Australia Faces Its Demons

[buyerbeware]

Yes quite right, I forgot that we were in 10 and was of course referring to 08 which of course is two years ago now. Yes last year was a ball tearer in Melbourne.

Reading past news articles it seems that Australian house prices are up and down more than a whore's knickers. 18% up one year, 14 percent down on the half year, just like the weather changes in Melbourne, or may be it is just that Australians can't do their sums.

Anyway if the average price is 500k AUD in Melbourne that is a scary price and nearly 280k pounds with average wages at 60,000k AUD pa.

Edited February 9, 2010 by buyerbeware

[JonoP]

If you look at the graph of Australian median house price over time it is fairly smooth but yes the dip in 08 was the worst since the war.

There are many differing markets in oz and also many different measuring systems but the main thing is that it is safe to say that they are all rising now. Although the mortgage belts will suffer the movement will now be in the mid to higher end and this will skew the medians up the way.

Lets go back to the point that Blue Skies raised.

- In December 09 you posted that you had purchased a house in Melbourne.

- In a post you made two days ago, you stated that you had no properties in Melbourne.

Which one of these two statements is true?

[JonoP]

If you look at the graph of Australian median house price over time it is fairly smooth but yes the dip in 08 was the worst since the war.

There are many differing markets in oz and also many different measuring systems but the main thing is that it is safe to say that they are all rising now. Although the mortgage belts will suffer the movement will now be in the mid to higher end and this will skew the medians up the way.

If you look at the graph of Australian median house price over time you will not see any period of time where they have been at 9x earnings and growing. Historical precendent does not account for the crazy valuations that are common today.

[ExecutiveSlaveBox]

Jeez you bears are really scraping the OZ HPC myths barrel now. Houses are not 9 X earnings and if you are referring to the debunked demographia report then dont forget they only count detached houses in cities ie they do not include semi detached, units, apartments and townhouses which are of course cheaper. And let’s not forget there is a major demographic shift towards these types of dwellings where families are now are opting for three bedroom apartments in lieu of detached houses as a long term lifestyle option. But you wouldn’t know any of this.

They also don’t include anything at all from regional l and country Australia and guess what that would do to your spruik ratio if they did.

Also the income should be multiplied by 1.2 which is the ozzie average income.

Now let’s stick to the facts which have been issued by the ABS and show that housing prices to disposable income are back within the long term average.

You bend the truth like a true banana bender.

senate report on housing

Look, there's some evidence from the government, change your mind? Admit your wrong? Thought not.

Keep on ramping in the free world!

[ExecutiveSlaveBox]

All that dated graph does is refute ponds 9 times statement.

As I said before housing affordability measured against disposable income is back in the long term average, nothing has changed.

x7 or x9 I think you may be splitting hairs a little bit. It was dated 2006 and you can see where the bloody trends going. I also don't remember any significant falls in prices or increases in wages recently.

So, some facts please.

Where is the evidence for this return to long term averages?

[ExecutiveSlaveBox]

I have posted it many times on this thread and dont intend to do it again.

I'm calling bullsh1t on that.

Don't let this descend into a Paxman.

Where is the evidence?

Edited February 9, 2010 by ExecutiveSlaveBox

[ExecutiveSlaveBox]

You are such a lightweight.

Are there no quality bears left on this forum, or do we just have the ill informed shouters ?

So you get it wrong yet again.

That was it? You provide absolutely no context for that graph. I have no idea how it's calculated but I do hope it isn't ratio of average household disposable income to the principal and interest repayments on a new mortgage.

Now that would mark you out as a rank amateur.

[blue skies]

Housing finance fell 5.5pc in December

* From: AAP

* February 10, 2010 11:36

HOME loan approvals retreated for a third straight month in December after a reduction in government subsidies and interest rate rises dampened enthusiasm for mortages, economists say.

Australian housing finance commitments for owner-occupied housing fell 5.5 per cent in December, seasonally adjusted, to 55,632 the Australian Bureau of Statistics (ABS) said.

That was weaker than economists' expectation for a fall of five per cent in the month.

Total housing finance by value fell by 2.8 per cent in December, seasonally adjusted, to $21.900 billion.

NAB senior economist David de Garis said the pullback in approvals for housing loans was expected after federal government stimulus measures were wound back and increases to interest rates during the final quarter of 2009.

The Federal Government reduced the first home buyers grant boost from $21,00 to $14,000 on October 1 and lowered it to $7,000 on January 1 this year.

The Reserve Bank raised the overnight cash rate by 25 basis points to 3.75 per cent on December 1, following similar moves in October and November.

Subquently, the central bank left the cash rate unchanged on February 2.

"It is probably largely due to the departure of the first home buyers, who did all their borrowing and buying in the past months,'' Mr de Garis said.

"When you look at the high levels we had a quarter or so back, we are getting some payback from that due to the stimulus measures.''

Loan approvals for the building of dwellings fell for the second consecutive month, down 6.4 per cent in December, the ABS said.

Demand for mortgages to buy new houses bucked the negative trend, up 3.0 per cent in the month, while loans for investment housing rose 1.9 per cent.

"Investment housing is up, that is suggesting the sector is picking up a little bit of momentum,'' Mr de Garis said.

[blue skies]

Hats off to Barnaby Joyce for having a crack. Maybe when his political career is finished, and he's yesterday's nobody, we could offer him a job writing newsletters. He certainly knows how to write a good headline!

If you missed it, in an interview with the ABC Barnaby Joyce said:

"We're going into hock to our eyeballs to people overseas. And you've got to ask the question how far in debt do you want to go? We are getting to a point where we can't repay it."

ABC reporter, Stephen Long's response? Well, here it is:

"The polite way to describe that comment - nonsense. It's not true, plain and simple. The credit ratings agencies don't always get it right; the global financial crisis showed that. But they've got a lot of experience in rating sovereign debt."

And then the little reporters scurry off to interview the usual suspects: Standard & Poor's, Fitch Ratings, and Citigroup.

Hmmm, the ABC relies on two ratings agencies that rated subprime mortgage debt as triple-A, and an economist from a bank that was partially nationalised by the US government.

