Australia Faces Its Demons

[blue skies]

It will be interesting to see how the ABS employment report reads when it is released on Thursday. That should give us all a relatively unbiased health check of the heartbeat of the economy.

In the meantime all we have to feast on is the entree.

Jobs ads rise 1.3 per cent in July - ANZ

August 9, 2010

The total number of ads was 35.1 per cent higher than July 2009, seasonally adjusted - the fastest annual growth rate since November 2007. ANZ chief economist Warren Hogan said the result highlighted the resilience of the Australian economy in an uncertain global economic backdrop.

http://news.smh.com.au/breaking-news-business/jobs-ads-rise-13-per-cent-in-july--anz-20100809-11s30.html

Here it is unemployment is up

Didnt see that comming did you?

[SHERWICK]

[Alan B'Stard MP]

And people will be emigrating on masse from Australia, so landlords will have to compete for tenants.

I suspect there's very little chance of that.

[blue skies]

Supply outstrips demand as market slows: new research

August 9, 2010

An increase in the number of online property advertisements in July is further evidence the housing market is slowing, research suggests.

Data released today by SQM Research shows residential real estate listings across the country rose by 5.1 per cent to total of 309,000 property advertisements last month.

Property advertisements for Melbourne jumped 6.97 per cent from June to July.

In a normal market during the traditional winter slowdown listing numbers remain flat or record a marginal drop.

Over the past three months the SQM Index has recorded an increase in supply, research manager Louis Christopher said.

New stock was coming on the market at a normal or ''slightly elevated'' rate but the overall volume of advertisements increased was because older stock was not moving, Mr Christopher said.

"Vendors have been more often than not failing to get the price they're after. The old stock hanging on the market is competing with new stock coming on, resulting in an increase in overall supply," he said.

Advertisements for south-west Melbourne, covering suburbs like Altona and Sunshine, showed a significant jump of 14.1 per cent to 4990. Advertisements covering north-west Melbourne increased in volume by 12.3 per cent.

SQM research tracks individual property advertisements in all the major online classified sites in Australia.

Recent data from the Real Estate Institute of Victoria shows auction clearance rates have fallen from 85 per cent before Anzac Day to an average of 67 per cent in July.

In further signs the market is slowing dwelling approvals posted a surprise 3.3 per cent fall in June and the volume of new home sales also declined.

Experts suggest the market also backs off during election campaigns.

REIV figures show 580 auctions are expected this weekend. On election day 320 auctions are listed. The following week 720 properties are expected to go under the hammer.

Spring will be the next big test for the property market with more vendors expected to put their homes up for sale.

Finally the tide is going out!

[blue skies]

I suspect there's very little chance of that.

I my experiance I have seen in harder times Blokes heading back to Pommy Land with there tail between there legs.

Winjing about Heat , Flies, Ozzie basstardos and Australias lack of Pork Pies , Jelly eals.

[JonoP]

I suspect there's very little chance of that.

You have to bear in mind that huge numbers of the recent immigrants to Australia are only over here on temporary work visas. If the jobs dry up, then these people will leave. They have to, they are not allowed to remain in the country if they do not have a job. Plus, there is no social security or health care for temporary residents without a job.

[blue skies]

Australian unemployment in surprise pre-election jump

A mine in Western Australia Demand for Australian commodities has helped to keep the country's economy out of recession

Australia's unemployment rate rose to 5.3% in July, according to official figures released just ahead of the country's national elections.

About 24,600 more people were out of work, raising the rate from June's 5.1%. Analysts had predicted no change

[mattyboy1973]

I my experiance I have seen in harder times Blokes heading back to Pommy Land with there tail between there legs.

Winjing about Heat , Flies, Ozzie basstardos and Australias lack of Pork Pies , Jelly eals.

The return rate of UK born migrants that arrive in Oz on 'permanent' visas hovers about 30% in good times and bad - much more for 457 business visa holders. Having said that, it would have to get pretty bad down here for the UK to seem like a better option at the moment.

