to the ABS between Sep72 and Jun07

    CITY REAL RENT GROWTH FOR PERIOD COMPOUND ANNUAL REAL RENT GROWTH

    Sydney 14.07% 0.53%

    Melbourne -5.15% -0.21%

    Brisbane -19.58% -0.88%

    Adelaide -1.22% -0.05%

    Perth -24.29% -1.12%

    Hobart -30.16% -1.44%

    Darwin *Sep80-Jun07 16.75 years -12.58% -0.80%

    Canberra -2.92% -0.12%

    Australia 1.01% 0.04%

    After a decade of overbuilding, this is not suddenly going to change. In fact rents fell by more than 20% in the years following the property bubbles of the 1880s and 1920s.

    Half of renters already pay more than 30% of their income as rent. Outside of the fantasy world of industry campaigns, rents cannot rise far.

    * It's different here to other places

    Kangaroos cannot save us from basic economics.

    * The economic cycle is dead - it's a new paradigm!

    It is not different this time. Every time people have claimed that it is different this time they have been proved disastrously wrong. The renowned economist Irving Fischer said in late 1929 that stock prices had reached a permanently high plateau. All agree that Australian house prices have reached a permanently high plateau. They have not.

    * The majority of rich people got rich through investment in residential real estate

    Really? Who? It is true that at the moment there are more real estate paper millionaires than there were a decade ago. In 2000 there were more internet stock paper millionaires than there had been a decade before that. The existence of apparently rich people who spent ten times their net worth on the one asset a decade ago is a symptom of the bubble, not proof that it will go on forever.

    * You can be thrown out of a rental property, but no one can throw you out of your own home

    You certainly can be thrown out of a mortgaged property. Your circumstances can change and you can need or want to move. The cost of moving if you own the house contains all the costs of a renter moving plus stamp duty which at today's fantasy prices is more than a year's rent, plus enormous transaction risk.

    The possibility of having to move house at low expense a few times during the life of the bubble is more than compensated for by staggeringly much lower financial risk and living expenses.

    * A mad landlord can make your life hell

    Sure, so can a mad neighbour. If you rent it will cost you one or two thousand to move away from the mad landlord or neighbour. If you own it will cost many tens of thousands.

    * House ownership is risk free

    Until it's not. While the bubble was inflating it certainly appeared to be risk free. If you could not afford to pay your mortgage you could always sell your house for more than the outstanding mortgage. It is not different this time, it will not go on forever. You do not have to be among the last to join the mania.

    Calculate the risk yourself. If you live in an equivalent house to the one you could buy and save the difference between the rent and and the interest and maintenance, how much extra money would you have in the bank to cope with a period without income? If you could not make those savings then you could not afford the mortgage anyway.

    * You are not a part of your community until you own a house in your community

    I can find nothing about the financing of your home in the rules of sporting groups, schools, community or religious groups. You can join in your community if you rent and you can stay inside if you own. Unless you are proud enough that you want to tell people of your financial prudence, nobody has to know anything about your financial affairs.

    * You cannot decorate a rental house the way you would like to

    You may not be able to rip out those horrible kitchen cupboards, but if a small fraction of the difference in cost between renting and owning is spent on furnishings that you like, you will have a very nice home indeed.

    * Rich immigrants are driving our high house prices

    Rich immigrants are able to calculate whether it is cheaper to rent or buy the box they live in too. You are under no obligation to outbid those who can't.

    * The resources boom is driving our high house prices

    The resources sector accounts for a few percent of the wages in our economy. The boom is keeping our exchange rate high which is killing what little is left of our manufacturing sector. (and making our houses even more expensive for those rich immigrants.)

    * Families have dual incomes now so they can pay more

    So why have rents not risen as well? This explanation does nothing to explain why people are suddenly willing to pay more for home ownership than to rent the same thing.

    * Australians love their homes more than other nationalities

    This is silly. Ring a random American and ask them if they love their home. Of course they do. Their house prices are far lower than ours in relation to incomes and rents, and falling fast.

    * You need to own a house to provide stability for your family

    You need to provide love and education for your children and spend time with them. If you commit to paying three times as much as you have to for your accommodation forever, then you will have to work more taking time from your family and yourself. Every unnecessary dollar you spend on housing is a dollar you can't spend on education and fun for your kids or invest for your family's financial future.

    * Houses are worth those prices, because people are paying them

    Only if you cannot tell the difference between price and value. Internet stocks were worth those prices because people were paying them. Was it a good idea to buy them?

