Jump to content
House Price Crash Forum

blue skies

  • Posts

  • Joined

  • Last visited

Posts posted by blue skies

  1. Aussie home prices world's most-overpriced: survey

    Simon Johanson

    March 4, 2011 - 4:09PM

    Comments 228

    Ads by Google

    Free Practice Account


    Want to learn more about cfds? We can help. Learn More

    Thumbnail image for video asset. Click to play video

    Return to video

    Video feedback

    Use this form to:

    * Ask for technichal assistance in playing the multimedia available on this site, or

    * Provide feedback to the multimedia producers.

    Video feedback form

    1. Name

    2. Email

    3. Subject



    Return to video

    Video feedback

    Thank you.

    Your feedback was successfully sent.

    More video


    * Thumbnail image for video asset.Click to play video

    Bookstores close with hundreds of jobs lost

    * Thumbnail image for video asset.Click to play video

    Packer resigns, new CEO for Ten

    * Thumbnail image for video asset.Click to play video

    Murdoch upsets Stokes-Packer truce

    * Thumbnail image for video asset.Click to play video

    Frank Lowy hands control to sons

    Replay video

    Return to video

    Video settings

    What type of connection do you have?

    Video settings form

    1. Automatically detect my connection speed (recommended)

    2. 56K modem

    3. Home broadband (100+ Kb/s)

    4. Medium-speed broadband (300+ Kb/s)

    5. High-speed broadband (600+ Kb/s)


    Note: A cookie will be set to keep your preferences.

    Return to video

    Video settings

    Your video format settings have been saved.

    Median home prices skyrocket

    Sydney has 14 suburbs with median house prices over $2 million. Andrew Wilson reports.

    Australian house prices remain the most overvalued in the world, according to the latest quarterly ranking of global house prices by The Economist magazine.

    Based on a historical gauge of home prices to rents between 1975-2010, the magazine estimates that Australian residences are 56 per cent over-valued, exceeding the 54 per cent over-priced rate in Hong Kong and 48 per cent in France.

    "There may be good reasons for Australian prices to have risen so far, but people made similar, and ultimately incorrect, arguments for the run-up in prices in the West," The Economist said in a statement accompanying the survey's release.

    Advertisement: Story continues below

    Australian house prices are 56 per cent overvalued, <i>The Economist</i> estimates - a higher rate than in Paris or Hong Kong.

    Australian house prices are 56 per cent overvalued, The Economist estimates - a higher rate than in Paris or Hong Kong. Photo: Glenn Hunt

    The report may stoke debate on whether Australia's property market is a bubble waiting to pop.

    The Economist's survey of 20 countries follows recent house price data released this week, which shows capital city value fell nationally by 1.6 per cent in January, a result of higher interest rates and floods in Queensland and Victoria deterring buyers.

    Australia's city home values fell 1.6 per cent, seasonally adjusted, to $465,000 after rising 0.2 per cent in December, according to RP Data-Rismark figures. Outside the major cities, they fell by 1.2 per cent in the month.

    Global house price survey

    Global house price survey

    Countering the concerns over a bubble, however, is the weakness in housing construction. Figures out yesterday showed new building approvals slumped in January by the most in more than eight years, although much of the drop may reflect disruption caused by widespread flooding in the month.

    Setting the pace

    The Economist also noted that, while Australia's economy had outperformed most in the developed world in recent years, the recent surge in house prices might be hard to justify.

    "In the years before the financial crisis, Australia's economy set a hard, fast pace for the rest of the Anglo-Saxon world," the article in The Economist said.

    "Its house prices rose faster than Britain's or America's (although Ireland's outstripped them all) and its current-account deficit gaped wider for longer. But its economy proved strong-livered."

    "[Australian] house prices fell from March 2008 to March 2009 (as measured by the weighted average of the eight state capitals), then resumed their rise," the magazine said. "In the year to the first quarter of 2010, they jumped by 18.8 per cent!"

    The Economist suggests the best way to limit the damage from a property bust is for regulators to exercise direct control over the amount of debt available to property owners and developers.

    [email protected]

  2. Is Canadian housing the next domino?

    Unconventional Economist

    Published 6:30 AM, 2 Mar 2011 Last update 9:40 AM, 2 Mar 2011


    Canada and Australia have a lot in common. Both economies are commodity exporters. Both countries have experienced similar rates of immigration. Both countries largely dodged the global recession that has recently shocked the developed world. And both are said to have world-beating banking systems, with Canada’s ranked as the strongest and Australia’s ranked third strongest in the world by the World Economic Forum’s Global Competitiveness Report.

    As in Australia, there is also widespread debate about whether Canada is experiencing a speculative housing bubble or asset inflation based upon sound fundamentals.

    Canadian home values have risen strongly relative to incomes and rents over the past ten years on the back of sharply rising debt levels. The key charts pertaining to the Canadian housing market are below, taken from Capital Economics’ recent Canadian housing and economic updates.

    The house price growth of Canada’s major cities compared to Australia’s capital cities is shown below (chart courtesy of World Housing Bubble, here and here).

    As you can see, there are some striking similarities between the two countries' housing markets. First, the two mineral rich cities of Perth and Calgary experienced their own unique house price booms during the 2006/07 commodities bubble. Second, both countries' governments and central banks were highly successful in reflating their respective housing markets after brief falls during the onset of the global recession.

    In Australia’s case, the housing market was reflated by a combination of significantly reduced interest rates, the temporary increase in the first home owners' grant, cash handouts to households, and the temporary relaxation of foreign ownership rules.

    Canada’s central bank and government also provided significant stimulus to the housing market. In addition to the Bank of Canada lowering interest rates to record lows (click to view chart), the government significantly loosened mortgage eligibility criteria, culminating in the introduction of the zero-deposit, 40-year mortgage in 2007. Further, the amount that Canadians could borrow was increased, with many individuals in 2009 being granted loans in the $C500,000 to $C800,000 range, provided their household income ranged from $C110,000 to $C170,000.

    Finally, in an effort to support the housing market in 2008 (when affordability fell sharply and the economy stalled), the Canadian government directed the Canadian Mortgage and Housing Corporation – the government-owned guarantor of high loan-to-value-ratio mortgages (explained here) – to approve as many high-risk borrowers as possible in order to keep credit flowing. As a result, the approval rate for these risky loans went from 33 per cent in 2007 to 42 per cent in 2008. By mid-2007, the average Canadian home buyer who took out a mortgage had only 6 per cent equity in their home, suggesting the risk of negative equity is high even if there is only a moderate correction.

    The Canadian government has since raised the mortgage eligibility criteria. In October 2008, it discontinued the zero down, 40-year mortgage, reverting back to the 5 per cent down, 35-year mortgage requirement that was in place prior to the global recession. Then, last month, the Canadian government announced that it would reduce the maximum amortisation period for mortgages to 30 years from March, adding around $100 in extra loan repayments to the average mortgage. The government also reduced the maximum amount that Canadians could borrow against the value of their homes – called a Home Equity Line of Credit (HELOC) – from 90 per cent to 85 per cent.

    Bubble trouble

    Last week, Capital Economics released its Canada Economic Outlook Report (Q1 2010), which predicts sharp falls in Canadian house prices, household deleveraging, and anaemic economic growth into the future.

    The report warns that Canadians' belief that their economy is somehow invincible after emerging from the crisis relatively unscathed is "disconcerting" as house prices lose touch with fundamentals.

    "Relative to incomes, our calculations suggest that Canadian housing is now just under 40 per cent over-valued, which is about the same level of excess that the US market reached before it collapsed. We have pencilled in a 25 per cent cumulative decline in house prices over three years, mirroring what happened south of the border.

    "The biggest downside risk is that an adverse feedback loop could develop, as it did in the US, with rapidly falling house prices leading to a contraction in both output and employment, which puts even more downward pressure on house prices."

    Capital Economics also warns that the government-owned CMHC could be exposed to significant losses should house prices fall significantly.

    "According to our reading of CMHC financial statements, insured mortgages and securitised mortgage guarantees total an amount close to $C800 billion. The total equity of CMHC is $C10 billion.

    "If house prices collapse further than we predict, say by 35 per cent, with a default rate of 10 per cent and average home equity of 10 per cent, then the potential capital loss amounts to $C20 billion.

    "Even if we assume that half of this amount is eventually recovered, that still leaves an expected loss of around $C10 billion. Under the same assumptions, the 25 per cent decline in house prices that we expect over the next few years would still result in a considerable loss of around $C6 billion."

    Only a year ago, the mainstream view in Canada was that the housing market was bullet-proof and that a US-style meltdown was highly improbable. Now sentiment appears to have changed following a collapse of sales, a build-up of inventory, and three consecutive months of price falls between September and November (December recorded a 0.3 per cent rise).

    Will Canada be the next housing market to fall? Watch this space.

    This article first appeared on the MacroBusiness website. Republished with permission.

  3. Finally, Here Comes the Price Crash…

    Tuesday, 1st March 2011

    Melbourne, Australia

    By Kris Sayce

    * Finally, Here Comes the Price Crash…


    The 20 most traded stocks on the Australian market lost 2.5% in 2010. Over the same timeframe another group of ASX-listed stocks that only a handful of investors know about posted a +47% return.

    These stocks have one thing in common.

    CLICK HERE to find out what it is (turn your speakers on now)


    “You haven’t mentioned the house price bubble much recently”, an old pal wrote to your editor over the weekend.

    We haven’t replied yet. But when we do, it’ll be to admit there’s a reason for our near silence.

    The reason is this: there hasn’t been much more to say on the subject.

    We’ve told you many times house prices are gonna go south. If you hadn’t taken notice by now, you never will. But that’s OK. We can’t help everyone.

    We’ve warned home-owners and home-buyers for the last two years that the Australian housing market was at the tipping point.

    We were ridiculed for saying so.

    We told you to only buy a house if: you don’t see a home as an investment. You’re prepared to see zero or negative price growth. And you’re pretty sure you can keep up repayments when interest rates go up, or when the economy crashes and unemployment soars.

    If you fit into any of those categories then sure, go ahead and buy a house. Just don’t expect to make any money from it.

    Remember that you won’t have the same luxury that house buyers had during the 1980s, 1990s and early 2000s. They rode the coattails of the credit expansion boom, where interest costs were more than offset by rapid price growth.

    The next ten years will be different: interest costs will outpace price growth.