Not surprisingly they give the Australian government coffers the stamp of approval.

You can click here to read the transcript, but the gist of it is blah, blah, blah... Australia did better than everyone else, etc...

According to Citigroup economist Josh Williamson, asked whether Joyce's comments were irresponsible he answered, "Absolutely."

So, is Joyce's comment nonsense? Well, it is in the sense that governments have one advantage that no one else has. And that is the ability to print extra money to pay off debts.

As we've mentioned before, if you crank up the Canon inkjet printer and run off a few thousand $50 notes, you'll find yourself in the Slammer before you know it.

The fact is, most governments are too sneaky and dishonest to openly default on debt. Their first response is always to inflate the money supply to devalue the currency. That way, while the debt is repaid it's done with a devalued currency.

But that's the disappointing part about the mainstream media's response to Joyce's claims. It doesn't take much effort to look beyond his statement to see there's at least an ounce of truth in what he's saying - not that he's the first to say it of course.

And the other disappointing point is Josh Williamson's comment that "We have an excellent debt to GDP position." Because that's only true of the government debt.

The household debt to GDP position, and income to household debt position is nowhere near as good. In fact it's terrible.

And worse is that unlike government's, households can't simply print out extra $20 notes to pay off their debt. So the real problem isn't the possibility of the government defaulting on debt, it's the scale of the household debt default when that happens.

Of course, we frequently hear the argument that inflation is the friend of debtors. That over time the amount of debt reduces when adjusted for inflation.

We have to say, that's one of the biggest furphies going around. Along with the idea that a house is a hedge against inflation.

As we've written before, in all cases inflation is bad for you and your wealth. Inflation is never good. At the extreme, ask Weimar Republic Germans, or Zimbabweans, or even look at your own position.

Has inflation really helped you out over the last twenty years? Didn't think so.

The simple reason is that inflation forces you to work harder.

Let's be honest. No one wants to work. We work because we have to. But imagine how much better it would be if there was no inflation. Or if there were periods of deflation to counteract the inflation.

Inflation devalues the dollar in your pocket which means you have to keep working harder and longer. Your ability to devote more time to leisure lessens the more inflation eats away at your income and your savings.

I mean, if your dollars weren't devalued and prices didn't rise then your savings would really grow, and without much effort either. Whereas now, as an investor you have to run just to stand still.

Look at the risks you need to take as an investor. Even a 10% or 12% annual return from taking big risks on the share market probably isn't enough to beat inflation. And I mean the real cost of living increases not the phony numbers the Australian Bureau of Statistics (ABS) come up with.

And as for the idea that a house is a hedge against inflation, well, that's more twaddle. It's no such thing. In fact, in an inflationary environment houses become nothing more than a 'White Elephant.'

If you want to know the origin of that phrase, just head over to the Lazy Researcher's Handbook.

You see, inflation appears to help by showing a correlation with rising house values. Yet there's no evidence that there's a causal relationship.

Just on that point, we've seen plenty of people say, "Look at the chart, inflation has gone up over the last thirty years, so have house prices, therefore housing is a hedge against inflation."

Not so fast. You can't take two data sets, compare then and then just announce a correlation.

If it was that easy then you could compare house prices to a chart of your editor's age over the last thirty years. You could conclude because both have risen that your editor is a hedge against inflation!

What utter nonsense.

Inflation inflicts greater harm on the homeowner due to higher maintenance costs.

Fuel bills go up, electricity bills go up, replacing furniture, fixtures and fittings all go up. And generally just keeping the home in good nick incurs higher and higher costs. The cost of moving goes up, the cost of downsizing to a smaller home goes up, and so on.

You only have to look the popularity of reverse mortgages. Old timers borrowing money in their old age because they've spent so much on maintaining their home for the last thirty-odd years. And because high taxes have robbed them of the chance to save, they've got no other choice than to put themselves into hock just to cover the weekly shopping.

Or another example. The relish with which a twenty or thirty year old home is advertised as a "renovate or detonate" property. How is that either an investment, or a hedge against inflation?

It isn't.

That's house price inflation for you.

Then at the extreme look at the number of Victorian stately homes in the UK that are falling apart. Lords of the manor having to rent out their 500 year-old ancestral home to bucks parties and corporate dinners because they can't afford to repair the leaky roof.

Or if they're really strapped for cash they have to flog it to National Trust and then live out their days in the Gatehouse because they can't afford the heating bills or maintenance costs.

And they can't sell them to private owners, because no one else is foolish enough to lumber themselves with such a White Elephant.

As I say, that's the extreme, but the reality is, housing isn't a hedge against inflation.

In fact if you compare it to something else which is claimed to be a hedge against inflation - Gold - they have nothing in common.

Gold is divisible, a house isn't - you can't sell it brick by brick and get the same proportional return.

Gold is transportable, a house isn't - unless it's some crappy weatherboard home no one wants and you're prepared to pay for transport costs. Or, unless your home is a caravan! But then of course, according to Saul Eslake and his crew at the National Housing Supply Council, if you live in a caravan you're homeless anyway, so that doesn't count.

Gold is durable, a house isn't - see the examples above.

Gold can be hidden from the government if they try to confiscate it like the US government did in the 1930s. Try hiding a house! Good luck with that one.

Plenty of people will tell you Gold isn't a hedge against inflation anyway, that it's a hedge against political instability. We're prepared to consider that argument. But we'll also say that if Gold isn't a hedge against inflation, then housing most certainly isn't either.

The fact is, while Barnaby Joyce may not be 100% correct, he isn't 100% incorrect either. Record high household debt levels have indebted the Australian population.

So even though the odds of the Australian government 'honestly' defaulting on its debt obligations are near to zero, the odds of Australian households being forced to default under the pressure of the White Elephant of housing is better than evens.

Cheers.

Kris.

[ExecutiveSlaveBox]

No it is certainly not that nor is it based on the Demographia data as were your antique senate committee graphs.