    * People can afford to buy houses at today's prices, because lots of people are still doing it

    You are not obliged to outbid people who cannot tell the difference between price and value.

    * You need a mortgage to force you to save.

    Locking yourself into higher living expenses is not forced saving, it is forced spending. A mortgage commits you to decades of spending a large amount of money on interest in return for the right to spend right now a gigantic amount of someone else's money that you must one day repay. How does that help you save?

    These are the days of debt consolidation, mortgage refinancing, mortgage equity lines of credit, and reverse mortgages. Borrowers can easily spend far more than they earn for years, all the while pretending to themselves that the rising prices of things they claim they will never sell are making them richer.

    * Prices have risen by x% per year since 1980, so you can expect to earn x% capital gain per year on your house.

    Today's prices are set by you, the buyer. Why not pay twice as much? Three times? Then the returns will have been far greater since 1980, so you can expect to make even more. Extrapolating recent house price inflation into the future forever leads to the conclusion that you can pay any price for a house, in fact the more you pay the better.

    * Those higher living expenses, higher risks and poorer accommodation are worth it for the profit you will make when you eventually sell your house.

    This is not the thinking of a home owner or even an investor, but a speculator (who buys assets without regard for ongoing returns, focused solely on capital gain). The bets come in a wider range of more convenient sizes at the racecourse and the futures exchange and you do not have to pay into them for decades before you learn the outcome.

    * When your mortgage is paid off, then you live rent free.

    True, and interest and dividend free and you have to maintain the house. At current prices the money saved by outright home ownership (ie. the difference between rent you are not paying and the maintenance you are) is less than a third of the amount of interest and dividends you could earn with the same size investment.

    * Even if prices are too high, they might rise even further, and you'll miss out on the increase.

    That is true. They might, or not. Even if they do, the long term outlook for something as overpriced as Australian housing is clear, and a house is a long term investment.

    Many people who did not buy internet stocks in 1998 felt like they had missed out in 1999. By 2002 they had remembered how they cleverly resisted the temptation to do what everyone else was telling them to.

    If you can understand that you do not have to buy at today's silly prices, you should have no trouble resisting if prices get even sillier.

  14. Reserve Bank increases its official cash rate to 4.5pc

    * By Edmund Tadros, Business Editor

    * From: news.com.au

    * May 04, 2010 1:58PM

    HOMEOWNERS will pay about $50 a month more on their mortgages after the Reserve Bank hiked its cash rate for the third time in a row.

    A 25 basis point increase to the official rate adds about $50 a month to a $300,000, 25-year home loan, according to research company Canstar Cannex.

    Economists had been tipping the rate rise, with the market pricing in a 69 per cent chance that the Reserve Bank board would hike its cash rate by 25 basis points.

    The Reserve Bank governor Glenn Stevens has indicated that rates are now back at "average levels".

    "With the risk of serious economic contraction in Australia having passed some time ago, the Board has been adjusting the cash rate towards levels that would be consistent with interest rates to borrowers being close to the average experience over the past decade or more," Mr Stevens said in his statement to accompany the rates decision.

    "The Board expects that, as a result of today’s decision, rates for most borrowers will be around average levels.

    "This represents a significant adjustment from the very expansionary settings reached a year ago."

    This expectation of a rate rise increased overnight after a report showed that capital city house prices rose by 20 per cent in the year to March.

    In addition, core inflation is now at the top of the central bank's comfort zone

    In a speech late last month Reserve Bank governor Glenn Stevens said the central bank's board was still moving rates back to their normal levels.

    "Eighteen months ago, the board moved quickly to establish a much lower level of interest rates in the face of a serious threat to economic activity," Mr Stevens said.

    "But interest rates couldn’t stay at those ‘emergency’ lows if the threat did not materialise.

    "The aggressive reduction in interest rates needed to be complemented by timely movement in the other direction, once the emergency had passed, to establish a general level of interest rates more in keeping with the better economic outlook.

    "Hence the cash rate has risen by 125 basis points over seven months – which is still only about a third the pace of the earlier declines."

    At the moment, homeowners are paying an extra $300 a month in mortgage payments on a $300,000 mortgage since rates were first hiked last October

  15. The Dominos Are Lining Up for a Sovereign Debt Crisis!

    by Bryan Rich 05-01-10

    Bryan Rich

    Boy, what a week! I’ve been warning about a troubled euro and a building sovereign debt crisis for some time. And the bond and currency market activities this past week are a clear example that the momentum is picking up.