[thecrashingisles]

So how is Kath Day-Knight's reelection campaign going? She seems to be spending a lot on the poster campaign at the moment.

[blue skies]

Mish's Global Economic Trend Analysis Mike Shedlock / Mish is a registered investment advisor representative for SitkaPacific Capital Management. Sitka Pacific is an asset management firm whose goal is strong performance and low volatility, regardless of market direction.

Australian Malls Lose Their Shine

Things are not well down under either. My friend "Brisbane Bear" comments "Retailer business models are broken yet most retailers are hoping things come back. They won't".

Please consider The gleaming malls are losing their shine

The disparity in Australia's two-speed economy, between a resource sector that is in overdrive and the hard scrabble of retailing, hit home to financial planner Kate Kimmorley when the Marina Mirage shopping centre slipped into receivership last month.

Ms Kimmorley maintains an office near the gleaming halls of designer clothes shops and boutique restaurants on the Southport Spit. She shops there and likes to drop in after work to one of the bars overlooking the rows of million-dollar motorboats and yachts.

Some of her best customers run shops in the centre -- and they're feeling the pain that is rippling through retailing, belying the stellar performance of mining.

"I sometimes wonder how they're going to cover the rent because they've had this fantastic refurbishment but there's less people there," Ms Kimmorley said yesterday.

Sam Hue, the self-styled "Wok Man" of the complex, said takings for his fast-food business last month were 30 per cent down on those 12 months ago.

"This is a great place and the people will come back," he said. "But they're not here now."

Brisbane Bear writes ...

The adjustment phase will render at least 50% of these retailers redundant.

'Things' ain't coming back.

regards

Brisbane Bear

Australia Commercial Real Estate Bust

Inquiring minds are reading Retail profits under attack for a decade, warns ex-Macquarie banker

The aftermath of the global financial crisis and changes in consumer behaviour could hit retail profits for a decade. The warning has come from former Macquarie Group property investment banking head Bill Moss.

Shopping centre owners and retail property would be one of the hardest-hit sectors, with real estate generally having further to fall in value, Mr Moss said.

"We're heading into a decade, or a generation, of changing consumer trends." Mr Moss said.

The population was ageing, the internet was eroding sales in shopping centres, the middle consumer market was disappearing, and discretionary spending patterns were changing sharply.

With retail sales falling and more uncertain economic times, Mr Moss questioned how many retailers were defaulting on their rent payments. "My guess is shopping centre rents will fall," he said.

"The global recession really is affecting us, despite what Julia Gillard says. It will affect us and retail profits for a decade."

US GDP Overstated

Economists were surprised by the last downward revisions in GDP yet another downward revision is on the way thanks to a rising trade deficit.

Bloomberg reports Wider Trade Gap Signals Weaker U.S. Second-Quarter Growth

A swelling trade gap, less stockpiling and weaker construction indicate the U.S. economy slowed even more in the second quarter than the government estimated last month, economists said.

Revisions due later this month may shave last quarter’s 2.4 percent annual growth rate by 1 percentage point or more, according to Morgan Stanley’s David Greenlaw and Nomura Securities International Inc.’s David Resler. The trade deficit in the U.S. unexpectedly widened by $7.9 billion to $49.9 billion in June, Commerce Department figures showed today in Washington.

A surge in imports means American companies contributed less to the rise in gross domestic product, the value of all goods and services produced in the U.S., than previously estimated. Earlier reports showing smaller gains in inventories and less of a rebound in commercial construction than the government projected will also reduce the pace of expansion.

“The slowdown occurred earlier than we thought,” said Harm Bandholz, chief U.S. economist at UniCredit Global Research in New York. “We expected the recovery to lose momentum only in the second half and now it occurred in the second quarter.”

Trade probably subtracted 3.25 percentage points from growth, the most since 1982 and up from the 2.78 points the government estimated last month, Bandholz said.