Now as far as understanding the graph it has been discussed in detail and at length previously on this thread and I have no intention of doing that again with you absolutely nothing in it for me. The only reason I posted this graph again was to counter your its all bullshyte claim.....................just for another laugh....................................................................

You post a graph with no explanation as to what it actually means or how it was calculated. Forgive me for not being that interested in trawling through the thousands of posts of utter banality that constitute you input to find it's hidden meaning.

The only respected measure of affordability is price/income ratio per year which is a pretty good indicator of how much a house costs, one year relative to another.

I feel vindicated in my claim that you are completely full of sh1t.

[ExecutiveSlaveBox]

You always say that yet all my predictions which are vey much against the grain around here are proving true.

I think you can feel something else in your hand.

Well it is the official chart of affordability and forgive me but I can’t be bothered with someone who doesn't have the faintest idea about the ozzie housing market and consistently gets it wrong all of the time.

You will only be vindicated when you eventually capitulate, and realise that you should have bought way back and are better of going back to Blighty and complain about how oz house prices didn't move the way you thought they should.

Oh....... it's the official chart, right.

So no explanation then?

Simple question, what does the y-axis mean, how is it calculated?

[blue skies]

Australian houses 'world's least affordable'

27/01/2010 10:00:00 AM

Australia has the least affordable houses in the world according to a ranking of international housing markets.

By Stuart Fagg, ninemsn Money

Australia has the least affordable houses in the world, according to a ranking of international housing markets.

From a total of 23 Australian regions included in Demographia's Sixth International Housing Affordability Survey, 22 were labelled severely unaffordable and Australia scored the worst housing affordability rating in the world, followed by Canada.

Demographia calculated the ratings by diving median house prices by annual median household income and named Vancouver as the least affordable market in the world.

Sydney was ranked second, with the Sunshine Coast, Darwin and the Gold Coast rounding out the top five.

Melbourne and Wollongong also made the top ten, coming in at eigth and tenth respectively.

In Sydney, nearly 57 percent of the average income is needed to pay the mortgage on the average house, compared to just 13.4 percent in Dallas, Texas, one of the most affordable major city housing markets in the world.

The average dwelling price in Sydney rose 11.6 percent last year to $475,000, just above the national average of $439,000, according to RP Data.

Experts said housing affordability is being eroded by a lack of supply.

"Residential land release in Sydney has been reduced from an historic average of 10,000 lots per year to less than 2,000 in 2007," said Dr Tony Recsei in the preface to Demographia’s report.

"In the face of the scarcity resulting from such a miserly allotment it is unsurprising that the land component of the price of a dwelling has increased from 30 percent to 70 percent. The result has been a cost increase of some three times what it was a mere ten years ago."

Demograophia added that land release and planning issues are making the situation worse.

"In Australia, there is consensus in both the government and the private sector that there is a severe housing crisis, with rampant unaffordability and a housing shortage," the report said.

"It takes from 6.25 to 14.5 years to convert urban fringe land into new houses, which compares to less than 1.5 years before urban consolidation, and which remains the case in the 'demand-driven' (more responsive) markets in the United States."

Demographia urged governments to free up land use rules in order to ease affordability problems without causing a housing market crash.

"The restoration of near historic housing affordability in some markets provides an opportunity to repeal more prescriptive land regulation policies, which would not only minimise the potential for future busts, but would also ensure housing affordability for future generations," the report said.

[blue skies]

Cause and effect.

Your personal finances are looking down, so you borrow money and just like that your problems go away.

Brilliant!

But what about 6 months time when you have to tighten up on spending?

Yes.

You all so have to work over time to pay the loans back.

Your life style in going down the toilet.

Hmmmmmmmmmm Sound like anyone we know? the government ?

[blue skies]

Blue skies, you wouldn't have the faintest idea about my financial position not that you draw on a basis of knowledge when you post anyhow.

Your post is just so void of substance and full of negativity I think you are looking in the mirror.

I dont see your name mentioned in my post?

but if the cap fits wear it

As for your finantual position I think it is overstated.

Funny how a man with a high profile has so much time on his hands?

you never tell us how you manage to do it

[blue skies]

More jobs available but fewer hours being worked

* David Uren, Economics correspondent

* From: The Australian

* February 12, 2010 12:00

THE jobless rate appears to be heading back below 5 per cent. However, Treasury believes the economy has spare capacity and does not expect the booming jobs market to lead to skills shortages or a wages breakout.

Unemployment dropped from 5.5 per cent to 5.3 per cent last month as business took on an extra 52,700 workers, extending the best run of employment growth in five years.

Since last September there have been almost 200,000 new jobs created.

However, testifying before the Senate economics committee yesterday, Treasury secretary Ken Henry drew attention to a fall in the average number of hours being worked, with more people working part-time.

"We think there is substantial spare capacity at this point," Dr Henry said, adding that the fall in hours was equivalent to a full-time unemployment rate closer to 7.3 per cent.

"We would not think that there is a lot of crowding out of private sector activity at the moment

Dr Henry said he did not expect the economy to confront capacity constraints until the jobless rate was up to a percentage point lower than it is now.

Employment Minister Julia Gillard said the number of unemployed was still 120,000 higher than it was in September 2008, when the global financial crisis started.

"We still need to support the Australian economy through economic stimulus," she said.

However, she agreed that labour shortages were evident in some areas, with the resources industry driving strong growth in the northwest of Australia and in Queensland.

She said the government was relying on the enterprise bargaining system to guard against wage breakouts.

"Once an agreement is struck, an agreement must be honoured and adhered to," she said, adding the "full force of the law" would be imposed on any breaches.

Opposition Treasury spokesman Joe Hockey said the strength of employment meant the economy no longer needed the help of government stimulus spending which would, instead, result in higher interest rates.

"I warned that the big issue going forward would not be unemployment for Australians, it would be higher interest rates and again I've been proven absolutely correct," he said.

Although many financial market economists agree that the overall strength of employment will push the Reserve Bank to lift interest rates by 25 basis points to 4 per cent at its March meeting, it may also be influenced by the fall in hours being worked.

Deutsche Bank chief economist Tony Meer noted that the average number of hours worked has fallen to 31.9 hours a week.