    There’s a bumpy road ahead … and not just for Greece.

    For those of you who aren’t closely monitoring this drama in Europe, you should be. As I’ve explained in recent Money and Markets columns, the events in Greece will likely impact your investments and the economy, both in the U.S. and abroad.

    And if you haven’t followed the events of the past five days, here’s a brief recap of what’s transpired, the impact on global financial markets, and what to expect from here on out …

    First, the Greek government’s official request for a rescue package from its European partners and the IMF did not calm fears. Instead, the Greek bond market shifted into another gear of panic. Investors and speculators rushed out of Greek debt, driving up two-year borrowing costs for the Greek government to over 18 percent.

    But that wasn’t all. The contagion factor started rearing its head.

    The grim outlook for Greece sent investors and speculators looking at the next likely victim, Portugal. And Portugal’s debt was aggressively sold, sending yields jumping to more than three times the levels of early last month.

    And downgrades soon followed. S&P downgraded Portugal’s credit rating two notches and downgraded Greece by three notches, to junk status.

    There was more …

    With the Portugal domino starting to wobble, the biggest, most threatening weak spot in the euro zone, Spain, came under the spotlight. As a result Spanish bonds were dumped, and S&P responded in kind, with a downgrade on Spain and warnings of possible further downgrades.

    The stability of the whole euro zone is at stake.

    The stability of the whole euro zone is at stake.

    All of this sent the euro tumbling further, and sent shockwaves through global financial markets.

    This is a scenario I’ve expected to unfold since Dubai failed to make good on their sovereign debt last year.

    And these recent events in Europe are just a few more steps in what will likely be early innings of a full blown global sovereign debt crisis.

    For those who have convinced themselves that a V-shaped economic recovery is underway, and that the problems in Europe will stay in Europe, they should be very careful.

    Here’s why …

    The Global Picture

    This most recent recession shares two key features found in three other recessions in the past fifty years:

    1. Global synchronization — According to the IMF, at the trough of the recent recession a whopping 65 percent of world economies were in a recession, too.

    2. Financial crisis — In recessions associated with a financial crisis, the recoveries were slower because households are in saving mode, credit is tight and demand is weak.

    And based on the IMF’s study of 122 recessions, for recessions that coincide with financial crisis recoveries tend to be slower. In fact, advanced economies should expect 5+ years of weak economic activity.

    It all boils down then to knowing where the global economy stands after emerging from the most severe economic downturn since the Great Depression. For that answer, let’s look at:

    The Four Stages of Collateral

    Damage of Past Financial Crises

    Stage #1—

    Deficits …

    When tax revenues decline and government stimulus spending rises, countries tend to swiftly turn budget surpluses into deficits. And for countries already running deficits, the deficits just get bigger.

    Stage #2—

    Debt …

    Facing weak growth and dwindling tax revenues, those deficits turn into debt. Soaring debt with questionable growth prospects ultimately flash warning signals to global investors.

    Stage #3—

    Downgrades …

    Those warning signals turn into credit downgrades.

    Stage #4—

    Default …

    'Markets tend not to discriminate as much when there’s panic.' —Ken Wattret, European economist, BNP Paribas, London

    “Markets tend not to discriminate as much when there’s panic.” —Ken Wattret, European economist, BNP Paribas, London

    And finally, credit downgrades tend to drive borrowing costs higher, which can force the fiscally fragile into default.

    History also shows that sovereign debt defaults can be contagious.

    Whether or not Greece receives funds from its European partners, the structural hurdles facing Greek put a default scenario squarely on the table.

    Perhaps that’s why the head of the IMF planted the seed last week, noting his plans to discuss a debt restructuring with Greece as part of the Greek rescue agenda.

    Nonetheless, the dominos for a sovereign debt crisis are clearly in line.

    As fears over deficits and debt continue to spread, expect the problems in Europe to test the lifespan of the euro, and ultimately present challenges to global financial markets and global economic recovery as fears spread to the UK, Japan and the U.S.

    Regards,

    Bryan

  16. Soaring house prices strengthens case for RBA to lift interest rates

    * UPDATE: James Glynn

    * From: Dow Jones Newswires

    * May 03, 2010 2:37PM

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    Housiong auction notes on bids

    Record jump: The rate of house-price increases was the highest recorded in nearly eight years. Picture by Jeremy Piper Source: The Australian

    AUSTRALIA'S established house prices soared 20 per cent in the 12 months to March, deepening fears that a house-price bubble would emerge, and at the same time clearing the decks for a further rise in interest rates tomorrow.