By Resler’s calculations, the world’s largest economy probably grew at a 1.3 percent pace from April through June, while Greenlaw’s estimate is down to 1.4 percent.

That should put a nice international flavor to the "Non-Recovery".

Hmmmmmmmmm I notice a change:

Once any bearish comment was instantly jumped on by Bardon and his alter ego Aussie Boy.

Were are they now?

Were is the endless ramping coments on house increases?

I will make a prediction:

We will hear less and less from him as house prices fall, he has panted himself into a corner

[canny man]

Ooer....lots of supply, and lot a not of demand

http://www.couriermail.com.au/property/flood-of-house-listings-in-queensland-mean-a-buyers-market/story-e6frequ6-1225905044210

Flood of house listings in Queensland mean a buyer's market

THE number of residential properties on the market is continuing to rise, with analysts warning some sellers will find it tough to achieve their asking price with so many homes to choose from.

The latest figures reveal that every region in Queensland has more property on the market than it did this time last year.

Instead of the expected winter slow down, the figures continued to rise over the past month, says SQM Research.

There were 27,475 properties being offered for sale in the Brisbane region alone, up from 25,265 properties last month and 17,773 properties this time last year.

The Sunshine Coast in July saw 11,333 properties on the market, a leap of 832 on the previous month and more than 3800 on that time last year.

The Gold Coast picture was similar, with 12,117 properties listed, a rise of 1000 from June to July and a jump of 4834 on July 2009.

Many regional areas of the state have experienced a surge in properties being offered for sale in the past year, with north Queensland listings jumping 196 per cent over the year, central coast 76 per cent and the far north coast 65 per cent.

SQM Research managing director Louis Christopher says the figures show that the market is continuing to soften.

He said it would normally be expected that, during the traditional winter slowdown from June to July, numbers would remain flat or drop slightly but in all regions of Queensland they had increased.

"Vendors have been – more often than not – failing to get the price they're after," he said. "The old stock hanging on the market is competing with new stock coming on, resulting in an increase in overall supply."

Mr Christopher said the slowdown in the state's property market was caused by a few factors, including increased interest rates at the end of last year and the start of this year.

[Tiger Woods?]

"Vendors have been – more often than not – failing to get the price they're after," he said. "The old stock hanging on the market is competing with new stock coming on, resulting in an increase in overall supply."

Every auction last week reported in the local property rag was passed in. You can rest assured if something had been sold it would be trumpeted, so I suspect this is a true reflection of the market. Auction results have been steadily declining all year in my area (Sunshine Coast). Houses have been reduced and reduced and then taken off the market with no sale (the ones I have been watching renting out at less than 4% of the previous asking price. it is also normal in Australia (this part at least) for the owner to pay council rates, so this return is low.) Another place I have been watching has gone from 890k to 700k and still no interest.

Estate agents who shop at the farm that Mrs Woods works at have been moaning that no one is buying and a couple of the small ones have shut up shop. Interest rates, together with the strong dollar and no jobs = a nasty dose of reality.

[JonoP]

You really do have an extreme view don’t you. I always find that extremists in either direction never get it right.

You also missed the boat on the taxation point as CGT compensates for negative gearing.

Unfortunately, it is not extreme. Your problem is that you cannot make the mental jump that is required to understand how the fact that Australians are carrying the highest amount of personal debt in the world can pose a risk to your banking system.

I find this amusing as you have basically every other western nation in the world to use as an example, but no one seems to put two and two together.

And, with regards to the CGT, you might, just might, find that they no longer want it to ‘balance out’ but rather they will keep the CGT and loose the negative gearing……

[JonoP]

That sounds like an efficient system to me.

.......but hardly good news for a proprty industry that constantly plays the 'record numbers of immigrants' card to justify the current bubble.......

[jackalope]

And, with regards to the CGT, you might, just might, find that they no longer want it to ‘balance out’ but rather they will keep the CGT and loose the negative gearing……

It would be literally impossible for either party to get elected on a platform of eliminating negative gearing so it's just not going to happen. You've got to understand the Australian love of property speculation makes the UK's seem like a transitory idle whim.