    And soon enough, property speculators and owner-occupiers will realise this. And that will cause the biggest hit to house prices. They’ll realise they shouldn’t take out the biggest mortgage possible, because price growth won’t offset the interest costs.

    Landlords will realise it too. For years they’ve taken a loss on the income because they knew house prices would go up. They could afford to be negatively geared because in the long run it would pay off.

    Not anymore.

    Negative Growth Arrives

    With no capital growth, landlords will have to increase rents. Or rather they’ll try to increase rents.

    But it’ll be hard to do that with a glut of properties on the market. If they increase the rents too much, new landlords will undercut them as they will likely have smaller mortgages due to lower house prices.

    Not only that, but the higher the rent the more attractive it becomes for renters to buy – especially when house prices have slumped 30-40%.

    Yet, after all the warnings, the spruikers continue to peddle the story that Australia is immune from a housing crash. You know the story, there’s a housing shortage… a shortage that doesn’t exist.

    The only place it exists is in the minds of the spruikers and the bankers who need to peddle the shortage myth. Just so they can postpone the inevitable – a painful housing slump, a credit contraction and another economic recession… or maybe depression.

    The reason we’ve decided to bring up the subject of housing today is because the beginning of the housing slump has been confirmed.

    We warned you at least three months ago the crash had begun. It’s just the dodgy indices hadn’t shown this yet. Well now they have.

    Yesterday’s The Age reported:

    “City home prices dropped more than a full percentage point in January, retreating for a second month in three, as floods in Queensland and Victoria deterred buyers.”

    OK, the floods did play a part in knocking down prices. In fact we told you they would. But house prices were set to plummet anyway, regardless of the floods. The spruikers are always looking for an excuse.

    Anyway, The Age states “City home prices dropped more than a full percentage point in January.” Strictly speaking that’s true. But Melbourne’s favourite snoozepaper could have been a bit more honest with the figure.

    According to RPData, the source of the number, “Capital city values were down -1.6 per cent [seasonally adjusted].”

    Just a slight difference. Annualised, you’re looking at a 19.2% price drop. Of course, I know it’s not fair to annualise a one-month figure. But if you look at the non-seasonally adjusted RPData numbers for house price growth you’ll see it’s truly awful:

    Source: RPData

    The year-on-year growth in Australian capital cities is just 1.2%. So much for house prices doubling every seven years. At that rate it would take sixty years for prices to double!

    The thing is, that’s where house price growth should be. It should only rise and fall by this amount because housing is supposed to be a low-risk investment.

    You shouldn’t get the double-your-money returns over seven years that the spruikers rave about. That kind of volatile growth is for the stock market. If you want high risk and high possible returns, invest in shares. If you want low risk and low returns then you should invest in property… or that’s the way it should be.

    But thanks to the unsustainable credit boom that has been fanned by retail and central banks over the past thirty years, the market is out of whack.

    Even though central bankers like Dr. Luci Ellis at the Reserve Bank of Australia (RBA) refuse to believe there has been a credit-fuelled boom – although shortly I’ll show you that even one of the banks admits easy credit has fuelled house price growth.

    Aussies Have Hit the Credit Limit

    The fact is house prices are too high. And consumers are now maxed out on credit.

    And don’t – please don’t – fall for the guff that Australians are saving more, just because the savings rate is up to 10%. Even the Australian Bureau of Statistics (ABS) warns the savings rate statistic is unreliable.

    Simply because it just minuses national consumption from national income, and voila the difference is what’s saved.

    Wrong. It simply means that those who have saved are still savings. But those who live on credit have reached their maximum credit limit. It’s not that people have suddenly become savers. It’s that they’ve borrowed as much as they can.

    Even the ropey banks are thinking twice about extending credit – although you wouldn’t know it from the number of credit card limit increase offers they send in the post or by email (your editor was getting about one a fortnight until a couple of weeks ago!).

    The so-called deleveraging that the mainstream told you had happened in 2009 and 2010 never happened. Credit continued to soar in the belief that Australia was immune to global problems. Australian household debt now stands at over $1 trillion.

    But now there’s nowhere left to go.

    And that means the great deleveraging has arrived.

    The Ponzi scheme that is the Australian housing market is on the verge of collapse.

    The banking and property spruiking chickens have at last come home to roost.

    Of course, the spruikers and bankers will claim they saw a slowdown coming all along. They’ll say, “Well duh, of course nothing could go up forever, but any price falls will be mild.”

    In fact, we’ve scanned the websites of some of the usual spruiking suspects this morning. Guess what… [Whisper: Shhhhh! They haven’t mentioned the latest house price stats, even though they’re usually right on top of it when the index goes up. They must be in denial. House prices do go down after all. Most likely they’re thinking up an excuse for the price fall even as we write].

    Remember, these are the guys who tried to tell you that Australia’s house prices would plateau, but they wouldn’t go down. That after a thirty-year credit-fuelled boom house prices would keep going at top speed.

    They even got in the big guns. One bank economist after the other has waded in with an excuse. The most recent is the ‘Housing Overvaluation’ research report from ANZ Bank.

    There’s not much in it apart from the usual banker spin. And needless to say it concludes Aussie house prices aren’t overvalued. But there are a few delicious lines in the conclusion:

    “The transitory forces are delicately poised, but in the absence of a rapid escalation in interest rates to combat unwelcome higher ‘core’ inflation… a wholesale downward shift in house prices remains unlikely.

    “Conversely, a risk scenario based around a major collapse in the terms of trade in future years, contrary to expectations, is more likely to prompt policy settings that can only be favourable for house prices, particularly if house price momentum has been restrained in the lead-up. Policy-makers intent on preparing for a ‘post-terms of trade collapse’ environment are likely to shift settings to a more accommodating stance. While the economy is likely to slow, the interest rate-sensitive sectors such as housing will benefit considerably and swiftly.”

    In other words:

    Economy bad = house prices rise.

    Economy good = house prices rise.

    Great eh? The bank concludes that house prices will rise in both a good and bad Australian economy. When you hear that sort of rubbish from a mainstream economist you know it’s time to batten down the hatches.

    And prepare for the mother of all price falls.

    Win-Win or Lose-Lose

    If you believe the banks, you can’t lose with Australian housing. It’s the world’s one and only completely risk-free investment. What clowns.

    They argue that even if the Aussie economy hits the skids, that’ll be good news because the government and central bankers will try to prop up the housing market with low interest rates and stimulus.

    Oh stop it. It may have worked once, but it only postponed the inevitable. Besides, all the suckers have been suckered in.

    The fact is bankers and spruikers are desperate. They’ve resorted to the ‘good news is good and bad news is better’ argument.

    It’s the same argument playing out right now with the US Federal Reserve and its money-printing programme – if the Fed stops printing money it means the economy is doing nicely. But if it keeps printing money then that’s even better because it’ll give the economy another stimulus.

    Just when we thought we’d heard it all. What do they teach kids in economics classes these days? Voodoo-nomics and witchcraft-nomics by the sound of it.

    But the ANZ report isn’t all bad – just 99% of it is. The one good part is this chart:

    Source: ANZ Bank

    It’s pretty much an admission from the bank that the house price gains have been the result of a credit-fuelled boom: “credit supply boosted by…”, “credit demand boosted by…”

    Although for the recent price rises, it’s not the fault of the credit boom at all… no, that’s all in the past… it’s all to do with that non-existent housing shortage. You know, the one that the National Housing Supply Council claims is proved by the number of homeless people and people who live in caravans!

    In fact, that’s the most disgraceful thing we’ve seen from the whole housing shortage ruse. Trying to make out that homelessness proves a housing shortage. We’re no psychologist, but we’ll tell you the major reason for homelessness is family breakdown and mental health problems.

    Homelessness most certainly isn’t caused by people being unable to afford a $500,000 mortgage in the Melbourne suburbs.

    But back to the point. Some spruiking clowns tried to tell you that a slowing Australian housing market would just mean prices would rise only 5% this year. These people were considered housing ‘bears’.

    But what they’re trying to say is that growth will revert to the mean.

    Normal Growth, Not Bubble Growth

    Their fatal mistake is that mean reversion only occurs after the market has overshot both sides. So far we’ve had a huge overshoot to the upside. Next is a huge overshoot to the downside – hence our call for a 40% drop in house prices.

    Only then will the market go back to some kind of normality.

    But normality won’t mean house prices doubling every seven years. That’s not normal. That’s abnormal. It was created by easy bank credit. House prices doubling every seven years was the excessive growth that led to this bubble.

    Of course there will be attempts to re-create the bubble. Just as the bankers and governments are now trying to re-create the stock market bubble.

    To them, “normal” is the stock market at a perpetual high. But it can only remain at the high levels seen in 2007 if there is a mad expansion of paper and electronic money. Once the credit stops growing, the manic growth stops and… no, it doesn’t plateau… it crashes.

    Without central bank manipulation you wouldn’t get the long boom periods followed by painful crashes. You only see these booms because of central bank manipulation. It’s happened in the stock market. And it’s happened in the housing market.

    Both were booms and both are busts.

    So a return to normality in the housing market means house prices rising and falling. This is exactly what happened to house prices worldwide until the early 1970s.

    The danger is the bankers and pollies will try to engineer another house price asset bubble before this one has been fully purged from the economy. We can expect them to try that, because they always do.

    That’s how they postpone the inevitable bankruptcy of the financial system. Unless credit continues to grow it’s impossible for bank customers to repay debts. And if debts aren’t repaid that means a whole lot of trouble for the banks.

    But even a bailout can only provide a pause. Something as immense as this can only be postponed for so long.

    In order to postpone it, credit must always grow. As soon as it contracts, the banks are in trouble. That’s why the Aussie bankers made a beeline straight to The Lodge in late 2008 to get the Fairy Ruddfather to bail out the Aussie banking system.

    Without the bailout, Australia’s banks would have been toast… and they know it.

    Bailouts Helped Banks and Hurt Aussies

    Make no mistake, a 1.6% drop in house prices is huge. And a 19.2% annualised fall is even huger. Especially when home buyers are already behind the eight-ball.

    When you add stamp duty, interest payments, establishment fees and rates, a homebuyer needs their new home to rise over 10% in the first year just to break even. But if the house price falls 19.2% in that first year, they’ll need it to gain more than 30% just to break even.

    And for every year the price growth is lower than the interest repayments, home buyers are falling even further behind.

    That’s when buyers start to lose faith in the fable that house prices always go up.

    You see, rising house prices is a psychological thing. I mentioned a few months back after returning from a holiday to the UK that the people I spoke to no longer believed house prices always go up.

    House prices weren’t even a topic of conversation. Housing was no longer a goose laying golden eggs… for many Poms it was more like an albatross around the neck… years of negative equity beckoned for those sucked into buying property at the peak of the boom.

    And contrary to mainstream opinion, hundreds of thousands of Australians will suffer the same fate. Perhaps many have already woken up to the fact. We hope so.

    They were betrayed into believing house prices always rise, and even bribed by the crooks in Canberra to take out mortgages. For what reason? To live the dream of Australian home ownership?

    Don’t make me laugh.

    It was for one reason only, the pollies and bankers needed to sucker-in gullible and innocent first home buyers in order to bail out the fraudulent and bankrupt banking system.

    As I say, without those taxpayer funded bailouts, the Australian economy would have collapsed, banks would have gone bust, and the pollies would have been kicked out.

    Trouble is, while it may have saved the bacon of the banker and the pollies, it has lumbered hundreds of thousands of Australians with unaffordable debt, secured against an asset that’s set to plummet in value.

    Do the numbers: the Aussie housing market is valued at $3.5 trillion. One third of that is debt free. The remaining two-thirds of homes have about $1 trillion of debt secured against it. That’s about $1 trillion of debt against $2.2 trillion of housing.

    By anyone’s figures, that’s a high loan-to-valuation ratio. And it’s set to get a whole lot worse and painful when the proverbial finally hits the fan.


    Kris Sayce

    for Money Morning Australia

  4. House prices fall in January

    Published 10:39 AM, 28 Feb 2011 Last update 10:39 AM, 28 Feb 2011


    By a staff reporter

    Australian house prices fell across the board in January, as natural disasters and low sales volumes weighed on sentiment.

    Prices in capital cities fell by a seasonally-adjusted 1.6 per cent during the month, according to RP Data-Rismark's hedonic home value index, while prices outside capital cities fell by 1.2 per cent.

    The median house price for capital cities dropped to $465,000 over the three months to January 31, and $325,000 for the rest of state category.

    Canberra (down 3.8 per cent), Perth (down 2.6 per cent) and Brisbane (down 2.3 per cent) posted the biggest price falls in the three months to January.

    Hobart was the only capital city to record price growth for the quarter, with prices lifting 0.6 per cent.

    Adelaide was the next strongest market, falling by 1.3 per cent over the quarter. Sydney and Darwin both dropped by 1.4 per cent, while Melbourne slumped 1.9 per cent.

  5. February 21, 2011 at 9:19 pm

    It’s a wonder anyone is still wondering whether the Reserve Bank will keep lifting interest rates this year. Of course they will.

    There are some pie in the sky, self-styled investors with little idea what is going on the economy, who believe house prices can keep rising.

    They are as out of touch as those who work in real estate and the banks.

    They rate of house price inflation is shocking. Even if the disappearance of the first-home-buyers takes some heat out of the market, we need more interest rate rises to bring this bubble under control.

    Rob Fisher

    Australian Real Estate Bubble Forum

  6. Monday, February 21, 2011 Archives Pictures

    Ireland:Fairly cloudy and windy Fairly cloudy and windy »


    House buyers ‘jittery’ in 2007

    By Niamh Hennessy

    Monday, February 21, 2011

    FOUR years ago, almost two-thirds of consumers expected house prices to rise each year until 2012, according to an ESRI report.

    a d v e r t i s e m e n t

    Click Here!

    One-in-10 people expected prices to increase by "a lot" between the years 2007 and 2012, while half said they would increase "a little". Just 18% expected prices to drop during this time, according to a survey conducted by the Economic and Social Research Institute (ESRI) in January 2007, one month before house prices peaked.

    Since the start of 2007 house prices have plunged by around 40% and are still falling.

    The survey asked consumers to give their perception of the outlook for the housing market over the next five years. It did note, however, that Irish consumers were becoming "more cautious" about the outlook for house prices but most still expected a small increase in 2007 and further gains over the following five years.

    The expected increase for 2007 was 3.5% while average gains of 7.3% were envisaged each year until 2012.

    Director of the Irish Mortgage Corporation, Frank Conway said nobody expected what happened in October 2008, when the entire global financial system came close to collapse.

    "Irish consumers were jittery entering 2007. And, while according to the Permanent TSB/ESRI house price index, house prices peaked in February of that year, in reality, all of the ingredients for a house price fall were already in motion.

    "We had seen a significant drop-off in attendees at our first-time buyer seminars. In hindsight, it is now clear what was going on but at the time, we were not sure."

    The survey also asked people what they planned to do with their SSIA money. Just 4% intended to purchase property and 2% planned to purchase foreign property. One-in- 10 said they would pay off debt, while one third planned to save.

    The ESRI also said at the time they thought as many as 150,000 mortgage holders would face some degree of adjustment because of higher interest rates.

    "We reckon more significant difficulties may be faced by 40,000 borrowers who will see a notable squeeze on their spending power if interest rates continue to rise," they said.

    The latest figures show that more than 45,000 homeowners have now failed to pay their mortgage for three months or more.

    It is estimated that up to 80,000 people are now struggling to repay their mortgage and up to another 40,000 have had to do a deal with their lenders to reduce their monthly repayments.

    Read more: http://www.examiner.ie/home/house-buyers-jittery-in-2007-145933.html#ixzz1EZUWv7Sk

  7. Yeah, he was one of the few who predicted the GFC though: "Sub-prime was a classic American scam and its now falling apart" Apart from CSL and Westpac shares I went 100% cash and fixed interest based on his figures and those of a couple of others. As far as shares in the four Australian major banks are concerned , well you just can't go wrong in the long term.

    Yeah bank shares are safe as long as the Goverment is backing and proping them up.

    I recon Steve Keen has a lot of logic behind his thinking and he will in time be recognised for the free thinker he is.

  8. Our bubble's bigger than their bubble

    Steve Keen

    Published 6:32 AM, 17 Feb 2011 Last update 10:10 AM, 17 Feb 2011

    The Australian housing bubble is categorically larger than the USA's, though in standard bubblology talk, the main reason that it is – that it was driven by far more than pure speculation on prices – is touted as one of the reasons that "Australia is different" and a crash won't happen here.

    It’s the sort of youthful hope that keeps many investors sleeping soundly underneath the Southern Cross. But this ‘logic’ is a better fit for astrologers – those other chartists – than property market forecasters.

    A quick look at a composite index of the raw housing data for both countries disproves this fantasy.

    By charting the Case-Schiller Index against the ABS established house price index from the same base year of 1986 (see Figure 1), it’s obvious nominal house prices in Australia have risen far more than in the US since 1986. Indeed the data shows a factor of six increase, versus a peak of about a 3.5 increase in the US (which has now fallen to less than a 2.5 times increase after the US bubble burst in 2006).

    Figure 1

    [Click to enlarge the image]

    click the image to enlarge

    However, when accounting for consumer price inflation which runs at different speeds in the two economies, an intriguing aspect is revealed.

    The two bubbles (see chart below) tracked each other from 1997 till 2004 (with the Australian at a higher level since a mini-bubble back in 87-89 that I'll return to later), and then diverged.

    Figure 2

    [Click to enlarge the image]

    click the image to enlarge

    The Australian trend broke first, but then restarted just before the US bubble finally burst. The Australian bubble then broke again in 2008, only to restart shortly after the government’s first home ‘owner’s’ boost.

    It has recently topped out, with one quarter of falling prices (with the nominal index dropping 0.3 per cent), and the latest rising by 0.7 per cent (bear in mind however that the 0.3 per cent fall for the September quarter was first shown as a 0.1 per cent increase, and both figures are still subject to revision).

    Whether this period marks the beginning of the end of the Australian house price bubble will only be clear in hindsight, but the volatility of the index is now extreme, and the inflationary impact and misdirected benefits of the Australian government’s first home owner’s boost (which I prefer to call the first home vendor’s boost) is obvious in Figure 3.

    Figure 3.

    [Click to enlarge the image]

    click the image to enlarge

    This is not a new phenomenon: though I apportion most blame for the Australian house price bubble to the finance sector, there’s little doubt that the fuse itself was lit by the government’s interventions via the First Home Owners Scheme, which began in 1983.

    This scheme has always been used as a means to stimulate the economy, and it’s worked – but in much the same way that an anabolic steroid will help an athlete win a medal: it pumps up the performance at the event, only to leave the athlete with long-term health problems in the future.

    From 1951 until the FHOS was introduced in 1983, the average quarterly increase in house prices was 0.07 per cent – which is statistically indistinguishable from zero, given that the standard deviation was 1.73 per cent.

    After the scheme was introduced, the average quarterly growth increased by more than a factor of ten to 0.94 per cent, and the volatility rose as well. Since there have also been periods where the scheme was removed and when it was doubled, it’s possible to drill down further on its impact – and it’s bleedingly obvious that it both increased house prices and their volatility.

    Government interventions in this asset market make it very hard to work out a decent base year from which to compare Australian house prices to those in America. Prior to 1949, the Australian government enforced a rental ceiling, which kept house prices artificially low. Since 1983, it has run the first home vendors scheme, which (along with other interventions like negative gearing) kept prices artificially high. I take 1970 as the best date for a comparison of the Australian and US house price indices, since it's halfway between when the price spurt caused by the abolition of the rental control scheme had petered out, and the new regime of keeping house prices high took over.

    So Figure 4 is my preferred series comparing Australian and US house prices (with the B marking the introduction of the first home vendors scheme):

    Figure 4

    [Click to enlarge the image]

    click the image to enlarge

    As tends to happen at the end of a bubble, when prices have been driven far higher than incomes, spruikers have claimed that Australian house prices are not really high when compared to incomes. The Demographia survey's comparison of median house prices to median incomes has been disparaged by spruikers who happily compare median house prices to average incomes, where those average incomes include imputed rental returns from owner-occupied dwellings, superannuation entitlements that can't be used to pay mortgage bills, etc.

    This is a good point to consider the usual spruiker case that house prices have risen because demand – driven by rising population – has exceeded supply. One of the most regularly cited justifications for this is the National Housing Supply Council report, which estimates the gap between supply and “underlying demand”.

    “ . . . the Council estimated a gap of around 85,000 dwellings between underlying demand for and supply of housing at 30 June 2008. The Council developed a methodology for measuring the gap based on selected measures of homelessness, including the number of marginal residents of caravan parks and the undersupply of private rental dwellings indicated by the rental vacancy rate. The measures used in the 2008 report were: 2008 gap size = additional private rental dwellings required in 2008 to increase the number of vacant private rental dwellings to 3 per cent of the total private rental stock + dwellings required to accommodate people who are homeless and sleeping rough or staying with friends and relatives + dwellings required to house marginal residents of caravan parks.’ (National Housing Supply Council 2010, pages 65-66)"

    These are legitimate measures of a social need, but they’re not a measure of the market demand for housing! Figure 5 shows the correlation of changes in the number of Australians per house with changes in nominal house prices.

    [Click to enlarge the image]

    click the image to enlarge

    A falling ratio of people to houses—so that the housing stock was growing more rapidly than population – should have meant falling prices according to the standard "supply and demand" argument. But what about the one brief period where population was actually rising faster than the housing stock – between 2006 and 2010 – and house prices also rose sharply?

    Whoops! The correlation is actually strongly negative: minus 0.56. Population dynamics gave spruikers a good story, but it wasn't what drove house prices up. What did instead was debt. Demand for houses is not population increase: it’s people with new mortgage loans.

    When you look at the relationship between new lending and the change in house prices, you finally start to see some serious long run correlations (as long as the data makes possible, anyway).

    [Click to enlarge the image]

    click the image to enlarge

    The correlation coefficient here is 0.53 – rather better than the minus 0.06 that applies between change in population per dwelling and change in price over 1975-2010 – and it improves when the trend of rising mortgage new debt to GDP is removed.

    So we’ve had a debt-driven housing bubble, just as has the USA, and it’s the dynamics of debt that will determine when and how it bursts – not demographics.

    Oh, and the property lobby is also given to arguing that Australian house prices aren’t really expensive when compared to incomes, and that they have moved largely in line with disposable incomes over time, so that there can’t be a bubble. This is a claim that Chris Joye makes frequently; however the figures he uses for income include such factors as imputed rental from owner-occupied dwellings. Try paying your mortgage with your imputed rent.

    I thought I’d put together a more realistic comparison, pitting the median price series for Sydney and Melbourne (using the ABS figures for median house prices since 2002, Nigel Stapledon’s estimates for the years from 1960 till 2002) against disposable income per household (using the RBA’s disposable income series, and the ABS estimates of the number of dwellings in the country). This tells us how house prices compare to the incomes available to actually pay mortgages – and it understates any bubble, if there is one, since it pits median prices against average incomes.

    So is there a bubble? Is the Pope a Catholic?

  9. “If the property value goes up every seven or eight years and it doubles, which I understand, I agree – how many years do you have to hold the property for the property to make enough cashflow… to cover your mortgage, your rates, your water and all your outgoings? Ladies and gentleman it’s sixteen years. So the property can double in seven years, it can double in eight years but for you to walk away from your job it takes sixteen years… before it makes enough money for you to stop going to your job to support it… so what happens is we find people go ‘I’m worth a fortune’, and they are. But they still have to go to the job every day at 6.30 in the morning because they’ve still got to put money into the fortune!”

    That’s probably the most sense we’ve heard from a property “guru” in years.

    Money Morning reader Pat brought it to our attention. The words come from property financing whizz Rick Otton.

    The fact is, most property investors are in the same financial position as the doddery old English Lords of the manor… asset rich, cash poor, and debt heavy. The Lords have to sell off the family silver to stay liquid.

    And property investors have to work harder than before to pay for what is no more than an expensive hobby.

    Investments shouldn’t cost you money, they should make you money… that’s why they’re called investments. If something is consistently giving you a negative return then it’s either a bad investment… or it’s not an investment at all.

    The fact is, if you keep pouring in more cash into than you get in return you may as well take up trainspotting or stamp collecting. At least you’d probably get some enjoyment from it rather than getting yourself deeper into debt with the bank.

    Of course, we dispute the argument that properties double in value every seven years. Simply because the numbers don’t support the claim.

    I know you’ve probably seen the charts and numbers that “prove” it, but they don’t. What you see is a neat number trick.

    What the numbers actually show is that property prices have typically doubled every seven to ten years, but only since the mid-1970s. Over the previous seventy years house price growth was broadly flat. There were periods of price rises and periods of price falls.

    “Ah,” you may say, “But if you take an average house price from 1900 and double it every seven years you’ll get to today’s average house price.” That’s the other number trick the spruikers like to use.

    Sure you do, but all the growth has been in the last thirty-odd years. Averaging out a number over two distinctly different periods doesn’t provide a fair reflection on the true price action.

    It would be like taking the price action of the Nasdaq market from 1998 to 2001 and saying stock prices always move up like that. You and I know that would be misleading.

    But what’s more important is Rick’s comment that it takes sixteen years for a property to be cashflow positive. Just remember that’s sixteen years in which the house has supposedly doubled in value twice.

    Yet it’s not until the seventeenth year that the property investor is able to walk away with a net profit!

    Now think about what the payback will be when property values don’t double every seven years. How long will you need to hold a property for it to be cashflow positive? Twenty years? Thirty years? Seventy years?

    I don’t know about you, but seventy years seems like a long time to wait in order to make a $1 profit on a several-hundred-thousand-dollar investment.

    I know the stockmarket has been pretty crummy recently. But at least the buying, financing and holding costs are low by comparison.

    And that wasn’t the only tip-off we got from a reader this week.

    It was a tip-off that contains a bombshell backing our call for a house price crash – a house price crash that’s already started based on what we’ve seen of the housing market – even though the official indices claim prices have plateeeeeaued.

    What does it tell us? Well, if we thought we’d put the stake through the heart of the housing shortage myth, housing index firm Residex has hammered the stake through to the table.

    According to its numbers, far from there being a housing shortage, Melbourne has a surplus of 18,000 properties! That’s right, surplus… not a shortage. And that doesn’t take into account the huge land release promised by the previous Victorian state government.

    If that wasn’t bad enough for the Melbourne market, get this… Melbourne also boasts the lowest rental yield of any Australian city at just 3.3%.

    That’s the gross yield of course.

    If it takes the average investor sixteen years to be cashflow positive on a property, and Melbourne has below average rental yields, just think how long it could take Melbourne property investors to be cashflow positive.

    You’d clearly need the staying power of Methuselah to get any kind of financial benefit from buying a Melbourne rental property!

    Boy, is the Melbourne housing market set to plummet once buyers figure out there’s no rush to buy into this over-priced market.

    By our back-of-the-envelope reckoning, the Melbourne median price needs to drop about $150,000 (about 30%) just for the rental yield to reach the national average of 4.35%.

    And, as you know, when markets fall they never fall to the average, they always overshoot.

    Looks like we may have underestimated with our forecast of a 40% drop… who’s to say it couldn’t be a whole lot worse.

    Not that the rest of the country is safe. Another Money Morning reader sent us this email:

    “I thought you might be interested to learn about Mandurah in Western Australia in respect of the so called “housing shortage” we have (that argument has been a bit quiet recently).

    “…It has been interesting to see that the hundreds of apartments that had been completed when I was here last year are still vacant. I have had a walk around tonight to get a better gauge to see how many lights and flickering televisions could be spotted and my calculations are that maximum 25% of these waterside apartments have people living inside them. There are “for lease” and “for sale” signs everywhere as well as a couple of developments that have stopped half way through!

    “Developers and bankers must be hurting big time sitting on these expensive and impressive looking buildings and bleeding heavily while waiting for gullible buyers!

    “Moral of the story is that I would be steering clear of WA companies involved in construction related activities.”

    As it happens, Residex calculates that Perth has a housing surplus of 6,000.

    Our advice for today?

    If you’re a property investor (but not necessarily an owner-occupier) then sell Melbourne and sell Perth… unless you’re planning on living to the age of 969… because that’s how long it’ll take to be cashflow positive on your so-called investment.


    Kris Sayce

    for Money Morning Australia

  10. The cult of Australian property

    Oliver Marc Hartwich

    Published 6:19 AM, 3 Feb 2011 Last update 10:25 AM, 3 Feb 2011

    The theory of an Australian housing market bubble shows all signs of a proper religion. There are rituals like the recurring publication of house price indices. There are miracles when house prices rise despite interest rate hikes. Then there are true believers in the theory that Australian house prices are not in any way exaggerated. And finally there are heretics who take great pleasure in questioning just that.

    Whether you believe in an Australian housing bubble or not, it is unlikely that any particular set of data will convince you of the opposite. Again, this sounds more like religion than the basis for a dispassionate analysis. The housing market may not yet promise salvation or eternal life but the debates about it couldn’t be fiercer if it did.

    Without wishing to upset anyone’s semi-religious feelings, I think it is time to deflate one of the great myths of the housing market. It is the myth that restricted supply is a guarantee for ever-rising house prices.

    As undergraduate students of economics learn, lowering supply results in higher prices. But their teachers also issue a disclaimer with this rule. It hides behind the Latin phrase ceteris paribus – ‘all other things being equal’. In their postgraduate studies – and even more so in the real world – the students will then spend most of their time finding out what happens when other things are not held constant.

    Applied to the conundrum of the housing market, the ceteris paribus assumption is usually ignored –at least by those who claim that a combination of restricted supply and rising demand for housing will inevitably lead to a rise in house prices.

    In the very long run, this is correct. In the short run, however, there is no such inevitability. Why? Because other things are never held equal. Demand fluctuates, expectations change – and then it is the very rigidity of housing supply that amplifies price swings.

    As the Unconventional Economist column correctly pointed out (The ‘no housing bubble’ myth can't last, January 28), "unresponsive housing supply results in greater house price volatility – both on the way up and the way down." This sounds technical, but the experience of two other countries’ housing markets provides a good illustration of the phenomenon.

    The countries in question are the United Kingdom and Germany. On the one hand, they are remarkably similar. Over the past forty years, both the UK and Germany experienced similar population growth, almost identical decreases in household sizes, and comparable economic growth. Besides, both countries have similar population densities.

    Summing it up, the UK and Germany share all the factors that explain housing demand. As is so often the case, the Brits and their Teutonic cousins are more similar than the Germans think and the British wish to believe.

    However, as comparable as they are with regard to housing demand, they are wildly different in terms of housing supply. For a variety of reasons housing supply was extremely rigid and limited in Britain and extremely flexible and responsive in Germany. The Germans built more houses than the British, both in per capita and absolute terms.

    The EU collects data for the housing markets of its 27 member states. According to their statistics, Germany’s rate of dwellings completions per 1,000 inhabitants was consistently higher than the UK’s. In some years the difference was only 10 per cent, in others more than 110 per cent.

    The differences in completions were also reflected in the land made available for development. The Cologne Institute for Economic Research calculated that last year there were 50 newly developed hectares of land per 100,000 population in Germany but only 15 hectares in the UK.

    So what did these different housing supply circumstances mean for British and German house prices over time? Adjusted for inflation, British house prices rose steeply in the early 1970s and then fell almost as much. German house prices were flat.

    Then British house prices peaked again in the late 1970s, only to fall slightly again. German house prices were flat. After that, British house prices rallied until the late 1980s while German house prices remained flat.

    Following a massive housing bust in Britain that ended in the mid-1990s, British house prices went on another long rally that ended in 2008. All the while, German house prices stayed flat. Now British house prices have suffered another heavy correction, and – surprise, surprise – German house prices are still flat.

    Looking back over the housing markets of both countries, British house prices are now considerably higher than they were 40 years ago whereas German house prices have hardly shifted at all. In the long run, the supply constraints obviously reduced housing affordability in Britain. It is just what economic theory would have predicted.

    But the history of British and German house prices also shows something different. Despite the long run house price increases, there were enough ceteris paribus moments in the meantime. They caused strong swings in British house prices because the rigidity of supply sent the market on a roller coaster ride. Booms and busts were programmed into the British market precisely because of its supply constraints.

    On the other hand, the flexibility of German housing supply ensured that no such swings could occur. Perhaps it also reduced demand for housing because potential buyers did not expect any future house price increases and thus felt no hurry to rush into the market and buy at all cost. This also explains Germany’s lower home ownership rate. The higher rate of tenants in Germany is a result of market stability, not the cause of it. There are no capital gains to be made in Germany’s boring housing market, so potential owners rather invest their savings elsewhere – and rent.

    The British-German housing comparison is instructive in the discussion of Australia’s housing market. It should challenge the religious beliefs in both camps as it shows that rigid supply and strong demand are no guarantee for constant price increases. Though they increase prices over long periods of time, they equally result in strong market swings in either direction.

    So is there a bubble in Australia’s housing market? Let’s put it this way: Before the UK housing bubble burst in 2008, the British also believed that strong demand and low supply would ensure ever rising house prices.

    Dr Oliver Marc Hartwich is a Research Fellow at the Centre for Independent Studies.

  11. U.K. house prices extended their decline in January as demand plunged the most in three years on concern about the outlook for the economy, Hometrack Ltd. said.

    The average cost of a home fell 0.5 percent from December to 153,600 pounds ($244,000), a seventh straight drop, the London-based property researcher said in an e-mailed report today. Demand, measured by the number of new buyers registering with agents, dropped 9.5 percent.

    Bank of England policy maker Adam Posen said last week he sees a “downside” risk to the housing market due to the lack of credit for first-time buyers and “very low” levels of home sales. The U.K. economy unexpectedly shrank 0.5 percent in the fourth quarter and central bank Governor Mervyn King said the recovery will be “choppy” as Britons brace for the deepest spending cuts since World War II.

    “Concerns over the economic outlook and the biting reality of spending cuts are doing little to improve a fragile market defined by weak consumer sentiment and a lack of demand,” Richard Donnell, Hometrack’s director of research, said in the report. “It is the change in demand that we need to pay most attention to, as this will have the greatest impact on pricing levels in the first half of 2011.”

    The drop in demand this month was the biggest since a decline of 11.5 percent in January 2008. It has fallen by 26 percent in the past six months, according to Hometrack. The number of new homes listed for sale this month fell 5.4 percent, the most in four years.

    ‘Downward Pressure’

    From a year earlier, house prices fell 2.2 percent in January, and Donnell said prices will remain under “downward pressure” in the short term.

    In addition to the weakening recovery, confidence among consumers has been dented by inflation, which accelerated to 3.7 percent in December, eroding spending power. The Confederation of British Industry said today that its retail-sales index fell in January for the first time in three months, with stores expecting further weakness in February.

    “Consumer demand is expected to be weak in coming months as the spending power of households is hit by a combination of sharply rising prices and weak wage growth,” said Chief Economic Adviser Ian McCafferty.

    Rate Increase

    The acceleration in inflation has also raised the prospect of an interest-rate increase. While the central bank held its benchmark rate at a record low 0.5 percent on Jan. 13, minutes of meeting showed policy maker Martin Weale joined Andrew Sentance in voting for a rate increase. Posen maintained his vote for more stimulus.

    “The prospect of higher interest rates and increased mortgage costs mean that few will be considering moving house,” Donnell said. “In short, demand for housing is, over the coming months, likely to fall further.”

    A separate report today from the British Retail Consortium showed demand for labor at retailers fell in December due to “difficult trading conditions in the run-up to Christmas,” partly caused by the cold weather.

    The number of hours worked by employees at stores dropped 1.5 percent from a year earlier, the equivalent of 10,300 fewer full-time jobs, the BRC and Bond Pearce LLP said. They also said 38 percent of retailers plan to cut jobs in the coming quarter, up from 13 percent a year earlier.

  12. Reading The Age reporting on the housing market over the last couple of weeks has been like watching the Comedy Channel.

    At any point we expect Jon Stewart or Stephen Colbert to fly out of the page to tweak our nose and give us a cheeky wink.

    First we had, “Land sales plummet, adding to price squeeze”.

    Fairfax reporter Chris Zappone wrote:

    “Land sales have dropped to decade lows, further eroding the nation’s housing affordability as prices continue to rise, according to RPData and the Housing Industry Association…

    “Even as the pace of sales slows, Australia faces a roughly 200,000-unit housing shortage, HIA estimates, driven by complicated planning processes, a tax policy that encourages buyers to hold multiple homes, and the slow release of suitable land by real estate developers and governments.”

    So what we have is falling demand equalling a housing shortage.

    How does that work then?

    Surely, if the bulls were right and there is a housing shortage, buyers would be ripping the arms off real estate developers to get land at any price.

    Yet as The Age reports:

    “Land sales in the city [Melbourne] staged an even bigger retreat, falling 74.2 per cent in the year to September, to about 1500, the lowest since the March quarter of 1991.”

    Cameron Kusher from RPData is quoted saying:

    “Undoubtedly something needs to be done to address affordability constraints and governments at all levels need to realise that it is a serious problem.”

    Turn the numbers around and what you’ve got are buyers saying they won’t pay stupid prices. Prices are too high. And they need to fall. But the mainstream doesn’t look at it like that.

    As far as the mainstream is concerned, a lack of demand equals a lack of supply. Therefore prices are bound to go higher… because there’s a housing shortage.

    Of course, as you should know, the so-called housing shortage doesn’t exist. What you’ve got in most cases is over-the-top expectations of sellers.

    I can give you a good example… about two years ago, a house in the Sayce family’s street sold for around $750,000. That was roughly 60% more than houses in the same street were going for three years earlier.

    Today, two homes in the same street are on the market in the mid to high $600,000s. One of these homes has been on the market for over a year. By our estimate, they’re dreaming if they reckon they’ll get anything close to what they’re after.

    If they knock 10—20% off the price they might be in with a chance… More likely they’ll have to lop 30% off the reduced price to have a chance of selling.

    And based on letters we’ve received from Money Morning readers, it’s a similar story elsewhere in suburbia. Prices on decent, relatively modern homes are 30% lower than similar homes were two years ago.

    Trouble is, they’re still overpriced!

    Yet so far, this familiar story has failed to show up in the dodgy housing index numbers. We doubt that will be the case for long. In fact, based on the comical analysis of the housing market by ANZ Bank [ASX: ANZ], we’ll bet the numbers will start showing up before this year is out.

    According to reporting of the ANZ report – which we haven’t got our hands on yet:

    “The bank estimates that house prices will plateau this year, at a little more than $550,000, on average.”

    Well, that’s something. At least it’s better than the ‘house prices will double’ rubbish we’re used to reading.

    Even so, the banks still can’t admit it. They haven’t got the balls to say house prices have and will fall. They’ve always got to put a spin on it. In their world house prices either go up, plateau or become more affordable… but they never go down.

    Of course, the simple reason for that is the banks don’t live in the real world. They live in the crazy banking world where house prices must go up.

    You and I know why the banks have to push house prices higher – because the banks’ balance sheets are so leveraged to the housing market.

    It’s similar to if you have a margin loan on a share portfolio. While share prices go up you’re laughing. You’re getting a lovely return on your capital. But as soon as prices fall, unless you’ve reduced your exposure, you’re going to be in a bunch of trouble.

    And that’s exactly what the banks are exposed to… falling house prices.

    But as we say, even with price expectations falling by 30%, Aussie homes are still way overpriced. Yesterday the 7th Annual Demographia International Housing Affordability Survey was released.

    It shows that housing in every Australian town and city surveyed is either ‘Seriously Unaffordable’ or ‘Severely Unaffordable’.

    For example, in Sydney the median house price is 9.6-times the median household income.

    In Melbourne the median house price is 9-times the median household income.

    And on the Sunshine Coast the median house price is 8.4-times the median household income.

    But we thought it would be fun to see how the ratios had changed since the Commonwealth Bank of Australia [ASX: CBA] published its misleading figures a few months ago.

    You’ll recall the bank printed the following slide in a presentation it gave to international investors:

    Comparing apples with rabbits

    The bank was trying to show that Aussie house prices weren’t overpriced compared to cities overseas. And a quick glance at that chart would make you think the bank was right.

    But, we could smell a great big stinking juicy rat…

    We were the first to point out at the time that the CBA had pulled a fast one. Not that the dumbos in the mainstream press noticed. They simply parroted what the bank told them.

    The bank’s crime? It used numbers from Demographia to highlight the high ratios in overseas markets. But it used lower numbers (using a different methodology) from UBS for the Australian cities.

    If it had used Demographia data for all cities the table would have looked like this:

    Comparing apples with apples

    Just a slight difference! Using the Demographia numbers would have shown the house-price-to-income ratios to be 50% higher than the bank claimed.

    Needless to say the CBA shifted the blame and claimed it wasn’t trying to mislead at all. Of course that didn’t stop the bank from keeping the slide in the presentation and embarking on a world tour to hoodwink investors into buying the bank’s bonds.

    So, how do the numbers stack up now? Take a look at this:

    Yep, house prices in Sydney and Melbourne are considerably more expensive than other major cities. And, whereas prices-to-income ratios in other major cities have largely stabilised, in Sydney and Melbourne the ratios have gotten much worse.

    But how does that gel when we claim house prices have already started to fall?

    It’s simple. Right now, many sellers falsely believe house prices will recover. So they’re holding on… for dear life. They’re still in a dreamland thinking they’ll get the same price that sellers were getting two or three years ago.

    But soon enough they’ll start to sell, and those figures will filter through to the dodgy house price indices. And eventually the numbers will even start to show in the Demographia survey.

    That’s when sellers will figure out the glory days have gone. And that’s when you’ll get the rush to the exit. Especially when the fabled baby-boomers start flooding the market with their un-mortgaged properties.

    What do they care whether they sell for $600,000 or $500,000 when they bought the house for $50,000 thirty years ago? OK, they will care, because it’ll be a big chunk out of their retirement savings. But the point is, once they get it that house prices don’t always go up, they’ll sell as soon as you can blink.

    But, The Age article did get one thing right:

    “Australian house prices are expected to finish this year flat, amid signs that a slowdown in price gains could become ‘entrenched’, according to ANZ.”

    The bit they got right is the ‘entrenched’ part… not the house prices finishing flat this year. House prices will finish the year lower. There’s no doubt about that.

    What will become entrenched is the realisation that house prices don’t always go up. Investors and buyers have already started to figure that one out. And the longer prices stay where they are, the more convinced buyers will be that there’s no rush to tuck into the market.

    That’s happened in the UK and US where property buyers no longer see housing as a get-rich-quick money-making goldmine.

    “But what about the chronic housing shortage?” you may ask. It doesn’t exist.

    Remember the daft numbers from the National Housing Supply Council? That’s the government body responsible for spreading the myth about the shortage. The NaHSC is where the banks and property spruikers have gotten their ammo to support the shortage myth.

    Before you swallow the myth check out how the NaHSC came to its conclusion. Here’s the table from the 2008 report:

    Source: NaHSC

    We remember seeing it for the first time and laughing heartily. We picked these numbers apart over a year ago. Yet still the mainstream peddles the myth.

    The numbers to support the housing shortage are based on 9,000 homeless people sleeping rough, 35,000 families who live with friends and relatives, 13,000 families who live in caravan parks, and 26,000 people who… well, this one is really ridiculous.

    These 26,000 people are imaginary. They no more exist than the Loch Ness monster…

    What it’s saying is that because the rental vacancy rate is, say 2%, another 26,000 homes are needed in order to get the vacancy rate up to 3%. In other words, there isn’t a shortage of rental properties at all. It’s just that the vacancy rate is lower than the long-term average.

    What it’s saying is that to solve the so-called housing shortage the market needs more empty houses!

    We liken it to a shop claiming there’s a milk shortage when they’ve got ten bottles of milk left over at the end of the day when they used to have fifteen left over.

    It’s not a shortage. It’s a surplus you clowns.

    But even better than that, the NaHSC wasn’t happy to just add all the dodgy numbers together. It had to round the number up to the nearest 5,000. So even if we accepted their dodgy numbers – which we don’t – the number has been exaggerated by 2,000 dwellings that are merely the result of rounding-up!

    What a joke. But that’s the government for you.

    Yet these are the numbers the banks and spruikers base their statistics on when they carp on about a housing shortage.

    Make no mistake, all the evidence is pointing towards a massive drop in the price of Australian housing. For many the drop has already happened. Just look at the houses on the market in your area and you’ll see the asking price is well below the levels of two years ago – and still they aren’t selling.

    The UK and US housing bubble made a loud pop when it burst. It seems in contrast the Aussie market is suffering from a slow deflation as the air comes out of it.

    Either way, it’s bad news for sellers right now. But a year from now it’ll be great news for buyers. As I wrote a couple of weeks ago, keep your eye on the housing market… but don’t buy yet… your time will come.


    Kris Sayce

    For Money Morning Australia

  13. When the tide heads out on the commodities orgy currently & fortuitously being enjoyed by Australia, the wreckage that is one of the last remaining asset bubbles in the western world remain, which is of course, the Australian residential property market. And what a wreckage it will be! The heavily opportunitustic and statist/socialist Gillard Federal Government will throw billions of Taxpayer dollars and debt at it to try to stop the tide and because of this in the end they will loose will therefore make it all the worse.

    #4 - mickyj - 01/24/2011 - 20:13

  14. Lose your shirt and the rest in the Australian property market

    Tasman Times

    James Gruzman

    24 January 2011

    The 7th edition of the Demographia International Housing Affordability Survey has just been released. The survey monitors 325 major urban markets in Australia, Canada, Ireland, New Zealand, United Kingdom, United States and Hong Kong (China). The survey assesses housing affordability in these 325 urban markets and concludes that the Median Multiple should not exceed 3.0. The Median Multiple is derived from the gross annual household income and the median house price. When they say the Median Multiple is 3.0 this means that the median house price is three times the gross annual household income.

    Download the 7th Demographia International Housing Affordability Survey here. It is a fascinating read.

    The Australian figures in the survey are still frightening. Please keep in mind that a Median Multiple higher than 5.0 is rated as ‘severely unaffordable’.

    The Median Multiple for all of the markets surveyed in Australia is 6.1. For Australian house prices to fall in line with the Median Multiple of 3.0, prices need to drop by 51%.

    The Median Multiple for the major Australian markets (population over 1,000,000) is 7.1. For these markets to fall in line with the Median Multiple of 3.0, prices need to drop by 58%.

    In the table below I have included some of the markets surveyed with their Median Multiple and the percentage reduction for that market to fall in line with the Median Multiple of 3.0.


    Median Multiple

    % Reduction to fall in line with MM of 3.0




    Alice Springs












    Gold Coast















    Figures rounded to the nearest whole number.

    Sydney is the second least affordable housing market out of the 325 markets surveyed. If you think that you can pay off a property 9.6 times your annual wage after factoring in taxes and all the other bills you need to get your head checked.

    According to the report, the major markets in Australia excluding Sydney had a Median Multiple of 3.0 in 1981 (See figure 2). The survey states that Australia’s restrictive land policies have contributed to the increasing house prices.

    Hugh Pavletich, the co-author of Demographia International Housing Affordability Survey has previously stated the following to Tasman Times about the housing market:

    Australian residential stock is grossly inflated as the Annual Demographia International Housing Affordability Surveys, based on house prices to incomes, clearly illustrate.

    Another useful measure of housing stress is the relationship between total residential stock value and Gross Domestic Product. This should not exceed 1.5 times.

    Australia’s total residential stock value according to the RBA is $A4 trillion and the GDP is in the order of $A1.2 trillion – some 3.33 times.

    In contrast Texas, where housing is affordable at below 3 times household incomes, real estate total value is $US1.8 trillion for an economy with a GDP of $US2.2 trillion.

    Better still is Houston with a population of 5.8 million people, where the total residential stock value is $US430 billion. According to the Bureau of Economic Analysis, US Department of Commerce, Houston has a Gross Metropolitan Product of $US405 billion. The residential stock is therefore worth 1.06 times Gross Metropolitan Product.

    It is likely Australia’s residential stock’s bubble value is a stratospheric $2.2 trillion, with Australian households carrying well in excess of $400 billion of excess mortgage bubble debt.

    To put it lightly, the Australian property market has a bumpy road ahead!

  15. Lose your shirt and the rest in the Australian property market

    Tasman Times

    James Gruzman

    24 January 2011

    The 7th edition of the Demographia International Housing Affordability Survey has just been released. The survey monitors 325 major urban markets in Australia, Canada, Ireland, New Zealand, United Kingdom, United States and Hong Kong (China). The survey assesses housing affordability in these 325 urban markets and concludes that the Median Multiple should not exceed 3.0. The Median Multiple is derived from the gross annual household income and the median house price. When they say the Median Multiple is 3.0 this means that the median house price is three times the gross annual household income.

    Download the 7th Demographia International Housing Affordability Survey here. It is a fascinating read.

    The Australian figures in the survey are still frightening. Please keep in mind that a Median Multiple higher than 5.0 is rated as ‘severely unaffordable’.

    The Median Multiple for all of the markets surveyed in Australia is 6.1. For Australian house prices to fall in line with the Median Multiple of 3.0, prices need to drop by 51%.

    The Median Multiple for the major Australian markets (population over 1,000,000) is 7.1. For these markets to fall in line with the Median Multiple of 3.0, prices need to drop by 58%.

    In the table below I have included some of the markets surveyed with their Median Multiple and the percentage reduction for that market to fall in line with the Median Multiple of 3.0.


    Median Multiple

    % Reduction to fall in line with MM of 3.0




    Alice Springs












    Gold Coast















    Figures rounded to the nearest whole number.

    Sydney is the second least affordable housing market out of the 325 markets surveyed. If you think that you can pay off a property 9.6 times your annual wage after factoring in taxes and all the other bills you need to get your head checked.

    According to the report, the major markets in Australia excluding Sydney had a Median Multiple of 3.0 in 1981 (See figure 2). The survey states that Australia’s restrictive land policies have contributed to the increasing house prices.

    Hugh Pavletich, the co-author of Demographia International Housing Affordability Survey has previously stated the following to Tasman Times about the housing market:

    Australian residential stock is grossly inflated as the Annual Demographia International Housing Affordability Surveys, based on house prices to incomes, clearly illustrate.

    Another useful measure of housing stress is the relationship between total residential stock value and Gross Domestic Product. This should not exceed 1.5 times.

    Australia’s total residential stock value according to the RBA is $A4 trillion and the GDP is in the order of $A1.2 trillion – some 3.33 times.

    In contrast Texas, where housing is affordable at below 3 times household incomes, real estate total value is $US1.8 trillion for an economy with a GDP of $US2.2 trillion.

    Better still is Houston with a population of 5.8 million people, where the total residential stock value is $US430 billion. According to the Bureau of Economic Analysis, US Department of Commerce, Houston has a Gross Metropolitan Product of $US405 billion. The residential stock is therefore worth 1.06 times Gross Metropolitan Product.

    It is likely Australia’s residential stock’s bubble value is a stratospheric $2.2 trillion, with Australian households carrying well in excess of $400 billion of excess mortgage bubble debt.

    To put it lightly, the Australian property market has a bumpy road ahead!

  16. Why Your Retirement isn’t Assured

    Monday, 24th January 2011

    Melbourne, Australia

    By Kris Sayce

    * Why Your Retirement isn’t Assured


    A 'QE2 Failure' Warning from Dan Denning

    In recent weeks, I've seen these worrying signs.

    What they tell me is this: The Quantitative Easing project is about to fail in spectacular fashion. Everything is setting up for you to LOSE any stock gains you've made since March 2009 - and then a whole lot more...

    I will show you why here.

    And, if you have investment capital you want to protect, you should sell many of the stocks you own... soon... and make these three defensive moves.


    Before we get on to today’s Money Morning you may have noticed that over the weekend we disabled the Money Morning website comments.

    You can click here for an explanation...

    Now, on to today’s letter.

    Money Morning reader Philip sent us a clipping from his local newspaper, the Sunday Mail. It read: “Super boomer threat”.

    A shorter version of the article can be found online. It has the headline: “Trouble ahead for your superannuation”.

    According to the article:

    “One of Australia’s leading demographic economists has warned a critical point will be reached in 15 years when there will be more people withdrawing cash from super funds than there are workers contributing to them.

    “Brian Haratsis, chief executive of Macroplan Australia, says unless more money is pumped into the system by current workers, many funds may not have enough liquid assets to meet redemptions, forcing them to shut up shop.”

    Mr Haratsis claims this is “the biggest problem that nobody is talking about.”

    Who is Brian Haratsis? And what is Macroplan Australia?

    We had no idea. We’d never heard of them. Something to do with the superannuation industry was our first guess.

    Our second guess was that it was a mouthpiece for fund managers. That it was cajoling the government to bump up super payments to 15%.

    We were wrong on both counts. Although Mr. Haratsis is quoted in the Sunday Mail article as saying:

    “While Mr Haratsis says the government will never actually allow the [superannuation] funds to freeze, it must act soon by increasing the super guarantee to 12 per cent as quickly as possible – and then to 15 per cent for a period to make sure that funds have enough money to meet the impending ‘hump’ in retiree numbers caused by the retiring baby boomers.”

    Anyway, we checked out the MacroPlan Australia website. Here’s what it states:

    “As leaders in the property market, MacroPlan provides thought leadership to the industry, through regular presentations identifying future trends and scenarios, and strategic direction in relation to major industry trends, including planning advice for major industry participants.”

    We’ve no idea what that means!

    It’s a shame it doesn’t take some of its own advice, “We pride ourselves on keeping the message simple…”


    Using our powers of logic it seems the company is involved in the property game. But, what MacroPlan does isn’t important.

    We’ll leave them right there and won’t say another word about them. But, Mr Haratsis has made a startling point. Something even your editor hadn’t considered.

    If you’ve been reading Money Morning for some time you’ll know we’ve had one or two things to say about the government stealing super. We first wrote about it two years ago.

    Back then we had 15,000 Money Morning readers. Today there are over 60,000. So if you’re a new reader there’s a chance you haven’t seen those articles.

    To sum it up, politicians have realised the biggest political mistake of the twentieth century was giving individuals more control over their retirement savings.

    Simply because there’s over $1.25 trillion that politicians can’t easily get hold of. Although that doesn’t stop them trying.

    The federal government started nationalising superannuation in 2009. That’s when it stole foreign temporary workers’ superannuation funds.

    Last year it took the next step. It ordered private super funds to send all unclaimed funds to the Australian Taxation Office (ATO) – including those of Australian citizens and residents. The ATO then handed the cash over to the federal government.

    The cash was added to consolidated revenue and saved for the future… erm, sorry, that’s not right… consolidated revenue is the government’s spending money. The government is potentially spending your retirement cash!

    That my friend is how governments’ plan for your future. They spend your money now and hope someone in the future will be prepared to pay for your retirement… good luck with that.

    In our view, Australia’s private retirement system will go the same way as the private retirement schemes in Argentina, Hungary and Ireland – it’ll be nationalised.

    But the point made by Mr. Haratsis is enlightened.

    Here’s the key quote:

    “[The government] must act soon by increasing the super guarantee to 12 per cent as quickly as possible – and then to 15 per cent for a period in order to make sure that funds have enough money to meet the impending ‘hump’ in retiree numbers caused by the retiring baby boomers.”

    You probably think the money in your super fund will be given back to you to live off in retirement.

    That’s what you’re told anyway.

    What really happens is funds pool all the contributions. They make an investment and then allocate a portion of that investment to an account in your name.

    For instance, with shares, the fund doesn’t place separate orders for each account. That would be unworkable. The fund buys a whole bunch of stock and then allocates a portion to you.

    Property investments are similar. If you’ve allocated $5,000 of your super to property, the fund can’t do much with that. Not unless it pools the money with others.

    So, it takes the total sum allocated to property, which could be billions of dollars, and buys a big building. It then allocates $5,000 worth of that building to your account.

    Here’s the thing. Properties, especially big buildings, aren’t liquid investments. It’s hard to sell off small parts of a big building. That’s not the same with shares which are liquid and can be sold and converted to cash in just three days.

    The problem – which Mr. Haratsis has revealed – is as more people retire, more super funds will need to convert to shares and cash.

    That means if there’s more cash withdrawn from super than deposited, there will be less demand for illiquid assets such as property and infrastructure.

    That’s a problem… a big problem. Go into any high rise building in the CBD and you’ll see a plaque somewhere that states the owner/manager of the building is one of Australia’s big fund managers.

    Indirectly, you may be a part owner of one of those buildings.

    So, the upshot is over the next 10-15 years there will be huge downward pressure on the commercial property market. As funds look to downsize property holdings in favour of cash. The question is who’s going to buy these buildings?

    Not other superannuation funds. That’s for sure. They’ll all be in the same position.

    If you think this is too far-fetched and couldn’t happen, think again. A similar thing happened just two years ago. In that case the problem was with the mortgage funds.

    Mortgage funds had to freeze redemptions because they didn’t hold enough liquid assets. Mortgage funds had a small stop-gap measure which was to borrow against the assets in the fund in order to meet redemptions.

    But unfortunately for those invested in the funds, the borrowings dried up quite quickly too.

    The result? Retirees who were told to invest in mortgage funds for the higher income yield suddenly found their income had stopped.

    The funds had to start liquidating assets. In other words they sold commercial property. If you’ve ever tried to sell a house you’ll know it can take months. Try selling a 40-storey building and see how long that takes.

    As a News Ltd report mentioned at the time:

    “At last count, 56 funds from more than 15 companies had locked out investors, insisting they wait six months or more before withdrawing capital. In most cases the money has been lent for investments such as commercial developments and infrastructure and other assets that can’t be sold quickly.”

    That was round one. Get ready for round two.

    Superannuation is supposed to be about your money being kept in trust for you until you retire. It’s not supposed to be a Ponzi scheme.

    In contrast, state pension systems are Ponzi schemes. You pay taxes today which are used to pay for someone else’s retirement today. You then hope that by the time you retire in 10, 20 or 30 years that some other sucker is there to pay for your retirement with their tax dollars.

    As Mr. Haratsis points out, odds are that over the next few years the number of retirees will explode. And there will be fewer workers contributing to super and taxation.

    That spells bad news for a Ponzi state pension and health schemes.

    And it seems if Mr. Haratsis is right, the news for those in private retirement schemes may not be too good either.


    Kris Sayce

    For Money Morning Australia

  17. THE DAILY CHART: Preposterous property

    Alexander Liddington-Cox

    Published 10:12 AM, 24 Jan 2011

    Housing in Australia's capital cities remains as unaffordable as almost anywhere on earth, according to the latest survey from US research group Demographia. Using the common median-mutiple method – where the median house price is divided by the annual median income – of the 12 most unaffordable cities in the world, five are Australian. Any multiple above five is considered "severely unaffordable". Sydney came in second with a multiple of 9.6 – bettered only by international finance centre Hong Kong – while Melbourne ranked at number four with multiple of 9.0, while Adelaide was at number seven with a multiple of 7.1.

    [Click to enlarge the image]

    click the image to enlarge

    It's perhaps Adelaide's 'performance' on the list that's most concerning. It makes sense that Sydney and Melbourne should appear on the list as Australia's two major business centres, but Adelaide? Yes, the Australian economy emerged from the global financial crisis in better condition than any other developed nation and that needs to be factored into every global comparison. But no matter how the housing bulls break down the numbers, can it really be just 'sound fundamentals' that have pushed property prices in the city of churches to levels rivalling the city of London?

    ;) well it comes down to 2 possablities: Inflation or Deflation. So place your bets

  18. Easy credit drove house prices up

    Published 0:05 AM, 22 Jan 2011 Last update 0:05 AM, 22 Jan 2011


    By a staff reporter

    Australia has seen the ninth-largest increase in real housing prices since 1980 among Organisation for Economic Co-operation and Development countries, according to a new report.

    The OECD report, 'Housing and the Economy: Policies for Renovation', shows real house prices in Australia rose an average of over 90 per cent between 1980 and 2008, as strong economic growth and high immigration saw demand growth outstrip an increase in supply.

    But easy credit also played a role, with financial liberalisation and deregulation increasing house prices by as much as 45 per cent over the same period.

    Meanwhile, "significant declines in nominal interest rates" also pushed prices up, the report, which aims to offer governments "a roadmap for sounder housing polices" in the wake of the global financial crisis, said.

    But price volatility was not the domain of Australia alone, with price growth of 90 per cent or more also seen in properties in Belgium, Finland, Ireland, Netherlands, New Zealand, Norway, Spain and the United Kingdom.

    "Badly-designed housing policies played an important role in triggering the recent economic and financial crisis," OECD Secretary-General Angel Gurria said.

    “OECD countries have seen the damage caused by badly designed policies through their effects on housing markets.

    “As we search for new sources of growth, as we seek to restore trust in our financial sectors, as we try to green our economies, policies related to housing can have a huge impact on our future”.

    Meanwhile, Australia has the fourth largest transaction costs for property sales of 33 countries surveyed, with combined buyer and seller costs reaching nearly 14 per cent of properties' values, on average.

    Vendor costs alone were the highest in the OECD, at around eight per cent of property values.

    "This eviscerates the notion that Aussie housing is tax-advantaged vis-à-vis the rest of the world," Riskmark International managing director Chris Joye said.

    "The OECD’s findings accord with the Henry Review’s recommendation that governments should dump stamp duties in favour of a more efficient tax base," Mr Joye said. "There is also an argument here that we need to look at the efficiency of the real estate agent industry."

    The report argued that the federal government should replace high property transaction costs with a recurrent property tax.

    In addition, the Canberra should also improve planning and zone regulations in order to ease supply constraints, it said.

    "The price elasticity of supply is about average for the OECD, but it is low compared to countries with a similar population density, such as the United States, Canada, Sweden or Finland," the report said.

    "Housing demand is concentrated in large coastal cities, which puts additional pressure on housing in certain areas despite generally low population densities."

    Meanwhile, governments around the world should seek to remove subsidies that favour housing investment over other asset classes, the OECD said

  19. How the resesion will end? Ask how the depression started ? Globilisation, overpopulation, exhaustion of resauses, lack of proper direction. Just look at the Uk to day the GDP is down because it is now importing oil, why? Because for 20 years it exported oil and is now running out, and suprise suprise its pound is dropping making it more expensive to import oil. I shake my head :(

  20. Aussie House Prices Set to Collapse

    Tuesday, 18th January 2011

    Melbourne, Australia

    By Kris Sayce

    * Aussie House Prices Set to Collapse


    "You're a champion! Don't know a service like yours in Australia. I have been a subscriber for a little less than a month and have already seen a gain of close to 17% of my capital after brokerage fees. That's just bloody amazing, seriously put... There is no way in hell that I'm stopping my subscription with your service. You're the man Doc!"

    -- Diggers and Diggers reader Max

    To try Diggers and Drillers risk-free for 30 days, click here.


    If you’re worried we’ve forgotten the National Australia Bank [ASX: NAB] and Westpac’s [ASX: WBC] secret loans from the United States Federal Reserve – don’t. We’re still on the case.

    We’ve still got them in our sights… Oops! Apparently we shouldn’t use that imagery. Sorry… how about this then:

    That’ll do it.

    No harm with that image. After all, going by mainstream logic, although it’s clearly inappropriate for individuals to have the right to self-defence with a small firearm, it’s OK for governments to threaten to destroy the lives of millions of people at the flick of a switch with something much deadlier.

    No double standards there.

    Anyway, if we get our gnashers into any more of the banks’ grubby secrets we’ll be sure to let you know.

    But before tucking into today’s Money Morning, we couldn’t resist showing you this from the Financial Times:

    “Europe’s bail-out fund is expected this week to announce the banks that will market the first Eurozone bond amid hopes that demand from the world’s biggest sovereign wealth funds and private investors will ease the continent’s crisis.

    “A number of European banks are expected to underwrite the deal, billed as a test of investor sentiment at a critical time.

    “Bankers say they have rarely seen such demand for debt with some of the wealthiest sovereign and private funds eager to snap up the bond designed to help fund the Irish bail-out.”

    As it happens, last night the banks were named. Those in charge for handling the bond sale are Citigroup, HSBC and Société Générale.

    That would be American bank Citigroup which secretly borrowed $89 billion from the US Federal Reserve… and needed $25 billion from the US government – a stake that resulted in Uncle Sam owning 36% of the company.

    That would be UK headquartered bank HSBC. It secretly borrowed $4 billion from the US Federal Reserve.

    And that would be French bank Société Générale which secretly borrowed $124 billion from the US Federal Reserve. The same Société Générale where Jerome Kerviel racked up trading losses of €4.9 billion in 2008.

    But all that aside, it’s more evidence of how messed up financial markets are.

    What you’ve got are banks that made a bunch of bad investments – thanks in part to government influence. Banks that needed a bail-out from national governments.

    Those bail-outs were so huge the national governments were at risk of going bust. The solution? Banks that were bailed out by national governments are now underwriting an issue of government bonds that will be used to help the governments pay for the bail out of the banks!

    Confused yet? You should be… because we are.

    The whole thing looks like Escher’s Waterfall:

    How the bail-outs work

    You can’t figure out which way is up or which way is down. Which way the money flows? Does it even matter?

    All we know is the banking system is corrupt. And those in government who support the system are equally corrupt – that goes for Australia’s banks and politicians too.


    “Floods tipped to hit house prices”, says today’s The Age.

    The mainstream press has got it spot on for once.

    Of course, the mainstream still denies the existence of an Aussie housing bubble. The floods will be a scapegoat. We can picture their argument now: “Oh, if it wasn’t for all the flooding, Aussie house prices would be up 10% this year – that’s the normal growth rate you know.”

    In fact, we speak too soon. The Age quotes Andrew Wilson from Australian Property Monitors:

    “Mr Wilson expects a recovery in Brisbane property by the end of the year, providing there’s no downturn in the economy or additional severe natural disasters.

    “’We’re expecting a pick-up in the Brisbane market around about the third quarter this year,’ he said. ‘That’s probably been postponed a little bit – but only by a quarter.’”

    Ha, ha, ha… Is he kidding? Postponed by a quarter! It’s more likely that house price growth will be postponed for five years. Or even ten years… perhaps longer.

    According to the same article, “28,000 homes would need to be completely rebuilt, while many houses would be uninhabitable for weeks, months or even years.”

    We’ve even seen some comments that suggest house prices could surge because of the floods. That a diminished supply coupled with a new and unexpected increase in demand will force prices higher.

    “It’s supply and demand” they say. No it’s not, it’s wishful thinking.

    The Queensland floods will decimate house prices. No doubt about it.

    Think about it this way. The spruikers are always keen to point out that roughly one-third of people own their home outright. Another third have a mortgage on their home. The remaining third rent.

    So, out of 28,000 homes, that’s just about 9,333 homes in each category. And we’re not factoring in the homes with less damage. So you can more than double that number.

    Now let’s work through it and figure out where the boom will come from. Remember it’s likely less than half these households will be insured for flooding.

    For those that own their home outright, you’ve got between 4,500 and 9,333 people who have seen the value of their “asset” drop by a significant amount. I mean, let’s be honest. Who wants to buy a home or land that’s flooded – ducks… geese… fish?

    If – and granted most won’t – they tried to sell the land today, they’d be lucky to get one-third the pre-flood value…

    But we’ll guess most probably won’t want to sell up. Mainly because despite the floods they probably like where they live. And besides, they’ll get nowhere near the price they’d like if they put their property on the market.

    These debt free householders will need to borrow a stack of cash to build a new home on their now empty block of land. Most likely a much smaller home in order to keep the costs down.

    Next, what about the folks with a mortgage? These guys and gals are the ones in even big trouble. Most likely at least 4,500 of these mortgages will be in negative equity. That’s where the size of the loan exceeds the value of the property.

    Thanks to recourse loans, even if these guys could sell, odds are they’ll still have a massive loan to pay off. It’s not like the New Orleans floods where home owners could walk away debt free.

    These folks will still have the burden of a loan. A loan that, even if it’s refinanced, would become an unsecured loan and would involve a huge increase in the interest rate being charged.

    And what would be the chances of these folks getting a new housing loan if they wanted to buy something else? Our guess is they wouldn’t have much luck. Besides, there’s the small matter of needing to save for a deposit as well.

    Not forgetting whether they’ve still got a job. With thousands of businesses shut down temporarily or even permanently, many could find themselves homeless and jobless too. Try getting a loan with those credentials.

    Finally, there’s the renters… ah, the much-ridiculed renters. Those who have been scoffed at for missing out on the property boom. Well, aside from losing their home and their possessions, the upside is that unlike those with a mortgage, renters won’t walk away with a debt hanging over them.

    The same can’t be said for the landlords, who – thanks to the tax breaks – are likely to be maxed out on their investment mortgage. But then again, isn’t property investing all about making losses? We’re sure that’s how it works. They must be delighted with the losses they’ll make from the floods… mugs.

    Back to the renters. Sure, they may still face issues such as not having a place to live and not having a job, but at least they won’t have to fork out monthly repayments for a loan on a house that no longer exists.

    And at least they haven’t seen the value of their biggest asset drop by 40%, 50%, 60% or more overnight. And in the case of the landlords, the income against the property drop by 100%.

    But surely the floods will cause a migration of people to other parts of Queensland and the rest of Australia… maybe. But it won’t lead to a rise in house prices. There’s not even a guarantee it’ll lead to a rise in demand for housing.

    Remember, the vast majority of these people won’t be cashed up. Even those without a mortgage and who have cash to spend are unlikely to consider hocking themselves up to the eyeballs with a brand new mortgage…

    Not after it’s taken them twenty-odd years to pay off the old one. And not after the experience they’ve just gone through of seeing their primary asset slump in value.

    Also don’t forget, many consider their home to be their retirement savings. How often have you heard that? “Oh, we don’t worry about superannuation or investing, our retirement fund is our house.”

    Good luck with that.

    The simple fact is, from a house price perspective there’s no silver lining to the floods. The decimation of the supply won’t lead to increased demand.

    In fact it’s more likely to result in prices across Queensland softening further.

    Aussie house prices were already destined to fall off a cliff this year and next as the credit bubble reached breaking point.

    The destruction of paper housing wealth and the burden of non-asset backed debt could be the trigger that finally sends Queensland and Australian property values tumbling.


    Kris Sayce

    For Money Morning Australia

  21. Queensland has floods , in many ways local shires are responsible for allowing buildings in flood areas, shires are allso responsible for building standards (alllowing houses to be built on slabs on the ground). the older houses are built on high stumps.

    The floods are of a benifit for the economy and just as undertakers are rubbing there hands so too builders , hardware supliers, road workers all the damage will be repaided and force people to spend.

  22. You see, there you go BlueSkies. Doing that Aussie thing and trying to excuse the extortionate lime price :rolleyes:

    Limes are new to the UK as well. And we cannot grow them as our climate is too cold so have to import them from Southern Europe/the Middle East. Yet they are 15 to 20 pence. Which equates to 24c to 32c.

    Lemons in Aus, for all their widespread availability are still around 80c. Versus 24c to 32c in the UK….

    I think your prices are high because:

    - Your supermarkets price fix

    - Your consumers just act like sheep. They bend over and take whatever the retailers want to dish out.

    The whole online retail debate is another case in point. But that debate can wait.

    Limes . Bannanas. Oranges, ETC are cheap in the UK because the importers are very good at purchasing and getting good deals with Airlines. Allso having a strong currency is a factor.

    I think Supermarkets are not the only offenders in price gouging, the mafia run fruit and vege wholesale markets and there is a lack of new market gardeners.

    I dont think it is fair to blame consumers in any way. But it is true shop keepers in Australia are a greedy lot.

  • Create New...

Important Information

We have placed cookies on your device to help make this website better. You can adjust your cookie settings, otherwise we'll assume you're okay to continue.