    The annual rise in house prices was the fastest ever recorded by the Australian Bureau of Statistics data series, which began in mid-2002. A rise of 4.8 per cent over the fourth quarter of 2009 was the second-biggest quarterly increase.

    “This is a shocker,” said Rob Henderson, head of Australian economics at National Australia Bank. He added that the Reserve Bank of Australia now needed to get more aggressive, and acknowledge the need for a restrictive policy stance.

    “The RBA needs to up their rhetoric and acknowledge that the economy is now growing at above-average rates, requiring above-average interest rates,” Mr Henderson said.

    House prices surged in the major capital cities, with the top end of the market accounting for much of the turnover. Melbourne topped the list with a 6.7 per cent rise over the quarter, followed by Sydney, with an increase of 5.3 per cent in the same period, the ABS said.

    Start of sidebar. Skip to end of sidebar.

    Related Coverage

    * KATHERINE JIMENEZ: Risk of price correction

    End of sidebar. Return to start of sidebar.

    The house-price surge comes on top of data last week showing that inflation is now emerging as a problem for the RBA. A commodity price rise, expected to tip $20 billion into the economy in 2010, is also washing in at a pace the RBA recently described as unexpected.

    Financial markets today were pricing a 65 per cent probability of a rate hike tomorrow. A week ago, betting was as low as 25 per cent. The ramping up of expectations of a hike this week has also been boosted by moves to ease concerns surrounding Greek debt.

    Said Chris Caton, chief economist at BT: “A 20 per cent increase in house prices is very difficult to ignore. This latest piece of news may well be the log that broke the camel's back. Until now, I had thought that the RBA would take a month off tomorrow. It may no longer be able to afford that luxury.”

    The RBA has raised interest rates five times since October 2009, increasing its cash rate target to 4.25 per cent from 3 per cent. House-price increases have lately been key to the RBA's rationale for rapidly removing loose policy settings.

    Australia's manufacturing sector is also surging back to life. The Australian Industry Group-PricewaterhouseCoopers Australian Performance of Manufacturing Index, also published today, rose 9.3 points to 59.8 in April from March, its highest level since May 2002.

    “The encouraging results across much of the manufacturing sector in April are signs the recovery, which has been patchy to date, is now beginning to gain some traction,” said Australian Industry Group chief executive Heather Ridout in a statement.

    The broad pick-up in the economy is starting to fuel inflationary pressures.

    In the 12 months to April, the TD Securities-Melbourne Institute Monthly Inflation Gauge rose 2.9 per cent, bumping up against the upper limits of the Reserve Bank of Australia's 2-3 per cent inflation target range. In April, the index rose 0.4 per cent, adding to a 0.4 per cent rise in March.

    Said Annette Beacher, senior strategist at TD Securities: “This report reveals that price pressures remain to the upside heading into the June quarter, a worrying development given the already outsized lift in prices in the March quarter.

    “We remain of the view that the RBA's projections for underlying inflation to decelerate to 2.5 per cent by mid-year are rather optimistic, as the Australian economy will be bumping against speed limits sooner rather than later,” she added.

  17. Australia allready has metho drinkers, Petrol breathers (Unleaded is better for your health), glue snifers (contact cement is the favoured type) and the real craze in cromeing (spraying silver paint into a plastic bag then breathing the vapors).

    We had Domminoes before you and the board wobblers.

    Sorry to export this to your Fine Country.

    Its rubbish just like Fosters Beer.

  18. If you believe this you will believe anything.

    View PostBardon, on 25 April 2010 - 12:40 AM, said:

    I reckon that the Indian hype that is currently going on is been orchestrated by the hidden persuaders. The target is to create an additional bargaining chip for the Indian side of the negotiations in order to convince oz to relax the ban on the export of Uranium to India.

    End of Quote

  19. First up is the news that mortgage lending is falling while house prices continue to rise. "Total mortgage applications fell 15 per cent in March quarter compared with the corresponding period a year earlier, the quarterly consumer credit demand index by consumer credit check company Veda Advantage showed," according to today' Age.

    Cris Cration of Veda said, "One consequence of a withdrawal in government incentives is a relatively sharp drop off in housing credit demand in 2010." Those "incentives" are the first home buyer's grants. Mortgage data provider Australian Finance Group says first home buyers have declined as a percentage of the new mortgage market from 28% last year to 10% this year.

    Once you bring forward all that demand…what then? You get now. Let us call it the "demand gap!" People who would have otherwise patiently built up a deposit and bought a home at a time that suited their finances are "brought forward" like reinforcements into the battle line. So who is going to get shot?

    Well, let's say you got yourself a mortgage six months ago when the RBA lowered the cash rate to 3%. The standard variable rate from any of the Big Four banks would have been higher than that. But let's say you want to refinance today (because you believe rates are rising) into a 15-year fixed rate mortgage. According to the rates at one major bank site we checked, the rate on a 15-year fixed mortgage is about 8.54%.

    So, if you're a first home buyer worried about an interest rate shock from rising rates and you want to lock in some stability, we reckon you're likely to pay nearly double the rate you got into your mortgage. And that would probably be pretty stressful. Of course if you think interest rates are not going up, then you wouldn't refinance and lock yourself into a fixed rate.

    All of which shows you how Australia's preference for variable rate loans coupled with central bankers rigging the price of money can turn a whole economy into a giant exercise in speculation. You make the biggest financial decision of your life based on factors that are influenced by unpredictable changes in the cost of money and the rate of inflation. Sounds like how you'd design a system to put people into debt to the bank and keep them there for decades.

    But only if rates move up, which they very well may be next week when the Reserve Bank of Australia meets to set the price of money. Based on the consumer price inflation data released yesterday (up 0.9% in the March quarter) annual Aussie inflation is running at the upper end of the RBA's tolerance/target of 3%. The IMF says in its Asia Pacific Regional Economic Outlook yesterday that the RBA will have to put up rates this year as Aussie GDP rebounds.

    Incidentally, we had a quick scan of the report, which you can find here. A couple of charts caught the eye. First, you can see from the IMF chart below that housing credit as a percentage of GDP is higher in Australia and New Zealand than anywhere else on the chart (and probably in the world). And the total amount of credit is dominated by housing in the Anglosphere countries, reflecting… something about their fascination with the idea of getting rich from houses, although to be fair, the banks (the ones that survived the credit crunch) HAVE gotten rich.

    The second chart, below, shows that while Aussie banks (mostly the Big Four) have gone on a lending binge, the provision of credit to the corporate sector fell off a cliff. Big listed firms managed to raise equity last year (although not always in ways that boosted shareholder value, given the cost and return on capital). But smaller firms have been cut off by Aussie banks, according to the chart below.

    Robert Gottliebsen made this point quite clearly today at Business Spectator when he wrote, "The Australian banking industry, as it is presently structured, is unable to fund the needs of small and medium-sized businesses." He the quotes from a UBS report we haven't seen about Australia's reliance in imported foreign capital (when you're a debt junkie, any hit will do).

    "As UBS research shows," Gottliebsen writes, " Australian growth in loans to both the housing and business market have been funded by overseas lenders. According to UBS, Australian banks are getting close to the upper limit of loans that overseas institutions are likely to provide to Australia. And worse still - as ANZ points out - the European crisis could contract the amount of loan money available to Australia and lift its cost."

    Ah yes. Greece and loan losses. ANZ's Mike Smith got on the front with the issue in the press today, including his own handy new term to describe Greece: "a rogue sovereign." The ABC reports that Smith said, "Europe is a mess and the sovereign issues have not been addressed with clarity...The uncertainty has continued and that's probably going to get worse. The contagion issue is now very real."

    The end result, he added, is a higher price for money for Australians. "That's where it will impact us. In terms of the funding that the Australian banks have, in terms of their wholesale funding, obviously credit spreads are going to be more volatile." Hmmn.

  20. The news that the Rudd Government was rolling back its changes to Australia’s foreign investment rules on housing came as we were still on The Walk. Just prior to starting it, I received a note from Dr John Daffy, with the following letter from him to the PM attached. I asked John whether I could publish his letter on the blog, and he agreed.

    Just as the absence of statistics on foreign purchasers means we’ll never really know the impact they had on the market, we’ll probably never know how many individuals like Dr Daffy sent similar letters to their MPs and the PM; but judging from the rapid backflip on that policy, there must have been plenty.

    Prior to the change, 50% of “off the plan” apartment sales could go to non-residents; after it, 100% could; now we’re back to the 50% ratio. So the changes restore the status quo on that point.