The market is definitely soft in Perth right now. I was speaking with a guy who works for one of Perth's biggest housebuilders and his grim assessment was "It's a buyer's market." I also know somebody who's had their house (very well presented, best house on the street by a mile) on the market for almost 4 months which is a very long time by WA standards. If we're heading for a crash here I think it will be in the newer mass produced suburbs in the far North and South, beach side and more central location will still do just fine.

[blue skies]

Well the stories of boom have evaperated.

The green shoots?

Very little about the volume of houses on the market, rents are not as tight as before.

I see for sale signs in street apon street, a different landscape than the boom years.

Soon some will be more motivated then there compeditors to sell.

The media is now side tracked with the politics side show.

Dick Smith has got the anti big population is best, rolling.

Labour smells votes and victory and will back a sustanable Australia. Finally reason and wisdom preval

I have bet on a Labour win on Saturday.

[Tiger Woods?]

The Commonwealth Bank chief executive, Ralph Norris, was asked after the bank announced a $6 billion profit last week whether the housing doomsayers were nuts.

''I wouldn't go as far as to say they're nuts but I think that it's very easy to make assertions based on averages,'' he said. ''You come to a different view when you look at the fact that the incomes based around averages are not relevant to the average person that has a mortgage.

Ralphy doesn't understand the fact that everyone has to live somewhere and the implication for return on investment. A bit scary given his position.

[JonoP]

It would be literally impossible for either party to get elected on a platform of eliminating negative gearing so it's just not going to happen. You've got to understand the Australian love of property speculation makes the UK's seem like a transitory idle whim.

The market is definitely soft in Perth right now. I was speaking with a guy who works for one of Perth's biggest housebuilders and his grim assessment was "It's a buyer's market." I also know somebody who's had their house (very well presented, best house on the street by a mile) on the market for almost 4 months which is a very long time by WA standards. If we're heading for a crash here I think it will be in the newer mass produced suburbs in the far North and South, beach side and more central location will still do just fine.

And that is my point exactly. Do you think the conservatives would have got elected in the UK 3 years ago on an election campaign of ‘let’s sack 25% of the public sector’? Do you think the Greek government would have won an election if they campaigned on the policies that they subsequently HAD to implement to stave off national bankruptcy?

Governments will take the least worst option when faced with national bankruptcy. And when the choice is between cutting back medicare, the police force and schools as opposed to cutting back negative gearing, then they will go for negative gearing.

And as for Perth. Hah hah. I agree it is a disaster in the making and I posted my thoughts on the topic a few months back. However, I think that you will find that once price drops occur in outlying districts, it becomes extremely hard for buyers to justify the premium associated with living in an inner district, so they go where prices are lower, which means that inner areas to have to drop their prices accordingly to compete. It is how crashes work…….

[JonoP]

Hold on their Koala Bears, open your other eye it may not be as bad as you hoped.

Pedlars of house-price doom off the mark

Jonathan Chancellor

August 16, 2010

The level of household debt in Australia has risen over the past three decades from less than 50 per cent of household disposable income to about 150 per cent.

Ric Battellino, the Reserve Bank of Australia deputy governor, has sought to allay concerns that this indebtedness means we face a risky unsustainable outlook. He said that 75 per cent of household debt was held by the upper 40 per cent of income-earners.

Advertisement: Story continues belowThe bank's governor, Glenn Stevens, had earlier given the RBA's estimate of Australia's dwelling price-to-income ratio, which found that dwelling prices in capital cities were typically 4.8 times disposable household incomes - about half the ratio put by the doomsaying international survey Demographia.

The Commonwealth Bank chief executive, Ralph Norris, was asked after the bank announced a $6 billion profit last week whether the housing doomsayers were nuts.

''I wouldn't go as far as to say they're nuts but I think that it's very easy to make assertions based on averages,'' he said. ''You come to a different view when you look at the fact that the incomes based around averages are not relevant to the average person that has a mortgage.