[buyerbeware]

Thanks for elevating me to a high profile, I like that.

And as for the time question, I guess I am just smarter than the average bear.

Bardon I am your boss and we are monitoring internet activities closely, get back to work!

[soldintime]

Yes I know what you mean, they always know your surfing habits.

Well I have changed jobs recently and I have worked every day bar one and I mean every day, holidays, Sundays the lot. I am averaging about 75 hours a week at the moment. That will come down once I get a handle on it that is for sure.

So my boss is the one that is getting his money’s worth at the moment. That will change to.

Australia has the longest working hours of any western country in the world. One of the reasons is the wrong timezone and the fact that they are in the southern hemisphere, this is a disadvantage if you work for international businesses.

[Mmmm]

Is 2010 a good time to buy a house in Australia? If you're buying a house because you want somewhere to live and call your home, you've got safe employment prospects and you can afford the mortgage repayments even if interest rates go up another 4 or 5 per cent then I'd say maybe. . But if you're buying a house as an investment it's got to be a definite no. Greece is the canary in the cole mine. Given the current global economic uncertainties around debt and inflation etc., I'd prefer to invest in more liquid assets - things you can buy and sell by picking up the telephone.

The real worry for Oz is that China stalls and commodities crash just as inflation kicks in globally and interest rates rise. China is looking bubble-liscious right now.

http://www.marketwatch.com/story/crisis-expert-says-chinas-boom-to-end-soon-2010-01-16

Jan. 16, 2010, 7:01 a.m. EST · Recommend (19) · Post:

Crisis expert says China's boom to end soon

HONG KONG (MarketWatch) -- After more than a quarter century of rapid growth, China's factory-to-the-world economy could now be set for a major slowdown, even as it tries to spend its way to strength, according to an expert on the causes of the global financial crisis.

Noted economist and author Richard Duncan said that, faced with sluggish global growth and a tapped out U.S. consumer, there's little hope that China can keep its factory-geared economy in motion much longer.

"China has followed an export-led growth model for the last 25 years, and it has just hit a brick wall when the U.S. economy went into crisis," Bangkok-based Duncan said in an interview with MarketWatch.

Duncan is the former London-based head of global investment strategy at ABN Amro. In 2003 he authored "The Dollar Crisis," which warned that imbalances in global trade would lead to a meltdown of the financial system.

Duncan now believes China is caught in a jam created by excessive credit. Years of easy lending and booming investment inflows have saddled its economy with surplus industrial capacity to the point where China out-produces what it consumes.

Expectations that Beijing can spark up domestic consumption to fill the void are bound to disappoint, he said, as wages are too low to support enough meaningful demand to lift the corporate sector to profitability.

Beyond that, Duncan doubts China can avoid its day of reckoning after years of super-heated credit growth. Dubai's debt-induced implosion last year significantly shortened the list of those who've manage to avoid becoming casualties of financial history, he said.

"Every boom busts ... and China is not going to remain an exception indefinitely," Duncan says.

China is not alone in facing up to a slowdown in economic growth. Most of Asia's export-dependant economies will struggle as the global slump proves structural rather than merely cyclical, he said.

Keeping currencies weak relative to the dollar in an effort to bolster exports is no longer a viable option for economic growth, Duncan said.

Duncan's latest work -- "The Corruption of Capitalism: A Strategy to Rebalance the Global Economy and Restore Economic Growth" - looks at why the global financial system imploded and comes to some stark conclusions.

He says that there's no hope of resuscitating a global trade system underpinned by "monetary LSD" -- borrowing a phrase used by a French economic minister during the 1970s to describe the floating exchange-rate system that followed the end of the gold standard.

The credit bubble which drove U.S. home prices to their heights of 2006 -- the same year the U.S. current-account deficit swelled to nearly $800 billion -- was the culmination of monetary disorder that began with the demise of the Bretton Woods system in the early 1970s, Duncan says.

The subsequent crash that wiped out most of the U.S. banking system amounts to a "New Depression," where the global economy still teeters on the edge of an abyss -- held up by the life-line of government aid.

And that government support, Duncan believes, is likely to become a permanent part of the financial landscape for years, if not decades to come.

"Japan serves as a very good example of what's likely to happen in the U.S. and China," Duncan said.

The good news is that the U.S government should be able to finance huge budget deficits without resorting to printing yet more money, he said, adding that Japan has been able to do just that since the 1990s.

The breathing room from such deficit-funded spending will provide the former engine of the global economy a window of roughly five to 10 years to restructure around high-tech industries of the future.

The key, he said, is not to squander the stimulus. Japan's public debt ballooned from 65% to more than 200% of its gross domestic product during its two-decade long crisis, mainly through public-works programs sometimes derided as "bridges to nowhere." While such projects helped to cushion joblessness, they did little to fix core economic problems.

[Mmmm]

Another view from outside Oz:

http://seekingalpha.com/article/186272-pool-of-greater-housing-fools-in-australia-finally-runs-out-oz-dollar-where-to-from-here

Pool of Greater Housing Fools in Australia Finally Runs Out; OZ Dollar, Where to from Here?

by: Michael Shedlock February 03, 2010 Michael Shedlock 491

This Tuesday the Reserve Bank of Australia (RBA) unexpectedly held interest rates at 3.75%. No doubt this was in fear of Australia's enormous housing bubble that exceeds the height of the bubble that long ago burst in the US. 20 economists predicted the RBA would hike. Not a single one predicted anything else.

Fear in the board of governors over the pending crash is palpable. Prime Minister Kevin Rudd did not learn a single thing from the US and the disastrous policies of Greenspan. He gave one last goose to the housing market with $14,000 tax credits in a foolish attempt to stem the tide of the global recession that started two years ago.

Prime Minister Rudd brags about Australia's ability to duck the recession. It did not work. All Rudd did was delay the inevitable, fueling an even bigger housing bubble. The bigger the bubble, the bigger the crash, and rest assured Australia is headed for a housing crash.

Here are a few snips from the Bloomberg article Australia Unexpectedly Keeps Interest Rate at 3.75%.