    But they don’t go far enough. The property lobby forever asserts that the cause of high house prices is undersupply; here’s a simple policy measure then to increase the supply of apartments for people who actually live in Australia. Why should only 50% of new apartments be reserved for local buyers? Why not 90%?

    Allowing up to 10% of new apartments to be purchased by non-residents should more than cater for warranted purchases by globe-trotting non-residents in our globalised economy. I suspect that allowing a further 40% to be purchased by non-residents caters more to the property lobby than it does to the jetset.

    Dear Mr. Rudd

    Re: Australian Residential Property Prices and Foreign Investment Laws

    I write to you to ask for an explanation as to why foreign investment laws have been changed in Australia allowing non residents to purchase residential property (otherwise known as family homes)

    This decision has resulted in approximately 30% of family homes in inner Melbourne being sold to people who are not residents of this country and has been a major factor in increasing family home prices dramatically, in what was already the most expensive real estate in Australia’s history relative to wages.

    Successive governments have also inflated prices with home owner’s grants and approximately 5 billion dollars of tax breaks per year for landlords at the expense of potential home owners (with negative gearing) Successive governments (State and Federal) have also dramatically increased immigration and ensured outer suburban land is artificially more expensive than it should be due to a number of policies which limit supply.

    The Rudd Government has played a major role in increasing these prices to the absurd levels we now have with the average person completely unable to buy the average home in this country. So much for working families. It has managed to do this with the first home owners grant, a flood of foreign investors and changes to the superannuation laws.

    The recent changes to the superannuation limits were “spun” as “closing a loophole” whereby the “rich” received a tax deduction. The net result of this policy is to drive people in to negative gearing in property and further inflate house prices away from the average home owner who pays the full interest on his loan( with no subsidy from the Australian Taxpayer). The Rudd government is obviously convinced that the home property market needs to be inflated even further and is very willing to support the banks in this pursuit.

    To add further insult, people who are saving for a deposit on their home have the interest on their deposit taxed at their marginal rate (keeping them further away from a rising market.) They may as well be subsidizing their own landlord who is invariably getting a tax deduction.

    I have watched in disbelief as governments have done EVERYTHING they possibly could to pump up house prices. Foreigners’ buying our family homes and further inflating prices is the final straw. Allowing people who don’t live in this country and do not pay tax to drive Australians out of Australian homes is a national disgrace.

    I call on the Rudd government to roll back immediately the foreign investment laws which allow this national disgrace to occur.

    Yours Sincerely Dr John Daffy

  21. SuitablyIronicMoniker SuitablyIronicMoniker is online now

    Community Team

    Join Date: Feb 2010

    Location: Australia

    Posts: 702

    Default Employment in Australia

    Australia is different. One of the reasons for this is that our unemployment rate is much lower than other parts of the world. The official unemployment rate in Australia is 5.3%, compared with the US 9.7% or Spain over 18%.

    So how robust is Australian unemployment? What would happen if there was an economic downturn?

    One way to address these questions is to look at the employment data from the Australian Bureau of Statistics;

    http://www.abs.gov.au/AUSSTATS/abs@....008&num=&view=

    The data is from the comprehensive survey conducted in November 2008. At the time, there were 10.6 million Australians employed (currently 10.9 at March 2010).

    Some interesting facts from the survey;

    * 2 million workers did not have paid leave entitlements. For men these were predominantly labourers (31%) and technicians (16%). For women, sales workers (29%) and community/personal service workers (20%) were the largest groups

    * 2.5 million workers were in part-time positions. Sales workers accounted for 28% of part-time positions.

    * 25% of employees had been in their current position for less than 12 months.

    * There were 967,100 people who were independent contractors in their main job. Independent contractors who were men were more likely to work in the construction industry (41%). 79% of independent contractors had no employees (sole traders).

    * The construction industry employed the largest number of men (15%), followed by manufacturing (13%).

    * The largest employment sector for women was health care and social assistance (18%) followed by retail (14%).

    * Retail Trade is the largest single sector for employment overall (12% of all employees).

    It is clear that construction is central to maintaining Australia's low unemployment rate. It is also obvious that a drop in construction would lead to a rapid increase in unemployment, particularly given the high percentage of independent contractors in the sector.

    A slump in construction would feed into a slump in retail trade employment, the largest single employment sector.

    This is the situation that occurred in Spain, the USA and many other countries around the world. It is clear why the Australian government is pumping so much money into maintaining the construction industry.

    They are desperately trying to avoid the Spanish situation.

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