''So you know, we're in a situation here where, in my view, the housing market in Australia is healthy.

''There will obviously be variations in price and we shouldn't be surprised if there are, you know, drops of 5 per cent or 10 per cent, as there are obviously increases in value.

''But I think the range of value is not going to be anything that suggests a bubble and a collapse of the housing market in Australia.''

Deutsche Bank issued a research paper last week suggesting Australia's house prices were not as vulnerable as doomsayers argue.

While acknowledging that on many comparisons Australia had a high house price-to-income ratio and high levels of household debt, the Deutsche Bank economists Phil O'Donaghoe and Adam Boyton argued the vulnerability of Australian housing was ''overblown''.

''The housing market is perhaps the most common vulnerability we are asked about in the Australian economy,'' the said.

''Combined with the role played by the US housing market in the financial crisis, investor awareness and suspicion of this key asset class is perhaps understandable.

''But we have long held the view that a broader assessment of the Australian housing market offers a more sanguine conclusion.''

The Deutsche Bank report noted that mortgage debt obligations in Australia were fully recourse loans and borrowers' mortgage obligations extend beyond the mortgaged property, therefore providing a greater incentive for repayment relative to the United States.

Battellino suggests the strongest evidence on the sustainability of household debt was the low level of arrears. This was evident again this week in housing repossession data.

Repossession actions lodged in the NSW Supreme Court for the first six months of 2010 totalled 1198.

There were 3800 last year and 4000 during 2008. The peak year was 5300 in 2006.

Foreclosures in the US rose 4 per cent from June to July, exceeding 300,000 for the 17th month in a row, according to RealtyTrac.

The number of foreclosure activities, which incorporates all phases of foreclosure including default notices, scheduled auctions and bank repossessions, totalled 325,229 in July.

Lenders seized 92,858 properties last month, the second highest monthly total since RealtyTrac began tracking repossessions in 2005. Total foreclosure activities reached 1.65 million in the first six months of 2010.

Deutsche Bank noted that Australian house price concerns were ebbing. ''The pulse in housing finance has moderated in line with rises in the cash rate. The housing cycle points to a steady moderation in price pressures.

''Elements of the market which had been described by the RBA earlier this year as demonstrating elements of 'considerable buoyancy' have moderated. Auction clearance rates have also slowed.'' From a peak of 72 per cent at the end of last year, auction clearance rates had fallen by last month to 61 per cent, Deutsche said.

http://www.smh.com.au/business/pedlars-of-houseprice-doom-off-the-mark-20100815-125az.html

Yeah, and four years ago Deutsche Bank were busy releasing press releases saying there was no US housing bubble. And the Fed was busy saying there was no US bubble. As were all the large US retails banks.

Guess what? Turns out there WAS a bubble.

There is only one statistic that has any bearing on what will ultimately happen to the Australian economy, and that is the debt level of Australian consumers. Which is the highest in the world.

[jackalope]

Governments will take the least worst option when faced with national bankruptcy. And when the choice is between cutting back medicare, the police force and schools as opposed to cutting back negative gearing, then they will go for negative gearing.

No, they won't. Cutting NG hits the type of middle class swing voter that both parties court assiduously. They'd much rather do a GST increase - that's the real least worst option.

[blue skies]

Population debate overflows

HENDRIK GOUT

23 Jul, 2010 12:27 PM

Geranium is a memory of a time forgotten. At the turn of last century, the South Australian Government sank a bore deep into the ground, and water was life. Around the graziers and wheat farmers came shops and a post office, schools and churches, a blacksmith and mechanic.

The mechanic was its ruination, because mechanisation meant bulk grain handling and John Deere reapers. Geranium became just a blink on the highway between Tailem Bend and Lameroo. Families drifted to the capital, the last passenger train ticketed the last passenger and the high school closed in 1990.

Geranium, like a hundred other towns in country South Australia, has been depopulated.