The Reserve Bank of Australia kept the overnight cash rate target at 3.75 percent after three increases, it said in Sydney today. The decision confounded the forecast of all 20 economists in a Bloomberg News survey for a quarter-point move, and futures contracts that signaled a 74 percent chance of an increase.

Australia’s dollar tumbled to a six-week low and Asian stocks pared gains after the announcement sparked concern at the economy’s ability to withstand higher borrowing costs. Business confidence fell to a six-month low, a report showed today, and Woolworths Ltd., the country’s biggest retailer, warned last week that rate increases would hurt consumers.

Business confidence fell in December to the lowest level in six months, a report by National Australia Bank Ltd. showed today. The bank’s sentiment index dropped 11 points to 8. Lending to companies “has continued to fall as companies have sought to reduce leverage, and lenders have imposed tighter lending standards,” Stevens said today. “Credit conditions remain difficult for many smaller businesses,” he said.

Here is a statement from the article that particularly caught my eye: Prasad Patkar, who helps manage about $1.5 billion at Platypus Asset Management in Sydney, said "Today’s decision reduces the serious risk of a policy blunder.”

Serious Policy Blunder

Sorry Prasad, a serious policy error was made long ago, and there is not a damn thing the RBA or anyone else can do to stop the impending housing crash in Australia.

What follows is a post I actually wrote Monday. I intended to post this before the rate decisions, but it never happened. I too, thought one more hike was coming. That it did not come is a sign of panic at the RBA.

First Time Buyers In Severe Stress

Just as happened in the United states with subprime borrowers, Australia's first-home buyers struggle as interest rates rise.

Almost half of first-home buyers lured into the market by the Rudd Government's $14,000 grant are struggling to meet their mortgage repayments and many are already in arrears on their loans.

Thousands of young home buyers are using credit cards or other loans to meet obligations, while those in "severe stress" are missing payments.

Just weeks after the grant was withdrawn, a survey of more than 26,000 borrowers conducted by Fujitsu Consulting has found 45 per cent of first-home owners who entered the market during the past 18 months are experiencing "mortgage stress" or "severe mortgage stress". ...

During the past 18 months, more than 135,000 first-home buyers have entered the market, encouraged by the generous grants and stamp-duty relief.

As a result, more than 50 per cent of first-home owners are forecast to be in the "mortgage stress" category by the end of this year.

No Lessons Learned

"LD", a reader from Australia who sent me the link asked and answered his own question: "What have Australians learned from Americans over the last 2 years? Nothing!"

Credit Squeeze Coming Up

Craig, another reader from Australia writes ...

Mish

I've been waiting a long time to buy a house in Australia. Looks like I may not have to wait too much longer for the Aussie bubble to burst. As always, love your blog. Cheers, Craig

Craig is referring to Tighter credit rules to halve home loans.

Last week Westpac cut its loan-to-value ratio (LVR) for new customers to just 87 per cent of the property's value - a new low for a big bank. Although it may appear relatively small, such a cut has a disproportionate effect on how much people can borrow and can halve the value of the property they can afford to buy.

"If you have a $50,000 deposit and you can get a 95 per cent loan, you are able to bid on a property worth $1 million," said Steve Keen, associate professor of economics at the University of Western Sydney. "But if the LVR is cut to 90 per cent, your $50,000 deposit is only equivalent to 10 per cent deposit on a $500,000 property, so the amount you can spend is halved."

Westpac's reduction from a maximum LVR of 92 per cent means that buyers with a $50,000 deposit will see the maximum that they can afford to pay for a property slashed from $625,000 to $384,615. Somebody with a $20,000 deposit would see the amount that they could spend reduced from $250,000 to $153,846, says Professor Keen.

Experts are worried that, if other banks follow suit, credit to the property market will be choked off and property prices could collapse. According to research by broker Mortgage Choice, fewer than half of all new home buyers have a deposit of more than 10 per cent of the property's value. ...

Lenders have gradually been cutting back the size of loans that they are prepared to offer home buyers. Just over a year ago, 100 per cent - or even 105 per cent - loans were relatively common. But over the past 12 months, the LVR has fallen steadily to 95 per cent, then to 90 per cent, and now to 87 for new borrowers approaching Westpac.

It was this same tightening of credit that led to the collapse of property prices in the UK in 2008, even though the country was still suffering from a massive shortgage of homes at the time.

Deposit Math

Note the above paragraph in bold by Steve Keen, one of few economists in the world who actually has a clue. His blog is Steve Keen’s Debtwatch.

Also note the worries of the so-called housing experts in the above article: Experts are worried that, if other banks follow suit, credit to the property market will be choked off and property prices could collapse.

If those "experts" had an ounce of common sense they would be worried the housing bubble would get bigger. Indeed, housing prices are so stretched in Australia that the bubble will burst soon enough regardless of whether lenders tighten standards or not.

The US housing bubble burst with credit standards still getting looser a year or more later.

When Do Bubbles Burst?

Bubbles burst when the pool of greater fools runs out, and not before.

That is exactly why Economist Steve Keen lost a housing bet against Rory Robertson.

AN ECONOMIST known as the "Merchant of Gloom" will have to walk from Canberra to the top of Australia's highest mountain after losing a bet about the resiliency of Australian house prices.

Last November, University of Western Sydney associate professor of economics and finance Steve Keen made a high-profile bet with Macquarie Group interest rate strategist Rory Robertson.

The two parts of the bet were that house prices would tank by the end of 2009 and that house prices would fall 40 per cent from their all-time high within 15 years.

The loser of the bet would have to make the more than 200km trek from Canberra to the top of Mount Kosciuszko wearing a T-shirt that says "I was hopelessly wrong on house prices! Ask me how."

Why The Bet Went Wrong

Keen's mistake (miscalculation is a better word as I am positive he will ultimately be proven correct), was that he misjudged actions the Rudd administration might take to keep the bubble going.

Bear in mind that once the trend changes, it changes for good, but until the trend does change, efforts to keep bubbles alive frequently produce blowoff tops.

In Australia's case I finally sense a blowoff top in fools. The US suffered the same fate in 2005 when the cover of Time Magazine went "gaga over real estate" and people were camping out overnight and entering lotteries for the right to buy Florida condos.

Inquiring minds might be interested in the following flashbacks, the first showing the funniest Time Magazine cover in history, the second shows approximately where we are today although I do have to move the arrow one notch closer to the bottom.

April 10, 2006: US vs. Japan Land Prices Pictorial Update

July 13, 2009: Housing Update - How Far To The Bottom?

How did Bernanke and other experts fare?

Let's answer that with a few more flashbacks.

The initial data point on my chart came in the post It's a Totally New Paradigm on March 26, 2005. Here are some excerpts from that post.

Ron Shuffield, president of Esslinger-Wooten-Maxwell Realtors says that "South Florida is working off of a totally new economic model than any of us have ever experienced in the past." He predicts that a limited supply of land coupled with demand from baby boomers and foreigners will prolong the boom indefinitely.

"I just don't think we have what it takes to ***** the bubble," said Diane C. Swonk, chief economist at Mesirow Financial in Chicago, who was an optimist during the 90's. "I don't think prices are going to fall, and I don't think they're even going to be flat."

Gregory J. Heym, the chief economist at Brown Harris Stevens, is not sold on the inevitability of a downturn. He bases his confidence in the market on things like continuing low mortgage rates, high Wall Street bonuses and the tax benefits of home ownership. "It is a new paradigm" he said.

Flashback October 27, 2005

Inquiring minds may wish to review Bernanke: There's No Housing Bubble to Go Bust.

Ben S. Bernanke does not think the national housing boom is a bubble that is about to burst, he indicated to Congress last week, just a few days before President Bush nominated him to become the next chairman of the Federal Reserve.

U.S. house prices have risen by nearly 25 percent over the past two years, noted Bernanke, currently chairman of the president's Council of Economic Advisers, in testimony to Congress's Joint Economic Committee. But these increases, he said, "largely reflect strong economic fundamentals," such as strong growth in jobs, incomes and the number of new households.

Flashback February 12, 2008

Bernanke Expects Housing Recovery by Year End

Federal Reserve Chairman Ben Bernanke told lawmakers Tuesday he expects the downtrodden U.S. housing sector to improve by the end of the year, a senator who participated in the closed-door meeting said.

"He let us believe that the housing situation should begin to ameliorate by the end of the year," said Sen. Pete Domenici, a New Mexico Republican, told reporters.

"He gave a very good, succinct, short overview of where he thought the economy was right now and how it might move forward," said Sen. Jon Kyl of Arizona.

Bubbles and Humpty Dumpty

Bernanke has proven all the king's horses and all the king's men cannot put bubbles together again.

For further proof please see Bernanke's Deflation Preventing Scorecard.

After bubbles burst, nothing matters including loose lending standards in the US that lasted long after the housing peak in summer of 2005.

Supply of Fools Exhausted

I am willing to bet that at long last, Australia's pool of greater fools just ran out. Rudd's ridiculous $14,000 grant and stamp-duty relief programs were likely enough to exhaust that pool.

The ultimate irony of Keen's bet is that by the time he starts his hike in April he will likely be right.

Bear in mind however, that prices tend to fall slowly at first as inventory builds up. Then the losses accelerate quickly.

A Long Wait

By the way, Australia buyers might need to wait 5-7 years or more for reasonable valuations. Look how long it took for the US housing bubble to implode. We have not hit bottom yet after 5 years, and the Australia bubble has a bigger starting point.

Please see Housing Bubble Comparison: US, UK, Canada, Spain, Australia, Japan for a county by country comparison of housing bubbles from the Ecomomist.

Demographia International Housing Survey

Inquiring minds are reviewing the results of the 6th Annual Demographia International Housing Affordability Survey. Countries in the survey include Australia, Canada, Ireland, New Zealand, the United Kingdom, and the United States.

Least Affordable Cities

The article shows the top 58, I captured the top 20 above.

Congratulations To Canada And Australia

Congratulations go to Vancouver, Canada for being the least affordable city in the survey. Vancouver thus wins the gold medal in the individual competition.

Sydney, Australia proudly wins the Silver medal and the Sunshine Coast, Australia wins the bronze. It was close but no cigar for Australia's Gold Coast. Honolulu, Hawaii came in a respectable fifth place.

Most Affordable Cities

Detroit, South Bend, Youngstown, Flint, Toledo, Akron, Peoria, Cleveland, and many other "affordable" cities are not places where anyone would particularly want to live. Indeed many cities at the top of the affordability list are places that most would hope to escape from.

The high school graduation rate in Detroit is a mere 25%!

I am willing to bet that Detroit's graduation rate is far and away the worst of any city in the survey. See Michigan Forces Business Owners Into Public Sector Unions; Detroit's Aura of Hopelessness for more details.

Moreover, there are houses in Detroit, Cleveland, Flint, etc, that one could buy for $500 that have no takers. Unlivable houses no one wants at any price skew the results.

Demographia Summary by Nation

All of the affordable markets were located in Canada and the United States, while most markets in Australia, New Zealand and the United Kingdom were severely unaffordable.

Australia: House prices have continued to rise in Australia (Figure 2), which registered the worst housing affordability (the highest Median Multiple) in the history of the Survey. Overall, housing in Australia is severely unaffordable, with a Median Multiple of 6.8, more than double the 3.0 historic maximum norm. Housing had been affordable in Australia in the late 1980s, with a Median Multiple of under 3.0. The Median Multiple remained at or under 3.5 until the late 1990s.

All of Australia‟s major markets were severely unaffordable (Median Multiple above 5.0). Moreover, all markets, including smaller markets were severely unaffordable except Ballarat (Victoria), which was seriously unaffordable (Median Multiple between 4.1 and 5.0).

Canada: Housing is moderately unaffordable, as in previous Surveys. Canada's Median Multiple is 3.7. Housing had been affordable in Canada in the late 1990s, with a Median Multiple of 3.0. Canada had 5 affordable markets, 13 moderately unaffordable markets, 5 seriously unaffordable markets and 5 severely unaffordable markets.

Vancouver remained the least affordable market of any size in the surveyed nations, at 9.3, worsening from 8.4 last year. Toronto joined Vancouver as severely unaffordable, with a Median Multiple of 5.2. However, Barrie, within the Toronto region was moderately unaffordable, at 3.4. Victoria, Abbotsford and Kelowna (all in British Columbia) were also severely unaffordable.

Ireland: Housing in Ireland has become moderately unaffordable with a Median Multiple of 3.7, showing a trend toward historic norm of 3.0.20 Housing had been affordable as late as the middle 1990s, with a Median Multiple below 3.0. The extent of Ireland‟s recent housing affordability improvement is illustrated by the EBS/DKB Affordability Index, which indicates that mortgage payments have been halved in Ireland since the peak of the bubble in relation to first home buyer incomes.

New Zealand: Housing in New Zealand was severely unaffordable, with a Median Multiple of 5.7, nearly double the historic maximum norm of 3.0. Housing had been affordable in the early 1990s, with a Median Multiple of under 3.0. Auckland is the least affordable larger market, with a Median Multiple of 6.7, while Christchurch (6.1) and Wellington (5.7) were also severely unaffordable.

Tauranga-Bay of Plenty was again the least affordable market, with a Median Multiple of 6.8. Five of the 8 New Zealand markets were severely unaffordable, while Palmerston North, Napier-Hastings and Hamilton were seriously unaffordable New Zealand had no affordable markets and no moderately unaffordable markets

United Kingdom: Housing in the United Kingdom remains severely unaffordable, with a Median Multiple of 5.1, well above the historic maximum norm of 3.0. Housing had been affordable in the late 1990s, with a Median Multiple of under 3.0. Less than one-half of the United Kingdom markets were severely unaffordable (14 of 33), while the other 19 markets were seriously unaffordable. The United Kingdom had no affordable markets and no moderately unaffordable markets.

United States: Housing in the United States is rated as affordable, with the Median Multiple of 2.9.The recent house price declines have restored U.S. housing affordability to the below 3.0 historic norm (last achieved in the early 2000s), as the price bubble burst in many plan-driven markets. The United States had 98 affordable markets, 58 moderately unaffordable markets, 8 seriously unaffordable markets and 11 severely unaffordable markets.

The most affordable major market (population over 1,000,000) was Detroit. Other affordable major markets were Atlanta, Buffalo, Cincinnati, Cleveland, Columbus (Ohio), Dallas-Fort Worth, Houston, Indianapolis, Kansas City, Las Vegas, Louisville, Memphis, Minneapolis-St. Paul, Oklahoma City, Phoenix, Riverside-San Bernardino, Rochester, Sacramento, St. Louis and Tampa-St. Petersburg.

Gold, Silver, Bronze Medals

In terms of national unaffordability (the team competition) Australia wins the gold medal, New Zealand, the silver medal, and the UK wins the bronze medal.

Because of a preponderance of "affordable" cities in the US and the way the national rankings are made, I question the results of the national survey although it likely did not affect the top three medal-winning rankings.

Email Exchange With Survey Developer

I had this exchange with Hugh Pavletich of Performance Urban Planning who helped develop the survey.

Mish: When you come up with "national affordability" are all the cities given equal weight? Does Detroit count as much as San Francisco?

Hugh: Yes.

Mish: In my opinion, a weighted average is what matters most (at least for the purpose of figuring out how big the bubble still is).

Hugh: We are NOT attempting to explain how big the bubble is on a country wide basis. We are simply illustrating what the Median Multiple is at the 3rd Qtr of each of the urban markets listed.

Other researchers are most welcome of course to take the next step and do a population weighting, if they wish to do so.

Our goal is simply to illustrate the degrees of housing stress of the urban markets listed.

Bear in mind my goal is quite different than Hugh Pavletich's. He wants to show the role local planning rules have in affordability. Hugh makes a case that local zoning rules play a huge factor on a city by city affordability basis while I am concerned with "How Big Is The Bubble?"

From my perspective, the US and Canadian bubble problems are very understated, and the national affordability rankings of the US and Canada are thus overstated. To be certain, one would have to take a weighted average of populations and rankings. One would also need to take into consideration unlivable houses offered at $500 that no one would take. If one did that, we would see the bubbles are where the most people live.

There is much more in the survey. Please give it a look.

Mortgage Stress in Australia

If this chart does not scream "nationwide bubble", nothing ever will.

Australian Interest Rate Hikes

On December 2, the Reserve Bank of Australia hiked rates to 3.75%.

At its meeting today, the Board decided to raise the cash rate by 25 basis points to 3.75 per cent, effective 2 December 2009.

With the risk of serious economic contraction in Australia having passed, the Board has moved at recent meetings to lessen gradually the degree of monetary stimulus that was put in place when the outlook appeared to be much weaker. These material adjustments to the stance of monetary policy will, in the Board’s view, work to increase the sustainability of growth in economic activity and keep inflation consistent with the target over the years ahead.

Let's come back to that last paragraph a year from now. Two years from now it is likely to look downright silly.

One more hike is in the cards, too, on February 2. Some will lay the blame on what is about to happen on these last couple hikes. The reality is the blame for the coming bust lay in the ridiculous expansion of credit that preceded it.

Australia's problems have not yet started. Remember too, that commercial real estate follows residential with a lag. Australia can look forward to a bust in commercial real estate down the road as well.

[Mmmm]

Apologies that the links and charts from Michael Shedlock's blog (pasted above) did not copy.

They are worth a look. The chart on Australian mortgage stress is particularly rewarding. If anyone out there feels glum about renting while you wait for price to correct, that chart will surely cheer you up.

Here's the link to Michael's blog:

http://seekingalpha.com/article/186272-pool-of-greater-housing-fools-in-australia-finally-runs-out-oz-dollar-where-to-from-here

By the way, one thing Michael didn't comment on was the decrease in mortgage approvals in November and December. From memory, I think November was -6.1% and December was -5.5%. At the same time 2009 Q4 prices went sky high. Generally speaking, rising price on thinning volume is associated with a trend reversal. Not that you can guarantee these things, but it's a pretty bad sign for the market.

