Australia Faces Its Demons

[Mmmm]

getting away from the blogs what is consumption actually doing in the here and now ?

Xinhua quoted the National Energy Administration said in a statement that China electricity consumption in January 2010 grew 40.14% YoY to 353.1 billion kilowatt hours.

The NEA said the electricity consumption volume was 2.7% higher than that in December 2009. Consumption in the primary industry sector topped 7 billion kWhs last month up by 23.5%YoY.

Secondary industry consumption rose 45.99% to 262.4 billion kWhs and the tertiary sector demand was up 25.61% to 39.8 billion kWhs.

According to the statement residential power use rose 25.9% to 44 billion kWhs.

(Sourced from Xinhua)

There's no doubt they are very busy bunnies over there at the moment. But there seems to be an awful lot of malinvestment going on. Faber and Chanos have made some pretty good calls in the past...

China New Village Makes Chanos See Dubai 1,000 Times

Feb. 22 (Bloomberg) -- The township of Huaxi in the Yangtze River Delta is a proud symbol of how Chinese communists embraced capitalism to lift 300 million people out of poverty during the past three decades.

Its leaders took a farm community with bamboo huts and ox carts in the 1970s and transformed it into an industrial and commercial powerhouse where today many of its 30,000 residents live in mansions and most have a car. Per-capita income of 80,000 yuan ($11,700) -- almost four times the national average -- allows Huaxi to claim it’s China’s richest village.

Huaxi is also emblematic of the country’s construction and real estate boom. Communist Party officials there are building one of the world’s 30 tallest buildings, a 2.5 billion yuan, 328-meter (1,076-foot) tower. The revolving restaurant atop the so-called New Village in the Sky offers sweeping views of paddy fields, fish ponds and orchards, Bloomberg Markets reports in its April issue.

Marc Faber, publisher of the Gloom, Boom & Doom Report, says China is overdoing it. “It does not make sense for China to build more empty buildings and add to capacities in industries where you already have overcapacity,” Faber told Bloomberg Television on Feb. 11. “I think the Chinese economy will decelerate very substantially in 2010 and could even crash.”

Huaxi has an even more ambitious project coming up: a 6 billion yuan, 538-meter skyscraper that would today rank as the world’s second tallest. The only loftier building is the new Burj Khalifa in Dubai.

Dubai Times a Thousand

Such undertakings figured in warnings hedge fund manager Jim Chanos delivered in January that China is Dubai times a thousand. The costs of wasteful investments in empty offices and shopping malls and in underutilized infrastructure will weigh on China, Chanos, president of New York-based Kynikos Associates Ltd., said in a speech at the London School of Economics. “We may find that that’s what pops the Chinese bubble sooner rather than later.”

China has defied the global recession of the past two years and remained the fastest-growing major economy. Gross domestic product soared 10.7 percent in the fourth quarter. The government has provided 4 trillion yuan in stimulus spending and encouraged banks to lend a record 9.59 trillion yuan last year, trying to bridge the gap until demand for exports rebounds or domestic consumption takes off.

Risk for Commodities

Last month, banks lent a further 1.39 trillion yuan -- almost one-fifth of the target amount for the whole of 2010. Also in January, foreign direct investment climbed 7.8 percent to $8.13 billion. Retail sales during last week’s Lunar New Year holiday rose 17.2 percent from the same period in 2009, according to the Ministry of Commerce.

While China’s resilience has helped support the world economy, raising demand for energy and raw materials, the bursting of a bubble would have the opposite effect. Government efforts to wean the economy off its extraordinary support may roil markets.

In January, the central government ordered banks to curb lending, which put China’s stock market into reverse. In a sign, in part, of how dependent the world has become on China, stocks and currencies slumped in places such as Australia and Brazil that supply commodities to the People’s Republic. On Feb. 12, the eve of the one-week Lunar New Year holiday, China for the second time in a month ordered banks to set aside more deposits as reserves. The Shanghai Composite Index has fallen 8 percent year-to-date, after gaining 80 percent in 2009.

Bidding Up Prices

“If the Chinese economy decelerates or crashes, what you have is a disastrous environment for industrial commodities,” said Faber, who oversees $300 million at Hong Kong-based Marc Faber Ltd.

The stimulus tap that Beijing turned on has flowed to projects such as its 2 trillion yuan high-speed-rail network. The 221 billion yuan Beijing-Shanghai line has surpassed the Three Gorges Dam as the single most expensive engineering project in Chinese history.

Some beneficiaries of the government efforts have plowed their loans into real estate and stocks. Property prices across 70 cities jumped 9.5 percent in January from a year earlier, according to government data.

Bridge of Strength

Instead of concentrating on their core businesses, giant state-owned enterprises, or SOEs, have bet on real estate, according to Zhang Xin, a former Goldman Sachs Group Inc. analyst who’s chief executive officer of Soho China Ltd., the biggest property developer in Beijing’s central business district. “All the SOEs are bidding the prices up to the sky,” Zhang told China International Business, a magazine backed by China’s Ministry of Commerce, in December. That’s despite office vacancies in China’s capital being at record highs, according to Boston-based commercial real estate company Colliers International.

Chanos, a short-seller who was early to warn about Enron Corp., is one of a growing number of investors sounding the alarm. “Right now, the Chinese market is overheating,” George Soros said in a Jan. 28 interview.