But not Adelaide. Like other Australian capitals, Adelaide has grown so that it’s now straining at its boundaries, its public infrastructure completely inadequate for its exploding population, its water supply drying and its affordable housing an oxymoron.

In Sydney, Melbourne and Brisbane, the population burden is itself unsustainable. Tapping into voter apprehension about Kevin Rudd’s “Big Australia”, newly appointed Prime Minister Julia Gillard immediately ditched the policy to replace it with a different message.

“It is time to reconsider whether our model of growth is right for an Australia facing fundamental constraints on our water supplies, an Australia where land use is increasingly contested, for example, between mining and farming ... or market gardens versus development on our suburban outskirts,” she said on Tuesday.

And wherever she’s been campaigning this week, Ms Gillard has spoken against the sort of unlimited growth which is Mike Rann’s future for Adelaide.

The Federal Government’s intergenerational report predicts an Australian population of 36 million by 2050. In SA, the State Government wants half as many people again – 560,000 extra in Adelaide alone. Mt Barker, in the electorate of Mayo, has been declared by the State Government as the repository of an extra 50,000 more people in just 15 years.

[blue skies]

Property owners looking to sell might need to hurry, expert warns

Monday, 16 August 2010 11:48

Patrick Stafford

E-mail Print

More on Property

* Property owners looking to sell might need to hurry, expert warns

* A flood of new property listings will force sellers to discount: Expert

* ASIC shuts down unregistered property schemes

* What businesses can learn from Australia’s big shift to the city

* Experts question price data to see where property market is moving

Property owners thinking of selling in the next 12 months should put their home on the market now in order to cash-in on recent growth before buyers start seeking more discounts in the spring selling season, one expert warns.

The comment comes as the Real Estate Institute of Victoria said over the weekend a record 18,000 properties have been put up for auction so far this year, with sellers keen to cash in on the strong price growth in Melbourne.

But SQM Research founder Louis Christopher says sellers who are thinking of putting their properties on the market should do so now.

Growth is starting to trail off, according to the latest figures from agencies including RP Data and Australian Property Monitors, and if you want the most for your money now is the time to sell.

"It does depend on personal circumstances, but if I had to sell in the next 12 months then I would be considering selling now," he says.

"There have been many sellers trying to cash in this year, but I think the boat really left earlier this year and since then buyer demand has really dropped off. I still think it's going to continue dropping off."

Christopher expects listings to increase over the next six months even as buyer demand backs off, resulting in a flat market with very little price growth, if any. He points to the recent RP Data figures which showed prices dropped by 0.7% across the country in June.

However, Real Estate Institute of Australia president David Airey says there are too many factors weighing into the decision to sell a property, and most of those decisions relate to family circumstances rather than a desire for cash.

"Death, divorce and debt are the main reasons behind selling a house. For those who have the luxury of decision-making, the market isn't bad, it's just not growing. If you're selling now, or waiting, I think people are taking a punt either way."

"It just depends on a lot of things, there is really no rationale here."

Meanwhile, auction results have continued to remain at relatively low levels for the year, but the Real Estate Industry of Victoria said in a statement the result indicates rates have begun to stabilise.

"The clearance rate for this weekend's auctions was 68%, a small increase from last weekend but largely in line with results this winter. Since the start of winter the clearance rate has been 70% or higher twice, a remarkable contrast to summer and autumn when it was never lower than 73% and frequently in the 80s."

Christopher agrees, saying that "clearance rates over the last four weeks have steadied, and I think that will be the case heading into Spring".

A total of 535 properties were put up for auction, with 364 selling. At this time last year, 504 properties were on the market and 85% sold. The REIV said only 300 properties will be up for sale next week due to the federal election.

Sydney managed to record a 67% clearance rate, with 170 properties selling out of a total of 238 on the market. Total sales value came to $146 million.

In Brisbane only seven properties sold out of a possible 26, with total sales coming to $2.4 million, while in Adelaide only six properties were sold out of a possible 11%, resulting in a clearance rate of 55% and total sales of $4 million.