[Alan B'Stard MP]

Apologies that the links and charts from Michael Shedlock's blog (pasted above) did not copy. ....snip

Don't you know that all that analysis and evidence is irrelevant.

I have it on good authority that we are at the bottom of the "property cycle"

....oh and saturn is in orion.

[Mmmm]

China Real Estate: Build It and They Will Come or Bubble Waiting to Burst?

John Lounsbury February 12, 2010

Bloomberg News today reports on 50% vacancy in Beijing commercial real estate. This is up from a 22% vacancy rate in the third quarter last year. From the article:

Empty buildings are sprouting across China as companies with access to some of the $1.4 trillion in new loans last year build skyscrapers. Former Morgan Stanley chief Asia economist Andy Xie and hedge fund manager James Chanos say the country’s property market is in a bubble.

“There’s a monumental property bubble and fixed-asset investment bubble that China has underway right now,” Chanos said in a Jan. 25 Bloomberg Television interview. “And deflating that gently will be difficult at best.”

A glut of factories in China is “wreaking far-reaching damage on the global economy,” stoking trade tensions and raising the risk of bad loans, the European Union Chamber of Commerce in China said in November.

In January, Douglas French wrote about a brand new city in Inner Mongolia that is nearly empty. Other accounts have recited a similar theme. In a recent Business Week article, Dexter Roberts described the affordability disconnect in China's residential real estate.

Also in January, Stefan Mufson wrote a more optimistic assessment in the Washington Post:

Some economists and bankers fear that they have read this script before. In Japan at the end of the 1980s and in the United States in 2008, residential real estate bubbles ended in big crashes, battered banks and slow recoveries. With China acting as a key engine of global growth, a bursting of the Chinese real estate bubble could be a pop heard round the world.

"It's definitely a bubble," said Beijing real estate broker Xu Xiangdong, a 24-year-old former nightclub cashier. "But it won't break because there is lots of support beneath the bubble because buying power is really strong."

Many economists say there are good reasons for such optimism. Rapid economic growth, rising family incomes, continued migration to the cities, pent-up demand for housing, and a banking system much less exposed to residential mortgages than banks in the United States or Japan could protect China, they say, from a real estate meltdown for years to come.

Carl Weinberg, chief economist at High Frequency Economics Ltd., has argued that there is no China real estate bubble. Recent posts on Seeking Alpha have discussed China real estate in a more negative light. See Chris Chovanec and Charles Hugh Smith for examples.

This comes as China orders banks to increase reserves to restrain lending, discussed in another Bloomberg News article by John Detrixhe and Abigail Moses. This could lead to a hard landing.

What will China have? A Field of Dreams or a brown field?

Hat tip to Jim Quinn at The Burning Platform.

Disclosure: No stocks mentioned.

........China is banking on the hope that their massive over-supply in real estate and overcapacity in industry is going to meet future demand. But that depends on the re-emergence of decent growth in the developed world. How likely is that looking now? America is experiencing a "jobless recovery" (whatever that means) and Europe is held back by sovereign debt concerns.

Check out this link to see the empty city in Inner Mongolia and you get a sense of the scale of China's over-investment.

[blue skies]

Apologies that the links and charts from Michael Shedlock's blog (pasted above) did not copy.

They are worth a look. The chart on Australian mortgage stress is particularly rewarding. If anyone out there feels glum about renting while you wait for price to correct, that chart will surely cheer you up.

Here's the link to Michael's blog:

http://seekingalpha.com/article/186272-pool-of-greater-housing-fools-in-australia-finally-runs-out-oz-dollar-where-to-from-here

By the way, one thing Michael didn't comment on was the decrease in mortgage approvals in November and December. From memory, I think November was -6.1% and December was -5.5%. At the same time 2009 Q4 prices went sky high. Generally speaking, rising price on thinning volume is associated with a trend reversal. Not that you can guarantee these things, but it's a pretty bad sign for the market.

If anyone out there feels glum about renting while you wait for price to correct, that chart will surely cheer you up.

Mmmmmm yes that sure has made me feel a lot happer.

I like to look into this subject page offen . However Bardon, his disrespect and his rantings spoil my enjoyment. the sooner property prices crash the better as it will mean bardon will no longer be hear braging and bosting. But then going on his past he will no dought tell every one how he got out "just in time"

Yes the corner you have painted your self in to is gona get very small.

Bardon your morning coffey will tast very bitter!

[laurejon]

Yes you bears can run around giving yourself high fives now you have the answer that you have been looking for all these years. Just as long as you don't look at the scoreboard you will all be just fine.

Did you also read the bit where he said it will take five years for a crash that would mean that it will have been twelve years on this forum warning about the impending ozzie house price crash. Like it says in the bible it comes to he who waits.

I am now looking seriously at buying on the Northern Beaches of Sydney. My rent is over $600 per week and my landlord is going to up that to $700 when my lease expires in September. In fact he made me a cash offer to move out early in order that he can up the rate now!!!!

With a little one now on the way for me renting is dead money, the Australian economy is now thriving, jobs are in abundance and we are hearing the same old cries from employers of skills shortage, which is a thinly veiled cry that they are now having to pay decent wages to retain and attract staff.

Looked at a few places today in the 560,000 region and they are ideal first time buyers properties, albeit flats. In my view taking a punt in Australia is about as good as you can get in the entire world. Just a shame that of the 350,000 applications for residency from the UK each year are refused as I could do with some updates on the weather.

[ExecutiveSlaveBox]

No Lessons Learned

"LD", a reader from Australia who sent me the link asked and answered his own question: "What have Australians learned from Americans over the last 2 years? Nothing!"

Good stuff mmmm.... makes a change from the usual estate agent sponsored VI that constitutes 90%+ of this thread.

Australians have learnt absolutely nothing from the on going housing crashes around the world believing firmly they are different and above it all some how. When China pops and it is very close now, things will turn very ugly for the Australian economy.