Local-government officials have wasted stimulus funds by replacing infrastructure that was fine in the first place. State media complained in May 2009 that party chiefs in Jianyang, Sichuan province, decided to help boost the local economy by rebuilding a bridge that was in such good condition it had emerged unscathed a year earlier from the earthquake that killed 70,000 people. The so-called Bridge of Strength withstood a demolition crew that tried to blast it to pieces with dynamite, the official China Daily reported.

Real Estate or Soybeans?

Another example Chanos has cited is the city of Ordos, where party officials have built an entire new downtown on the windswept grasslands of Inner Mongolia, 25 kilometers (15 miles) outside the existing municipality of 1.5 million people.

Mark Mobius, meanwhile, is sticking with China. The executive chairman of Templeton Asset Management is encouraged that the government is pulling back some of its extraordinary economic support. “We see the government’s tightening of lending as a positive because it moderates the risk to some degree,” says Mobius, who oversees $34 billion. “This is a correction in an ongoing bull market.”

Chris Ruffle, who helps manage $19 billion for Edinburgh- based Martin Currie Ltd., also remains confident China will avoid a bust. “It’s not a highly leveraged situation,” says Ruffle, who works in Shanghai. “I was in Japan in the 1980s, and that was a bubble. Here in China, we are nowhere near that.”

Still, even Mobius says investors have to be wary. He got rid of an investment in a Chinese food company after discovering that it was using funds to buy apartments instead of to process soybeans.

To contact the reporter on this story: William Mellor in Sydney at wmellor@bloomberg.net

[Bloo Loo]

I wonder what effect this will have on inner city house prices?

Australian Economy to Boom Later This Decade, BIS Shrapnel Says

Feb. 23 (Bloomberg) -- Australia's economy will accelerate over the next two years before building "into a boom" amid a surge in business investment, BIS Shrapnel Ltd. said.

Gross domestic product will rise 2.7 percent in the 12 months through June 2010, 3 percent in fiscal 2011 and 3.8 percent the following two years, the Sydney-based forecaster said today.

A surge in house construction and government investment in infrastructure such as schools and roads will help stoke economic growth, BIS Shrapnel predicts. Inflationary pressures, leading to higher interest rates, will increase in three to four years as a mining expansion intensifies.

"We are now well and truly into recovery from what turned out to be a modest downturn," said BIS Shrapnel economist Richard Robinson. "Investment, and primarily the construction side of it, is the primary driver of growth in the economy."

"Growth will pick up speed over the next two years and build into a boom later this decade," the BIS Shrapnel report said.

Property analyst predicts propertyboom....buy our report....read all about it.

[Bloo Loo]

That is one of their products but I think you will find that they are not spruikers.

Anyway the truth hurts.

truth? the future?

more like a guess.

I could consider exporting the Famous Bloo Loo Prediction tool to your guys, but you would have to invert it.

[JonoP]

Hah hah. I am expecting that sometime, in to not too distant future, China will announce they are buidling the worlds tallest building.

I will immediately catch the next plane out of Aus.....

[Meerkat]

Look its not exactly a secret its called interest only.

You are taking a pi55, aren't you

[JonoP]

Where will the plane land ?

Not sure. There is bound to be someplace that is experiencing a miracle, too good to be true bubble that is actually built on sand. If you catch my drift ?

[blue skies]

Money devalued by 99.4%

Money devalued by 99.4%

According to the Reserve Bank of Australia (RBA) numbers on Money Aggregates, the M3 money supply has increased from the equivalent of $6.7 billion in 1959 to $1.19 trillion by the end of 2009.

In other words, the value of money over the last fifty years has fallen by 99.4%. To put it another way, the equivalent of a dollar held in 1959 is almost worthless if still held today.

Now, I know it's not likely that you'll have kept the same currency unit in your pocket or your bank account for fifty years, but the point is, thanks to inflation your wealth is being eroded on a daily basis.

Even if we look at a shorter time period, 1990 to 2009, you can see the M3 money supply has increased from $207 billion to $1.19 trillion:

82.5% decline in 30 years

82.5% decline in 30 years

That's a depreciation of your dollar by 82.5%. And that's just within the last thirty years.

The reason I bring this up is to try and settle an argument we've scoffed at but which the property spruikers are convinced is true. That is that property is a hedge against inflation.

That if you buy a property today it will rise in line with the prices of everything else and therefore your debt will be paid off easier because of inflation and you'll be left with a higher priced house.

Our argument has been, "Where's the proof that inflation and property prices are directly correlated?" And furthermore, we constantly warn anyone not to believe that inflation is your friend. By itself, inflation is always your enemy.

So far, the spruikers haven't come up with anything to back their argument. So, our only course of action is to try and refute our own argument. We're happy to try, it keeps us on our toes.

Below is a chart we knocked together using data from the Australian Bureau of Statistics (ABS) and the Reserve Bank of Australia (RBA). It compares the index values of '8 Capital City House Prices', the Consumer Price Index (CPI), and the M3 money supply:

Are inflation and house prices correlated?

Are inflation and house prices correlated?

Now, before I go into too much detail, a quick note on the dates.

You'll see it only runs from 1986 to 2005. Just to make it clear, we haven't cherry-picked that timeframe for any particular reason. The only reason we've done that is the ABS changed the index calculation for house prices in 2005 and we didn't want to mess around with trying to marry up the two sets of numbers.

Anyway, the dates aren't as important as the comparison of the data sets over the same timeframe.

As you'll note, using a logarithmic scale, the green and blue lines move almost in tandem.

In index number terms, the 8 Capital City House Prices index has risen from 61.3 in June 1986 to 251.9 in June 2005. That's a 310.9% increase.

Over the same period, the M3 money supply increased from $125 billion to $678.5 billion. An increase of 442.8% in the money supply, or a decrease of 81.5% in the value of your money.

In percentage terms that's a pretty big gap, but on the chart, well, it's hard to see any difference. But, as we've pointed out before, you can't just put two different data sets on a chart and claim there is or isn't a correlation.

But in this instance, whether there is a correlation or not is irrelevant. We don't need to prove or disprove it, we can simply look at the data and draw a simple conclusion. And that is, between 1986 and 2005 the M3 money supply increased by a greater amount than the value of the 8 Capital City House Prices index.

Therefore, we can say that during that period, house prices did not provide a complete or perfect hedge against inflation.

The divergence is more obvious if we use a linear scale:

Inflation almost off the charts!

Inflation almost off the charts!

The interesting point to note is by how much the official CPI number understates the impact of the devaluation of your money.

If you just take the 8 Capital City House Prices index and compare it to the CPI then you'd be left with the false impression that property is an inflation buster.

Whereas the truth is that the CPI number masks the real story. And that is the value of the dollar has fallen to such an extent that even the so-called housing boom has failed to maintain the value of your dollars.

In fact we can go even further than that and say that between 1986 and 2004, the real price of property would have dropped as the value of your dollar fell faster than the price of homes rose.

Look, we're sure the property spruikers won't like that, and they'll set their Phasers from stun to kill, but those numbers speak for themselves.

If you accept the fact that creating more money has a devaluing effect on the money already in circulation, then you must also accept that you need to take the real rate of inflation into account when valuing an asset after a specific time period.

In this case the value of the 8 Capital City House Prices index has failed to keep pace with the increase in the money supply - M3.

Of course, articles such as this one from Peter Boehm over at Yahoo! Finance prefer to use the CPI when he claims, "Combine this with a return to stable economic conditions and relatively low and stable interest rates and you have the necessary ingredients for home prices to increase well ahead of inflation."

He's referring to the growth rates required to make the median house prices in Sydney, Melbourne and Brisbane $1 million by 2019:

Median House Prices at $1 Million October 2019

The trouble is, by 2019, if the increase in the money supply is anything like it's been over the last ten years, then the 117.8% increase for Brisbane will have been dwarfed by the 184% increase in the money supply:

Inflation to outpace property growth

Inflation to outpace property growth

Simply put, the increase in property prices won't have kept pace with inflation.

We've heard plenty about "Property Millionaires", yet the reality is that they don't exist in the way the spruikers would have you believe.

What they should really be called are "Property Debt Millionaires." $1.1 million of assets and $1 million of liabilities. Waiting for the so-called 'equity' in the home to increase and then withdrawing more cash to take out more debt.

Isn't there a saying about 'credit' being the only difference between the hobo on the street and the majority of home owners?

So, when the spruikers talk about the median house price reaching $1 million in 2019, just remember a couple of things...

First, a million dollars in 2019 won't be worth what a million dollars is today or ten years ago.

And secondly, if you look at the chart below:

Million dollar mortgages

Million dollar mortgages

If owner-occupied housing loans increase at the same rate as they have over the last ten years, then even though the median house price very well could be $1 million by 2019, odds are the median mortgage won't be far behind.

The upshot is, by these numbers you can argue property prices have already fallen. But that's only the half of it. So far, the insidious effects of inflation have meant borrowers are suffering a silent 'debt-death'.

The realisation and the pain will be more obvious when borrowers experience an actual fall in the price of housing in dollar terms. Contrary to mainstream belief about Australia missing the housing crash, the facts are it's likely to happen sooner than we all think.

Cheers.

Kris.

[blue skies]

Good news guys, I just settled on my property in Melbourne today.

I was sweating big time on this one, it looked like my non refundable 10% deposit was a bit shaky at one point. Bank was making me jump through hoops right up to the glorious end.

Heading up there now, and furniture arrives tomorrow.

Non refundable 10% how does that work? You put in a cash offer on the hope you may get finance!

That must be bull dust no one is dumb enuff to put a full 10% when 5% would have done the same thing.

Any way the vendor may not just let you walk away, they may well go after the sale if they thought you may have asetts, Not so smart Bardon.

[Fairies Wear Boots]

Money devalued by 99.4%

Money devalued by 99.4%

....

Ouch! I started to read that and my head started to hurt. Of course Bardon is right. Buy a rental property that covers the rent and a bit more and you're quids in. After a while inflation makes the rents cover the maintenance and some profit, and then you're laughing.

Of course, if you buy at the top of the bubble, have to subsidise your tenants, house prices drop, and interest rates rise, you'll be subsidising your tenants for a long long time. Those who bought buy to lets in the UK in 1998 are laughing their asses off. Latecomers to the party in 2007 have got their fingers burnt.

[blue skies]

Bardon

You can put $10 on a offer to buy the money is held by the agent not the vender, let me explain the deposite is to make the contract binding.

Once a unconditional offer is acepted by the vender that is it. there can be no walking away, That is what it is to put your signiture and money down on a contract.

you live in a fantisy!

trying to big note yourself.

I recon you suffer from a mental disorder.

[blue skies]

So you are now lecturing me on real estate contracts...........................thanks for the training course.

I would like to see you buy a house in bayside Melbourne in the current market, with you eastern European negotiating tactic.

Now you may think I am big noting myself and live in a fantasy................but you certainly come across as a two bob type living in dreamtime.

You better be careful with your mental anguish or else your toes will start deforming and you know what that means..

Sounds like you got yourself a real bargain at the top of the bubble. You show your ignorance about realestate negotiating and Iam a old Australian not a new one like you!

Talk is cheep it takes money to buy beer. For myself I have few illusions, things may or may not go my way.

Over time I have watched how start a argument by a intentional misunderstanding on your part and than try to disrespect and belittle your target.

I have this mental image of you a lonely single middle aged man venting his anger at the key board and building a world of imagination : family, wealth, position.

Yes Bardon you are full of it

[newbie]

Bardon & other Oz locals,

A friend of mine is going to be putting in an offer on a flat in Brisbane. I don't know what the property market is doing in Oz but the heated discussion on this thread suggests that it's doing something. He's asking around for advice.

If it were you, what's the amount that you'd expect to negotiate off the asking price? How much would you offer as your first offer? Ie. what's the negotiating protocol in Brisbane/Australia, if there is such a thing?

Also are rents advertised in Oz normally inclusive or exclusive of the service charge? Ie. does the landlord absorb it or is it passed on to the occupier? I imagine rates are covered by the landlord, unlike council tax in the UK, but tell me if I'm wrong here. I want to compare the net rental value of the place against the asking price to give him a more considered opinion of the deal.

Thanks

Edited February 23, 2010 by newbie

[JonoP]

Hah hah. I am expecting that sometime, in to not too distant future, China will announce they are buidling the worlds tallest building.

I will immediately catch the next plane out of Aus.....

http://www.thefirstpost.co.uk/60052

In the 1970s it was all bamboo huts and ox carts. Today it's home to 30,000 residents who boast of a per-capita income four times the national average. Huaxi claims it is China's richest village and plans a 1,760 metre skyscraper second only to Dubai's Burj Khalifa in height.

Drat! Was hoping they were going to hold off for a while. Oh well, it should take them a couple of years to build it and history suggests (Empire State Building, Canary Wharf, Burj Tower etc) that the market usually crashes just before the open it.....

[aussieboy]

Bardon

You can put $10 on a offer to buy the money is held by the agent not the vender, let me explain the deposite is to make the contract binding.

Once a unconditional offer is acepted by the vender that is it. there can be no walking away, That is what it is to put your signiture and money down on a contract.

you live in a fantisy!

trying to big note yourself.

I recon you suffer from a mental disorder.

I'd have thought the need for a 10% deposit was common knowledge.

BTW you may want to hold off on the "cheep" psychoanalysis until you've brushed up on your phenomenology.

[blue skies]

Bardon & other Oz locals,

A friend of mine is going to be putting in an offer on a flat in Brisbane. I don't know what the property market is doing in Oz but the heated discussion on this thread suggests that it's doing something. He's asking around for advice.

If it were you, what's the amount that you'd expect to negotiate off the asking price? How much would you offer as your first offer? Ie. what's the negotiating protocol in Brisbane/Australia, if there is such a thing?

Also are rents advertised in Oz normally inclusive or exclusive of the service charge? Ie. does the landlord absorb it or is it passed on to the occupier? I imagine rates are covered by the landlord, unlike council tax in the UK, but tell me if I'm wrong here. I want to compare the net rental value of the place against the asking price to give him a more considered opinion of the deal.

Thanks

Well in this market just pay what they want if you think it is a bargain, right now it is the sellers who have the upper hand.

Auctions have become common because of the super heated market.

If the market sould suddenly change than it is the same as every were , look for the best value and then find the most desperate seller.

One difference to the Uk is that gasumping is not common place as the agent is not allowed to say how much the other offer is only that it is better than yours.

Non comercial Rent: the land lord pays costs except the water costs and that is up for negotion.

there is no GST on rent if I remember correctly.

It may or may not be that the agent gets a one off letting fee of one weeks rent from you.

[Paddles]

Pure class.

Bogan property investments

[blue skies]

It seems that property bandit Christopher Joye can't help but make a fool of himself while feeding misinformation on property to his readers.

Yesterday, by all accounts, El Joye was debating Steve Keen at the Perennial Investment Partners conference in Melbourne.

As Joye loudly and proudly pointed out on his Business Spectator blog yesterday afternoon:

"Update: Christopher Joye won his debate with Steve Keen in an electronically scored result in front of an audience of 500 investors at the Park Hyatt in Melbourne."

We think the words, 'three year-old,' and 'child' spring to mind - "Tell them I won, tell them I won..."

We've held back on Joye recently, but it's time to put his claims under the spotlight again...

First, let's take a look at a couple of the comments in the same Business Spectator blog:

"The total value of privately-owned residential property is around $3.5 trillion. The total value of outstanding mortgage debt is circa $1 trillion. Australia's mortgage debt LVR is therefore slightly less than 30 per cent - ie, incredibly low. But Keen ignores this."

El Joye wrote that in response to Steve Keen's method of measuring household debt, which is to compare mortgage debt to GDP.

According to Joye, using mortgage debt to GDP is a:

"...Pretty meaningless benchmark. If you want to understand the viability of debt levels, you can use two key measures: debt-to-assets ratios and debt-to-income. This is exactly what any intelligent investor would do when appraising a company's leverage."

And then El Joye explains how the Australian mortgage debt LVR is only about 30%. In other words about 30 cents of debt for every $1 of 'assets.'

Can you see a problem with El Joye's method? For a start, where's the $3.5 trillion come from? As investors with Storm Financial well know price and value are two different things.

And when the price readjusts to reflect the real value, that's when the problems arise.

But apart from that, the other problem with his claims are this, when you're valuing a company and assessing the ability of a company to honour its debts, the last thing an 'intelligent investor' would do is look at the ratio for the entire market.

What would be the point of that? Would any 'intelligent investor' really look at the balance sheet of Duet Group [ASX: DUE], which has 81% of its capital as debt, but then ignore that and invest anyway on the basis of the overall market only having a debt to capital ratio of 30%?

We could be wrong, but we're not aware of any 'intelligent investor' that would do such a thing. But then again, we don't mix in the same circles as Christopher Joye. He's clearly got a monopoly on intelligence.

Then he makes his second point:

"We know that total household interest repayments as a share of disposable income are only about 10 per cent today. This is exactly the same as what they were 20 years ago."

Do we really know that? I don't think we do. Is El Joye really suggesting that mortgage repayments only comprise 10% of household disposable income? It would seem he is.

So, let's go to the source, his pals at the Reserve Bank of Australia (RBA). And if you look at the numbers, well, they're not quite as Joye would have you believe.

Because according to the RBA, 'Household Interest Payments to Disposable Income' is indeed around 10% (actually 9.8%), and if you do cherry-pick 20 years ago then you will find the number was 8.7%. Which we'll give some leeway and concede is "about" 10%.

But go a little further back and you'll see that the date Joye cherry-picked - December 1989 - was the peak following an increase from 5.2% in 1977. And funnily enough, between 1989 and the late 1990s it fell again.

Anyway, look at the spreadsheet for yourself by clicking here. Whichever measure you look at, the debt burden has ballooned:

Debt to Assets - 7.2% in 1977, 19.9% in 2009

Housing Debt to Housing Assets - 8.8% in 1977, 30.2% in 2009

Debt to disposable income (total) - 33.2% in 1977, 152.7% in 2009

Debt to disposable income (housing) - 24% in 1977, 135.4% in 2009

But the important part of this is that as any 'intelligent investor' will tell you, making assumptions about the ability of an individual to repay their debts based on the repayment ability of a much larger sample of people is statistical chicanery at best, and outright deception at worst.

Let's look at a simple example. If you have two households, one with 60% of their disposable income going towards interest repayments and the other with just 5% of their income going towards interest repayments, it's hardly fair to say that no-one is in mortgage stress because the average is only 32.5%.

The reality is much worse than Joye's rose-tinted vision would make you believe. And it doesn't fit in at all with the numbers that show borrowing levels have reached an all-time high, in part thanks to the first home buyers bribe.

Take this example. According to the HIA-Commonwealth Bank first home buyer affordability report: "Monthly loan repayments on a typical first home mortgage in Melbourne surged from $2114 to $2600 in the year to December as federal grants were wound back and other costs jumped."

Got that? That's a 22.9% increase in monthly repayments. It's an extra $5,832 of after-tax income each year that is diverted either from savings or other spending, and is instead spent on feeding the ponzi banks.

But not only that, it rather makes a mockery of Joye's claim that interest repayments are only 10% of household disposable income. Do the maths. With an annual mortgage repayment of $31,200 (most of which is interest in the early years) Joye obviously believes everyone is on the same kind of wage as he is.

Maybe the flash-Harry's at Rismark earn $312,000 of after tax income each year, but most normal people don't.

And even if you take Joye's previous claim that household disposable income is over $90,000, then you're still looking at over 30% of disposable income going towards interest payments.

That's backed up by Joye's pals at the RBA who have Housing Loan Repayments at nearly 30% of household disposable income:

Housing Loan Repayments

So for El Joye to come out and claim "We know that total household interest repayments as a share of disposable income are only about 10 per cent today" is downright misleading.

Look, let's forget all the stats and ratios and percentages. Let's think about this logically. In 2009, 191,000 first home buyers hit the market, that's more than a 50% increase on the previous year.

Common sense tells you that these 191,000 first home buyers aren't spending just 10% of their disposable income on interest and mortgage repayments. Even if these buyers were uber yuppies with a disposable income of say $150,000 can you really imagine they are only spending $15,000 a year on interest?

That would mean a mortgage of just around $200,000. Maybe we're wrong, but that would need a huge stretch of the imagination and suspension of reality to believe that's the case.

Besides, even if you take Joye's disposable income of around $90,000 then you're looking at annual interest of $9,000 and a mortgage around $120,000. The numbers just don't add up to reality.

Of course, Joye's pal, Macquarie Group's Rory "Output Gap" Robertson has chimed in as well:

"The 'bubble crew' seem to keep missing the main story... There's extraordinary and ongoing rapid growth in the number of actual people in Australia with money wanting to own or rent houses in which to live - as opposed to living in tents and shipping containers - while the underlying long-term trend in homebuilding remains flat near 150,000 per annum."

His arrogance never ceases to amaze. The actual people with money, are actual people being cajoled into taking out massive debt burdens. Cajoled by the likes of Robertson and Joye who believe Australia is immune from the realities of excessive debt indulgence.

But that's not all, because it seems as though Joye has another visual impairment. Not only does he suffer from rose-tinted vision, but he's had a bout of tunnel vision as well.

Last week Joye offered, "Exposing the sharemarket sham."

The conclusion of his article? Wait for it. It's a barnstormer. You're not going to believe this...

The stockmarket is risky! He's even managed to put a number on it. It's "11.6 times riskier than 'cash'".

Well we could have told him that. In fact, 97.9% of 'intelligent investors' could have told him that. We hope Rismark clients didn't have to pay too much to receive that pearl of wisdom.

But at least he's not afraid to spruik for property investing at the same time, because as he informs readers:

"Australian equities also don't stack up relative to fixed income investments, such as bank bills and government bonds. I am pretty sure one could also add AAA-rated Australian home loans and A1+ corporate debt to the fixed-income outperformers, although it is difficult to quantify their long-term returns due to a lack of suitable time-series data."

It seems that investors should forget about the stock market. They should forget about investing in companies that make things or dig resources from the ground or provide services to people.

According to Joye you'd be much better off if you could invest in AAA-rated Australian home loans. Oh Lordy. What a fabulous idea. And as luck would have it, Rismark is just the firm to help you out. It has been trying to flog the idea of investors investing in Australian residential property securities for years.

And from what we can see, without much success.

But anyway, here's a link to the proposal Joye put to the [hehem]... Fannie Mae Foundation seminar in October 2003:

"Consider a $250,000 house that is purchased with a downpayment of $25,000. The homebuyer uses standard mortgage finance of $125,000. The remaining $75,000 is raised using equity finance in the form of a specific SRR mortgage that works as follows. There is no interest due on the SRR mortgage until the house is sold. If the house is ultimately sold for more than it cost, the interest due corresponds to 60% of the appreciation. If the house sells for less than its purchase price, no interest whatever is due, and the amount of the initial loan is written down in proportion to the decline in the property price."

You remember Fannie Mae, it was nationalised by the US government last year when a whole bunch of its mortgages went proverbial up.

The gist of the proposal - as we can figure it - seems to be that you buy a house but only take out part of the mortgage, the rest of the cost is paid for by an investor or group of investors through some sort of security. They call it 'shared equity.'

That idea is probably ringing a few bells for you.

Well, it was less than five years later that Joye was proposing an Australian version of Fannie Mae and Freddie Mac to be called 'AussieMac.'

In that document he states:

"We propose that the Commonwealth Government sponsor an enterprise - 'AussieMac' - that would leverage the Government's AAA-rating to issue low-cost bonds and acquire high-quality mortgage-backed securities from Australian lenders just as Fannie Mae and Freddie Mac have done in the United States."

And this comment, which was made before Fannie and Freddie went bust, but after the first signs of trouble had emerged:

"While Fannie Mae and Freddie Mac have been extraordinary successful institutions for the best part of 50 years, they too have been occasionally embroiled in governance sagas that tend to at one time or another afflict all major corporations."

And this:

"Indeed, there is a compelling case that liquid markets for securitised residential mortgages would never have emerged in the US, or for that matter anywhere else in the world, were it not for the establishment of Freddie Mac and Fannie Mae, which were the pioneers of the securitisation process and for many decades the only providers of off balance-sheet funding to US lenders."

Joye seems to say, "All hail Freddie and Fannie!" Whereas we say, "To hell with Freddie and Fannie!"

We assume Joye is still intent on establishing an 'AussieMac' in Australia and therefore is set on importing to the Australian housing market the very same housing disease suffered by the American market.

But getting back to the 'Shared Equity' proposal, isn't it a great investment idea? Wouldn't it be good if investors could help buy into residential property? We're surprised it hasn't caught on. We'll tell you why it hasn't caught on, because it's a terrible idea.

First off, it would do no more than gradually push prices even higher as more capital is allocated towards the residential housing market. Of course, it wouldn't happen overnight, but the gradual trend would be to expand the housing bubble further.

But secondly, what investor or investment firm in its right mind would buy into an over-priced illiquid asset, an illiquid asset that they earn absolutely no income on until the property is sold, and then they only get paid interest if the house is sold for a profit?

What the academic in Joye forgets is one simple thing about housing. And that is, there's potentially more money to be made from lending money to sucker property investors than there is to be made from owning the actual property.

Investment pros are too smart. They may spruik to push prices higher, but they're not dumb enough to put their own clients funds at risk when they can make more money from lending cash as a loan.

But back to Joye's "risky sharemarket" article. Because there was another hilarious line we just couldn't ignore:

"Unfortunately, most of us underestimate risk (including many supposedly sophisticated investors), and focus obsessively on returns... And that touches on a sobering fact that one should never lose sight of: risk represents the probability of loss. This is precisely why any person who tells you that shares are 'the best place to be' is mad: the only way they can possibly arrive at this conclusion is by completely ignoring risk, or by assuming that you are trying to generate unusually high returns."

And yet, it's Joye and the band of property spruiking bandits who every day ignore even the faintest possibility of downside risk in the housing market.

Shares are risky, and they always have been. We'll be the first to tell you that if you didn't already know. So we'll agree with Joye on that score. If you're not prepared to accept the downside risk then you shouldn't invest in shares.

But for Joye to point to the risks of share investing without even mentioning the potential risks of investing in a property market that is close to bursting point shows his complete lack of investment objectivity.

It's up to Joye to put the record straight and finally admit that there is risk in taking out a massive loan that's 6 or 7 times your annual income and buying a depreciating asset, which provides a negative income stream, at the height of a thirty year property boom.

That's what we call risky. In fact, we'll say it's just as risky as investing in shares - and that shouldn't be the case for property. Property should be low risk, but thanks to the spruikers it's on par with the risk of shares.

Look, we're not claiming that everyone's perfect, certainly not your editor. But we do object to the propaganda that the spruikers infest the mainstream media with, that the Australian housing market is unique, like no other in the world.

And that Australia's record high level of debt is of no concern, because, well, this is Australia and we're different.

The reality is, to use an analogy, while the bus journey from prosperity to household economic debt Armageddon may have taken a different route to that taken in the US and UK, the ultimate destination is the same.

It's just that Australia is taking the scenic route. And whether we like it or not, the property spruikers are the one's driving the bus.

Cheers.

Kris.

[blue skies]

A property Bogan is laying by the beach , he notices that the tide has has slowly retreated leaving a mile of what was sea bed. fish are floping all around.

Never one to miss a great opertunity he starts walking out to were the bigest fish are left strandard.

Using his superior reasoning he thinks just as the tide gently resided so it will return.

[aussieboy]

It seems that property bandit Christopher Joye can't help but make a fool of himself while feeding misinformation on property to his readers.

<Sniiip>.

Wasted too long reading (most of) that.

One point to consider: Kris makes accusations of data cherry picking then does just that comparing average first time buyer repayments with average household salary. Big assumption there/

[newbie]

The first offer depends on a few things such as the area, the demand, how close to market price it is. You would probably be at least going it at 10% below asking, I just had a look at the report for Woolloongabba and it shows actual discounting on asking price as 6% and 5% for the region. Here is the link all you need to do is plug in the suburb as a guide.

http://www.domain.com.au/public/suburbprofile.aspx?mode=research&suburb=Woolloongabba&postcode=4102

I bought a property in Kingaroy late last year that has a lot of potential for developers. My first offer was 10% off asking, and best and final was 7% below asking and I got the vendor to do some electrical work, painting and cleaning based on some defects in the building inspection report.

When you say services do you mean the fee that you pay to the body that is responsible for the maintenance of the units? If that is the case then we call that body corporate and yes the landlord absorbs that as well as rates as well as building insurance and of course your property managers commission on the rents.

Yields are higher on units as opposed to houses but long term growth is less. If it was me I would refer him to the Residex top growth report for Brisbane Units and only buy in a suburb that has high predicted growth and I don’t think there are many that do for units. There are better places to buy units than Brisbane if location is flexible.

I have the report somewhere and can look it up for you if you tell me the suburb.

Also try to stick just below the median price for the suburb or on the median, greater than median is not recommended.

Thanks Bardon and Blue Skies. He's looking at a big unit in the City centre.

[Mmmm]

Home loans rise

The rise in home prices is mirrored by rising mortgage lending, according to private lending figures released today by the Reserve Bank. Notably, business borrowing continued its slide.

According to AFG, Australia's largest mortgage broker (apparently), there was a 47% drop in mortgage sales in January:

http://corporate.afgonline.com.au/idc/groups/public/documents/web_content/mortgageindex-feb10-national.pdf

The Sydney Morning Herald covered the story:

http://www.smh.com.au/business/mortgage-market-under-pressure-as-rising-rates-spook-buyers-20100131-n6j5.html

''We've seen a lot of data recently about rising house prices and increasing consumer confidence, all of which would suggest buoyant property markets. But the opposite is the case,'' AFG's managing director, Brett McKeon, said.

Loan Market Group says its home loan approvals have dropped by 40 per cent:

http://au.biz.yahoo.com/100205/2/2b3ya.html

So who ya gonna believe?

Nice stat in the AFG data - first home buyers made up just over 12% of loans as compared to 27% in mid-2009. Now do any of my fellow poms remember what happened in the UK just before the market when south. Dwindling number of first home buyers killed off the market as I recall......

[Mmmm]

So it looks like the beat goes on during a traditional quiet time on the market.

Home prices extend their run-up

Home prices extended their rally into 2010, adding to the difficulties faced by first-time buyers struggling to get into the market.

National home prices increased 1.8 per cent in January, according to RP Data, taking them 11.8 per cent higher in 12 months.

Brisbane homes rose 1.8 per cent to a median price $440,000, while in Adelaide they jumped 3.2 per cent, to a median of $379,600, in the three months to January.

Over the same period, Darwin home prices rose the most in January, jumping 4.6 per cent to $475,000, while in Perth they fell 0.6 per cent to a median price of $472,500, RP Data said.

Home prices in Melbourne rose 4.3 per cent in the three months to January to a median price of $455,000 in January, while in Sydney they nudged up 1.7 per cent to $494,500, RP Data said.

Over the same period, Darwin home prices rose the most in January, jumping 4.6 per cent to $475,000, while in Perth they fell 0.6 per cent to a median price of $472,500, RP Data said.

Canberra values rose 4.3 per cent to a median level of $489,250, while in Hobart values were down slightly by 0.1 per cent to $320,000.

Curious thing about this article is that it talks about Januray prices being up 1.8% but then seems to quote prices changes in the three months to January, though it isn't always clear.

So Melbourne prices are up 4.3% in the three months to January. A curious time frame to report on. According to an article that Bardon posted on this forum about a week ago, Residex said that Melbourne was down in January (0.68% I think but can't remember exactly).

Maybe Bardon can supply the residex figures, I don't buy the report myself.

I have to say I don't particularly trust the RP data numbers. Not that I can ever imagine Chris Joye's company would ever present a biased picture of the property industry , but seeing as their data is sourced from real estate agents.... see article below

http://www.heraldsun.com.au/news/victoria/victorian-home-prices-overstated/story-e6frf7kx-1225811878623

Victorian home prices overstated

Ben Butler

From: Herald Sun December 18, 2009

AVERAGE house prices have been overstated by up to 18 per cent by the real estate industry, official statistics show.

In September the average house price quoted by the Real Estate Institute of Victoria was $67,000 higher than the official figure, based on preliminary valuer-general data obtained by the Herald Sun.

Property experts say some of the difference between the valuer-general data, which captures every property sold in Victoria, and the REIV's figures is due to agents failing to report their less impressive sales.

A comparison of the two sets of figures shows the REIV has quoted a higher average house price in every quarter since the start of 2007 and captures fewer than three-quarters of sales in the Melbourne metropolitan area.

The latest publicly available figures from the Victorian Government's valuer-general, Robert Marsh, are for the three months between April and June this year.

But the Herald Sun has obtained preliminary figures based on about 8400 sales reported to the valuer-general's office showing a median house price of $413,000 - far less than the $480,000 reported by the REIV.

The REIV's figures showed a similar overstatement of average prices at the peak of the 2007 boom, with a gap of $74,000.

REIV spokesman Robert Larocca defended the organisation's figures, but admitted they did not include some transactions, such as off-the-plan sales made by developers.

"Their median price is always lower than ours for the very simple reason that they get every single property sale in Victoria and we don't," he said.

[JonoP]

Has anyone posted this one yet?

The Aussie media are pretty good at writing 'everything is marvelous' articles. It is a bit like a nation where every economist is either Anatole Kaletsky or David Smith. They do the same about all their news though. At the moment, the headlines are full of headlines about the big 4 Aussie banks being 'the strongest in the world'.

The Aussies seem to think that many of their companies are ‘the best in the world’. Having recently started a new job, I have had to sit straight faced while being told Telstra is one of the ‘biggest Telco’s in the world’ and how various regional power companies are also ‘the biggest in the world’ I mean, wtf, do these people really believe it?

Oh well. I guess they will be proud when they have the biggest property market crash in the world

[JonoP]

Is that the one that has nothing to do with the ozzie residential market, jingle mail for non-recourse loans tha tdont exist here and goes on to say that the most affordable cities are the worst palces to live. Maybe should have went on to say taht the most livable are the most unaffordable whcih would expalin why ozziie cities dominated the recent top ten most livebale citise list.

Hah hah, yup, the average Aussie journalist is SO dumb they cannot even work out that US mortgages and Aussie mortgagees have different default options. Oh well, at least this financial journalist was trying to put two and two together. Unlike all the journalists that write the rubbish articles that you frequently post. Do you feel ashamed about the intellect of your national journalists or do they just give you a warm feeling of comfort?

Anyhow, there was another one in the Financial Review today. Cannot be bothered to track it down but it basically says the same as all the other press articles written by press organizations that do not have huge property supplements. I.e, the market is screwed.

Yes they are a fickle bunch, the press, you only need to look back at the doom laden articles at the start of this thread that the bears used to lap up.

Cannot be bothered to do that. That was then. This is now. Previous posts are irrelevant.

Sounds like you have a pretty ordinary work environment and work mates.

Hmm. You would never, ever, be able to get a job with the company I work for, which, incidentally, is one of the most successful companies known to mankind. Keep digging those holes of fixing pipes or whatever it is you do. It will hopefully provide you with plenty of cash to subsidize your rental tenants……

So not buying then ?

Err. probably not..........

Edited February 28, 2010 by Pond321

[aussieboy]

"Hmm. You would never, ever, be able to get a job with the company I work for, which, incidentally, is one of the most successful companies known to mankind. Keep digging those holes of fixing pipes or whatever it is you do. It will hopefully provide you with plenty of cash to subsidize your rental tenants……"

How exciting! Is it Microsoft?