Related Items :

* A flood of new property listings will force sellers to discount: Expert

* Halving of Bryon Bay coastal property land values a warning to other coastal property owners: Expert

* Buyers start to return as house prices cool further

* Backlog of property listings will put pressure on price growth, experts say

* Investors warned to remain cautious of property market until bargains appear

[blue skies]

Thinking out side the box?

Low priced outer suburbs will hold most of resent gains?

High priced inner suburbs will be the hardest hit?

[blue skies]

How a Housing Index Could Work...

But Won't

Monday, 16 August 2010 – Melbourne, Australia

By Kris Sayce

* How a Housing Index Could Work... But Won't

As mentioned in Friday's Money Morning, today's newsletter follows on in the same theme - the idea of a tradeable housing index.

An index which would allow investors to buy if they thought house prices were going up, and sell if they thought house prices were going down.

If it's done properly, a housing index could provide a useful purpose. Both as a measure of house prices but also as a way to bet on the performance of house prices.

That's the plus side. The down side of the idea is that the high price of housing could actually increase a person's risk exposure to housing. Or the capital required to enter the trade could be so prohibitive as to make it not worthwhile.

But let's look first at how a housing index could be created...

On Friday we wrote that a tradeable housing index that was based on theoretical values or fancy computer modelling would be doomed to failure. That's our opinion anyway.

We can't see how any serious investor would be interested in investing in something that was based on an opaque and unfathomable set of mathematical formulae.

So, what's the alternative?

As we see it, it's important to not try and reinvent the wheel. For all its faults, stock markets are still the most transparent market for trading there is. So therefore why not just copy the stockmarket model?

In the case of shares, most investors want to know a few key points. Chief among them is, what profit does the company make now, and what profit is it likely to make in the future?

Once you've run the numbers you can then figure out if the stock is currently trading at a discount, a premium or at fair value to its future profit potential.

So, is it possible to do the same with housing?

Of course it is.

But not with a fancy-pants computer model.

The simplest way to figure out the current and future value of housing is to use residential rental properties. The residential rental market provides all the figures you need to know about current and future profits.

A portfolio of rental properties provides the three vital ingredients you need: a purchase price, maintenance and financing costs, net rental income, and sale price (if the property is disposed of).

With all that information, not only would it be possible to monitor the increase or decrease in property values as properties are sold from the portfolio, but it would also give investors a genuine indication of the total income generated by the properties.

As you know, one of our biggest criticisms of property investing is that it's priced for perpetual growth, with no regard for how much income the property is generating - a classic sign that an asset class is trading in a bubble.

Just like the dot-com boom, and just like the US housing boom. Income was ignored simply because prices continued to rise, and the punters thought that would continue forever.

Residential property investors are happy to make a loss on their rental homes because they've been brainwashed into believing house prices can only ever go up.

But let's suppose this idea took on. Who would manage and monitor this portfolio of rental properties?

Well, there are two options. First is that property investors simply place their investments in a "managed portfolio", handing over administration of the properties to the property manager for a fee - not too dissimilar to how things work right now with real estate agents.

The second option is to rely on the data records of existing property managers, requiring them to provide purchase, sale and rental details for a random selection of properties they manage.

Either way, for the most part the data is already there. It's just a case of there being the will for someone to collect and maintain the records.

The benefit of this approach - while by no means perfect - is that the income generated from the rental properties would provide investors with an indicator of whether housing is undervalued or overvalued relative to the value of the underlying portfolio.

Sure, there would still be a degree of guesswork by investors, figuring out what the value of the underlying properties should be. But that's no different to the stock market.

The benefit that the rental index would have over the stock market is that properties are bought and sold all the time. If a property is sold from the portfolio, investors would be able to see how the sale price compares to the purchase price.

In other words you'd get a combination of growth and income data based on real prices and real rental incomes, rather than airy-fairy computer models.

Of course, it wouldn't be perfect. But no investment or index is perfect. Again, just look at the stock market for proof of that.

But that's the whole point of investing. Uncertainty is what drives prices in the market. Once you have complete certainty either way then you can guarantee that prices are ready for a reversal because they are either priced for perfection or priced for destruction.

And in reality, neither is likely.

The important point is that it would give investors a picture of comparative risks. Investors could easily compare the yield on a property index against that of a stockmarket index.

They could then figure out whether that's a yield worth investing in. Investors would then need to consider whether that makes it overpriced or not.

If they think so, then they can use the index to short-sell for profit, or to hedge an exposure.

Which brings us on to our other point. We've been told that one of the benefits of a housing index is that it would allow homeowners to hedge their housing exposure.

If they've bought a house worth $500,000 and they're worried the price could fall then they could short sell the index and neutralise their market position. They'd be protected against falling property prices, but because it's a hedge, they'd also miss out on any gains if prices continued to rise.

Right there you have your problem.

Quite frankly if you've bought a $500,000 house and you're worried the price could fall, then you've seriously got to consider whether paying that much for a house was a good idea in the first place.

You see, unless you're prepared to take a punt up to the supposed value of your house then it isn't a full hedge.

Is it really such a great idea that not only have the spruikers and banks and policy makers conspired to pump prices up to bubble proportions, that the some wonks are now encouraging people to take another punt on house prices in case they fall... to the tune of another half a million dollars.

Don't get me wrong, hedging a portfolio can be a great idea. It can help to protect your investments should something happen.

But do you really want to take a risk on short selling an index when you're betting against the most manipulated asset class in Australia? Would you really want to place a down bet when you know the government could come in to prop the housing market up with another billion or so dollars?

Sure, if you own a home then that intervention may have helped to support your house price.

But let's say house prices do go up. That means you're losing on your down bet. If it's a true hedge then as the price of the house increases your loss on the hedge also increases.

Imagine the irony if you'd hedged your $500,000 house at the beginning of 2009 only to see the index showing a 20% increase in house prices and then suddenly you're out of pocket by $100,000 on your bet... only to have to sell your house in order to cover the hedging loss!

You'd want to hope your house price had increased in line with the index in that scenario.

But even before that, how would you even place the bet? Would you have to stump up $500,000 in cash? Or would you do it on margin using a loan from, erm, a bank? Probably using your house as security.

From a hedging perspective the whole idea is getting smellier and smellier the more we think about it.

But the point is, as we've written many, many, many, times before, the ultimate use for a house is that it's somewhere for you to live. A house is a home not an investment. A house is a cost for an owner occupier, not a source of income.

Besides, if you're sensible then you'll have taken out building and contents insurance.

So do you really need to take out an insurance policy (hedging using a housing index) to insure against the value of your house falling?

Maybe you do. Certainly many homeowners in the US and UK probably wish they could have hedged their house price. But that's only because house prices were pushed up to such a crazy level - much as they have been here.

But as we see it, the creation of a housing index is the equivalent of a drug dealer giving his customers "downers" after spending years pumping them with "uppers."

The real cure is not to get the market high to begin with.

When all's said and done, regardless of what any potential housing index looks like, even if it's based on our idea, the reality is that anyone considering using a housing index to hedge the price of their house really shouldn't have spent that much on a house to begin with.

A housing index might be fun for a punt, but it won't prevent the housing market from crashing and it won't prevent overextended borrowers from losing not only their shirts, but their entire wardrobe as well.

Cheers.

Kris Sayce

For Money Morning Australia

We are all gamblers as all forms of investment carry risk.

[Tiger Woods?]

I have never been one to express a political view but I think it is prudent to warn that If anyone is thinking of voting for the Greens, they must read their policies beforehand. This will surely dissuade you of any such action.

....

Thanks Bardon. Now I am back at square one. There is literally no one who I can vote for with a clean conscience...or even a huge dose of guilt ridden self interest.

I knew there was a reason why I stayed away from this place for so long... :angry: