Australia Faces Its Demons

[Mmmm]

I don’t think much can or will be done about this provided the auctioneer declared his bid as a vendor bid. It depends on state law and I am not familiar with auction rules in SA. The most important thing is that the successful; bidder did not have a gun to her head when she made the winning bid and that she did this on her own volition which from your explanation is the case.

I love auctions all the emotion and anxiety and the heat of the moment decisions the auctioneer extracting more money for his vendor great spectacle indeed they are in but only in a rising market. I wouldn't dream of buying at auction though.

Auctions are notorious for funny business, I bid my friends house up at auction not so long ago and ended up having the highest bid. My friend did not accept this price but used it post auction as a basis for negotiating a good price for the eventual sale. There was nothing illegal about that and that fact that we were best friends and I had no intentions of actually buying his house does not have to be disclosed either.

second vendor bid was above the guide price .. may be illegal?

have to wait and see what the OCBA say....

[blue skies]

You'll remember this quote we relayed to you from one of Christopher Joye's recent blogs at Business Spectator:

"There is an investment category out there that you likely have a large chunk of your wealth tied up in. The problem though, is that it is literally 11.6 times riskier than 'cash'... Australian equities also don't stack up relative to fixed income investments, such as bank bills and government bonds. I am pretty sure one could also add AAA-rated Australian home loans and A1+ corporate debt to the fixed-income outperformers..."

It was his 'bombshell' moment. The 'revelation' that investing in shares is a risky game. Thanks for the info!

Shares are risky, but not property. Investing in property and residential mortgages is much safer apparently. In fact, according to Joye's 'bookend' appearance on the SBS show Insight:

"We had 11.1% house price growth in 2009. House prices have continued rising in the first month of the year - in January. Melbourne experienced 16% house price growth last year and then Sydney also experienced around 11% house price growth. The national housing shortage is estimated to be around 200,000 homes... ANZ project that will be 400,000 homes by 2015."

And the price pressure is on the up:

"We will have a 62% increase in our population. We are looking at 7 to 8 million people living in Sydney and Melbourne individually. One of the concerns I have is the 36 million forecast is very conservative. It assumes our population growth rate today halves so it will place huge pressure on prices."

It's the typical spruikers mantra. A population increase means more demand for houses which means higher house prices, which means, 'Buy now before it's too late!'

By the way, we've referred to it as a 'bookend' appearance because El Joye was asked one question at the beginning and then one at the end. And that was it. But in just a few words he managed to express almost every property myth there is.

Hats off to him for having the argument so fine-tuned that it can be rolled out under any circumstances. Even on the occasion when you're just asked two questions during a one-hour show.

Anyway, we thought it was about time we looked at the Transforming America's Housing Policy conference that was held at New York University in February 2009.

We thought we'd look at it because it's the conference that El Joye has banged on about ever since, usually with statements such as, "While presenting to the Obama Administration alongside Robert Shiller last year..."

It's obviously an appearance he's proud of. You can tell that by the number of times he mentions it.

It was Joye's opportunity to show the Americans how fab the Australian housing market is. And how, if only they'd done things the same way as us then everything would be fine.

So, yesterday afternoon, we settled back to listen and watch the video recording of the panel discussion that included Robert Shiller (or 'Bob' as Joye referred to him), Raphael Bostic, Eric Stein, and of course Christopher Joye.

Click here to watch and listen for yourself. It's discussion Panel 4.

Only a few minutes in and it was pleasing to hear Robert 'Bob' Shiller say:

"This financial crisis was caused by a failure to manage real estate risk. We put people... no matter how low income... into a leveraged position in local real estate. Highly leveraged, and if they're low income, with their entire life savings. It's hard to believe it, but that was the conventional wisdom... Larry White was saying... people had this strange idea that home prices only go up, and he couldn't fathom how people would have thought that..."

Sound familiar? Ask any spruiker or property investor and they'll tell you, you'll always make money on property because prices always go up.

Even the feedback we received from yesterday's Money Morning article, readers told us our example was wrong because we should allow for property doubling in value every ten years.

And that was from readers who class themselves as property bears. The idea that housing doubles in value every ten years and that it always goes up is brainwashed into almost every Australian.

We don't take into account property doubling in the next ten years because we don't believe it will happen.

The fact is, the idea that property is guaranteed to double in seven or ten years is a lie. Property is not a magical investment that can be detached from every other investment. It is inherently risky. But look, don't take my word for it, just ask Christopher Joye how risky property is...

"What?" I hear you ask. Yep, straight up. Here's a quote from El Joye I've taken from the video I mentioned above. And if you don't believe me, watch for yourself. El Joye starts babbling on at about the 20-minute mark:

"Our research shows the single family home is a phenomenally risky investment. It's around six-times the risk of a broad based property index. In Australia the single family home has around a 20% volatility, so volatility akin to equities and yet the average family invests 50% to 60% of all their wealth in the world in this highly idiosyncratic asset... The system [financial markets] had too much leverage, and particularly households had geared to high levels... They're leveraging against what is an incredibly risky underlying asset."

Got that? We nearly fell off our $99 Officeworks chair when we heard those words. We finally have an admission from El Joye that residential housing is a "phenomenally risky investment" and an "incredibly risky underlying asset."

Well, well, well. Who'd have thought it? An admission that confirms everything we've said about residential property for the last eighteen months.

That residential property has been bid up to such a high level, and that the leverage is so enormous, it has burdened Australian households with a "phenomenally risky investment."

It confirms exactly what we wrote a few months ago, that property is now at least just as risky as share investing - and we know how risky that is.

But because of our comments and our busting of the conventional wisdom myth, your editor has received a barrage of abuse from Joye and his property investing cronies. All of it claiming that your editor is a liar for saying that property investing is risky.

Yet all along, Christopher Joye was completely aware that in February 2009 he himself labelled the family home as a "phenomenally risky investment." That's taken the wordage even further than us.

And remember, he's stating that a family home is a "phenomenally risky investment." He's not referring to investment properties or commercial real estate, he clearly states the "family home."

And despite all this, El Joye and the other property spruiking bandits insist residential housing is a safe investment. An investment where prices always rise. An investment which according to his recent article, is less risky than shares.

But I'll let you figure out what words you want to apply to someone who states one thing to an American audience and then states the opposite to Australian home owners.

If you ask me it's a downright shameful disgrace.

All I can say is, how convenient it is to tell the truth when you're trying to sell an idea to an American audience. An audience that has already experienced a housing crash and therefore the Joye solution will supposedly help prevent it happening again - or make it worse in our opinion.

Whereas to the Australian audience, well, the crash hasn't happened yet. Joye wouldn't want to ruffle anyone's feathers. And besides, the money in the Australian market is to be made selling research to fund managers and the real estate industry.

Those customers won't be best pleased if El Joye starts talking about housing being a "phenomenally risky investment" or a "risky underlying asset." That's not the way to keep dollars flowing through the door.

Look, I can't believe it's taken your editor over a year to come across this gem. Maybe others have spotted it, but we can't say we've noticed.

Yesterday I said that Joye's credibility was in negative territory, well, after viewing this video, in our opinion his credibility has gone off the scale and through the floor.

So far, Jason Clout at the Australian Financial Review (AFR) is the only mainstream journo to call Joye out for having soggy numbers. We can only hope that the mainstream journos really do start to take everything that Joye says with a gigantic pinch of salt.

The next time we see Joye interviewed we'll hope to see the journo ask him to explain what he means by Australian family homes being a "phenomenally risky investment."

It's about time the mainstream press stopped thinking of Chris Joye as an independent objectively minded real estate analyst. The reality is that he's a spruiker with a vested interest in keeping the property bubble going for as long as possible.

And then, when it pops, he'll turn up like a white knight saying, "Have I got a solution for you!"

Can you trust another word Christopher Joye writes? And of equal importance, does the mainstream press have the balls to finally challenge what he says?

Let's wait and see.

Cheers.

Kris.

[blue skies]

I don’t think much can or will be done about this provided the auctioneer declared his bid as a vendor bid. It depends on state law and I am not familiar with auction rules in SA. The most important thing is that the successful; bidder did not have a gun to her head when she made the winning bid and that she did this on her own volition which from your explanation is the case.

I love auctions all the emotion and anxiety and the heat of the moment decisions the auctioneer extracting more money for his vendor great spectacle indeed they are in but only in a rising market. I wouldn't dream of buying at auction though.

Auctions are notorious for funny business, I bid my friends house up at auction not so long ago and ended up having the highest bid. My friend did not accept this price but used it post auction as a basis for negotiating a good price for the eventual sale. There was nothing illegal about that and that fact that we were best friends and I had no intentions of actually buying his house does not have to be disclosed either.

There has bein a law passed to punish Phantom bidders. How ever White collar criminals such as yourself offen get away with it!

[Bloo Loo]

You wouldn't know this as you don't know a lot about anything but real estate is governed by state law and you implied that one law was passed. But that is very like you.

Sorry you are wrong again as usual, with respect to QLD I was a registered bidder (relatively new law) and I had to show my driver's licence and all the rest of it to get a bidders card...............

No white collar crime there I am afraid it's enough to curl your toes isn't it.

There is still time to do a back flip on your heartfelt conviction that houses will have dropped by 10% in price by year's end. Or are you going to tough it out up until the bitter end that is the way I would prefer it for you to be tortured by it all, I really enjoy that.

Oz is on the back of a confidence boom right now...no doubt....the confidence is based on all the mud and rocks you are exporting to China, who are building bridges and high rise that nobody wants or needs...

Another Economy doing that was Spain....

[Bloo Loo]

Bloo Loo I know you think this as you say it often although I think your comparisons are not apples with apples.

This is a commodity boom it's not Germany in the 30"s or Spain at any time.

It's a 30 year cycle and we are on the early upside.

Can I ask you why you think that house prices are rising when you don't believe that the credit is there for them ?

Serious question I aint having a go.

erm, prices are falling here.

they are rising in Oz I hear as there is abundant credit....your rates are rising to counter the boom.

And if China is about to stop building its pointless infrasturcture, who is going to buying your minerals...which appear to be the entire basis of the Countries optimism?

[Bloo Loo]

Good I must have misread your previous posts on this thread when I thought you said that the credit would not be available to allow house prices to rise. Now that we are clear and thattis not the case then we are right and can move on.

As for China stopping development it won't in my lifetime and neither will India

Yeah, I tend to post with a UK perspective.

I have read here and in other places in the last week or so that the credit boom is alive and well in Oz.

and I dont know how long you intend to live...but BOOMS dont tend to last that long. Invite me to the funeral please. Be great to drink to an online pal.

[Guest Disposable Heroes]

You are invited to the inaugural HPC down under boom party....

If I die before it then please play this pommy song at my wake, some good stuff always come out of the UK, its by Mumford & Sons called Little Lion Man...very motivational...video with lyrics intentionally selected

http://www.youtube.c...h?v=REPctGLpWqk

For some reason i cant post the medai box properly on the laptop

[ m e d i a ] http://www.youtube.com/watch?v=REPctGLpWqk [ / m e d i a]

-no spaces.

http://www.youtube.com/watch?v=REPctGLpWqk

[JonoP]

As for China stopping development it won’t in my lifetime and neither will India

It will stop sooner than you think. When the real estate bubble bursts in China it is game over for Aus.

Classic quote 'the speed you buy houses here is faster than you buy vegetables"

The following article was in the Australian Financial Review this weekend with the headline 'China rises from boom to bubble'

http://www.nytimes.com/2010/03/05/business/global/05yuan.html

[Tiger Woods?]

So obviously not a bubble then ?

Obviously not economically rational either. Better return in a Commonwealth Bank Netsaver account for the past 5 years.

[Tiger Woods?]

Yeah, I tend to post with a UK perspective.

I have read here and in other places in the last week or so that the credit boom is alive and well in Oz.

and I dont know how long you intend to live...but BOOMS dont tend to last that long. Invite me to the funeral please. Be great to drink to an online pal.

Having finally set up the TV here last night, discovered we are at the "credit consolidation loan" stage.

[Tiger Woods?]

Well I reckon I get an average 25% cash on cash on my houses so I am pretty happy with that.

You may well be picking up bargains, but as a whole it is unsustainable and once it starts to unwind the poison will spread everywhere.

House prices tripled here in the course of approximately 4 years. Until I saw the graphs I hadn't realised it had been that quick. That rate of increase is not "natural."

What the last 4 to 5 years of more or less no growth indicates to me is that there is no more money to be squeezed out of people. This can be stable for as long as China et al. keep wanting our dirt. If/when that contracts then the marginally sustainable become unsustainable. The money generation just does not exist in the local economy to support these prices, in the same way Cornwall real estate prices are not locally sustainable. Without serious, serious sustained inflation, the risks are on the downside.

[JonoP]

Having finally set up the TV here last night, discovered we are at the "credit consolidation loan" stage.

Hah hah, yeah, I have been doing my bit for the Aussie bubble today by purchasing loads of furniture/white goods etc.

There is a look of abject shock on the salespersons face when you tell them that you will be paying cash.

The shops make the assumption that everyone will pay using interest free credit and thus hike the prices by 15/20% to cover the cost of the credit. You can as a result haggle loads off the prices by paying cash. Happy days.

Bardon, would of course, use leveraged debt to pay the inflated price 'cause he is a little winner

[JonoP]

Funny you should mention that as I bought an LG TV for the kids nook in the new gaff today. Anyway Good Guys $1100 on it got it for $690 which was the best cash price you could get it for and payed with my credit card. Which happens to be a special new Amex that they are promoting that gives you shed loads of frequent flyer points, not everyone got invited to use this one. Only long term break free clients of ANZ. I am running at about 18000 points a month that is equivalent to eight Melbourne Brisbane return flights a year or 1.6 UK Oz return flights a year.

Not only that I have the bank financing me for 30 days for free, and the debt is automatically paid off on the due date . The best bit is that the payments are made out of my savings account for which the interest on savings offset against my principal place of residence mortgage and hence do not attract any tax.

I think I will stick to my strategy thanks.

15/20% to cover the cost of credit is absolute tosh just ask a retailer they will tell you excatly what it is even Amex have pulled their heads in. Dont you bears know anything ?

LG? Tatty rubbish.

[aussieboy]

Funny you should mention that as I bought an LG TV for the kids nook in the new gaff today. Anyway Good Guys $1100 on it got it for $690 which was the best cash price you could get it for and payed with my credit card. Which happens to be a special new Amex that they are promoting that gives you shed loads of frequent flyer points, not everyone got invited to use this one. Only long term break free clients of ANZ. I am running at about 18000 points a month that is equivalent to eight Melbourne Brisbane return flights a year or 1.6 UK Oz return flights a year.

Not only that I have the bank financing me for 30 days for free, and the debt is automatically paid off on the due date . The best bit is that the payments are made out of my savings account for which the interest on savings offset against my principal place of residence mortgage and hence do not attract any tax.

I think I will stick to my strategy thanks.

15/20% to cover the cost of credit is absolute tosh just ask a retailer they will tell you excatly what it is even Amex have pulled their heads in. Dont you bears know anything ?

Yep Good Guys suck. "Pay cash and we'll slash the prices" ... to what you'd pay at Harvey Norman.

[blue skies]

View PostBardon, on 06 March 2010 - 04:18 AM, said:

I don’t think much can or will be done about this provided the auctioneer declared his bid as a vendor bid. It depends on state law and I am not familiar with auction rules in SA. The most important thing is that the successful; bidder did not have a gun to her head when she made the winning bid and that she did this on her own volition which from your explanation is the case.

I love auctions all the emotion and anxiety and the heat of the moment decisions the auctioneer extracting more money for his vendor great spectacle indeed they are in but only in a rising market. I wouldn't dream of buying at auction though.

Auctions are notorious for funny business, I bid my friends house up at auction not so long ago and ended up having the highest bid. My friend did not accept this price but used it post auction as a basis for negotiating a good price for the eventual sale. There was nothing illegal about that and that fact that we were best friends and I had no intentions of actually buying his house does not have to be disclosed either.

There has bein a law passed to punish Phantom bidders. How ever White collar criminals such as yourself offen get away with it!

I recon you had taken part in Fraud and that comes under the criminal act.

How ever the reality may be that one again you are trying to impress people with bulldust.

Once again you display your ignorance in housing as depending on the conditions of the auction it is possible on the fall of the hammer to with draw your last bid.

[JonoP]

Pond LIfe gets the best deals.......................................he is far more shrewd than an ozzie

Thanks. I know.There is no need to blow smoke up my ass though.

Actually - on that note, lots of people have said that Good Guys do the best deals for electricals - Aussie boy - you reckon Harvey Norman?

[aussieboy]

Thanks. I know.There is no need to blow smoke up my ass though.

Actually - on that note, lots of people have said that Good Guys do the best deals for electricals - Aussie boy - you reckon Harvey Norman?

I'm more of a Bing Lee guy - they seem to employ all of Australia's hagglers and are always good for chucking extra stuff into a deal.

[JonoP]

Another strong weekend in the Melbourne market despite the strom and holiday. That apartment sale featured at the end on Hampton St makes me very happy.

Rain, hail or shine - the bidding stays strong

It was going to take more than a wild hailstorm to dampen buyers' spirits, with strong demand continuing to outweigh supply.

Despite the Labour Day holiday, which typically has fewer auctions scheduled, agents reported decent crowds gathering at many of the weekend's 238 auctions.

The results cap off another solid week of property sales in 2010, with the $25-million sale of a Toorak mansion breaking Melbourne's record house price of $21 million in November.

Fortunately, while most of this weekend's scheduled auctions took place before Saturday's hailstorm, JPP Buyer Advocate Catherine Cashmore said for those still taking place ''it presented a good test for the buyers to check if the house had a leaky roof!''

The overall clearance rate was 87 per cent, compared to 75 per cent this weekend last year and just 66 per cent this weekend in 2008.

Meanwhile, the clearance rate for flats and apartments this weekend reached 93 per cent, with 71 out of 76 the properties sold.

A unit at 2/28 Ulupna Road, Ormond had five bidders and sold for $560,000.

Woodards agent Ruth Roberts said they sold the same unit in the same block three months ago for $505,000.

Janet Spencer, director of Buyer Solutions, said the auction of a three-bedroom property at 37 Elm Grove, St Kilda East also had good attendance.

The house was quoted at between $750,000 and $820,000 but sold under the hammer for $990,000 after five to six bidders made over 40 bids.

Noel Jones group chairman Adrian Jones said one of the properties they auctioned at 8 Selwyn Street, Blackburn, was quoted at $500,000 to $550,000 and sold for $625,000.

''Buyers are out there regardless of long weekends, regardless of Easter and regardless of interest rate increases,'' he said.

Ms Cashmore said because of the strong demand, it was important for buyers to keep in contact with agents, as a number of properties were being sold prior to auction.

''It's very difficult for the agents to make sure they have notified everyone who showed interest in the property that it may sell earlier than expected.''

The REIV reported that out of the 152 residential auctions scheduled this weekend, 52 properties were sold before auction.

However, there is good news for potential buyers as the stock levels are set to increase with about 2500 auctions scheduled over the next three weekends.

■Overall clearance rate 87 per cent, compared to 75 per cent this weekend last year.

■Clearance rate for flats and apartments reached 93 per cent.

■ About 2500 auctions scheduled over the next three weekends.

TOP HOUSE

9 Russell Street, Camberwell

This double-storey brick home in Camberwell was the top-priced auction reported to BusinessDay this weekend. It was auctioned by Jellis Craig and attracted bidding from three parties. It was declared on the market at $1.4 million, before selling for $1.56 million. Situated on a 521-square-metre block of land, the house has three bedrooms, all upstairs, two bathrooms, a study and family room which opens to an outdoor entertaining area featuring a pergola and garden.

TOP APARTMENT

832 Hampton Street, Brighton

Although scheduled for auction next weekend, this five-room Brighton property sold on Wednesday. Initially quoted at over $1.15 million, the two-storey property sold for $1.43 million. It features four bedrooms, three bathrooms, a rumpus room, powder room, as well as open-plan living and dining zone. The property has oak flooring, 3.3-metre ceilings, a gas log fireplace, a decked outside area with pergola, as well as a double-garage. It is located close to William Street Reserve, schools and Bay Street train station.

TOP WEEKENDER

9 Aristines Place, Sorrento

Within walking distance to the beach, this Sorrento house, which was quoted for $1.75 million went for $1.68 million in a private sale. The property, which is situated on 970 squares metres, comprises four bedrooms, three bathrooms and two kitchens. It features self-contained living areas on each level, decks and balconies, in-ground pool and spa, as well as garage and workshop, wine cellar and double carport.

BARGAIN HOUSE

52 Douro Street, North Geelong

This four-room house was reported to BusinessDay as the cheapest house to be auctioned this weekend, although it ended up selling prior to auction. The property was sold by Fruit Property Geelong for $280,500, above its estimated price range of between $220,000 and $240,000. Situated on about 623 square metres, the three-bedroom house features a central bathroom, spacious kitchen and lock-up garage, as well as plans for a large rear warehouse.

BARGAIN APARTMENT

6/27 Synnot Street, Werribee

According to the REIV, Werribee is the second most affordable suburb for apartments, with an annual median price of $234,000. Located close to shopping, restaurants and Werribee train station, this two-storey brick veneer property was listed at $220,000 plus and sold by Altona Meadows Real Estate prior to auction for $235,000. The apartment includes two bedrooms with built-in robes, bathroom, large living area, private courtyard and car parking for one vehicle.

http://www.smh.com.au/business/rain-hail-or-shine--the-bidding-stays-strong-20100307-pqpn.html

Alternative headline:

‘More idiots face destitution as hail lashes Melbourne’

Same difference. Apart from the fact that I know about 1000% more about property bubbles than ‘cub reporter’ Natalie Puchalski

Yawn.

[Mmmm]

About six months ago I was reading somehing on RPdata's website about what might happen when the FHOG boost ended. This being a property spruiker's website the commentator was pretty upbeat. S/he reckoned that the number of first home buyers would drop back from about 25% of the market to around 22%, and that an influx of investors would pick up the slack.

Well at the time I thought this was typical nonsense that you get from these property spruikers. Anyway, six months on I thought I'd look at how things have actually turned out. The data is available on AFG's website. AFG is Australia's largest mortgage broker. They arrange about 10% of the Australian market and they publish monthly stats on how many loans they arrange and who to. So it's a pretty decent sample and a useful dataset. You can see it here:

http://corporate.afgonline.com.au/idc/groups/public/documents/web_content/mortgageindex-mar10-sa.pdf

As it happens it's no surprise to see that first home owner's have dropped to less than the ridiculously optimistic 22% forecast by RPdata. Looking at the stats for February we find that -

- Percentage of first time buyers in the market has dropped to 11.3%

- Percentage of investors in the market increased to 34.1%

So three investors for every first home buyer. If you adjust the stats to remove re-financing mortgages from consideration, so you're just looking at actual house sales, then you have just over 53% of all February sales going to investors.

Pretty crazy!

A few of my own thoughts on this -

- The real estate industry has done an astounding job of convincing Australians that we have permanently high house prices because of high levels of immigration and a basic shortage of supply. This argument seems to be pretty much accepted as conventional "wisdom" these days. Another possibility that the real estate industry might be less keen to promote, is that we have high house prices because of high levels of housing investors, and there is actually no shortage of supply. Looking at the AFG figures for February, if you halved the number of investors in the market, it would have made an extra 33% of houses available to buyers who actually want to live in those homes. I wonder if anyone has worked out the ratio between the demand for houses from new immigration and demand from investors? I suspect it would make it pretty clear where the pressure on prices is coming from.

- An increase in investors and a decrease in first home buyers has previously indicated a top in the market and imminent price crash. I believe this was the case in the UK for example.

- The housing market can't sustain rising prices if first home buyers don't return to the market.

- If you have a surge of new investors coming into the market, presumably you have downward pressure on rents. Recently, I've seen the usual RE propaganda about how rents will rise 20% this year. Whilst I am happy to dismiss this as a typically mean attempt to whip up fear in renters and greed in investors who are unsure about entering the market, the figures from AFG suggest that if anything rents could actually go down this year.

- The dismal yields that late entry Australian property investors suffer don't look like they're going to pick up any time soon.

- If house prices stop rising, investors face the prospect of years of negative cash flow and they will start to head for the exits. The alternative scenario if this does not happen is that somehow the market continues ever upwards with house buying increasingly dominated by investment from people who already own houses. New mortgages are only offered to people who already have housing equity. People who don't have no chance of getting a foot on the ladder. Australian becomes a socially divided nation of housing-haves and housing-have-nots.

I did a quick google to try to compare percentages of first time owners and investors with other housing markets. Ths only thing I found was an article saying that in the US, 48% of buyers were FHO, and less than 3% were investors. Classic! Informed contrarians investing in the US post-bubble and herd mentality investors about to get burned peak-bubble in OZ! So maybe the ratio of FHO to investors is as good a sign of a housing bubble as any. I have no idea whether the American investors will get a good return on their investment, property is still unstable over there, but I dare say they have a better chance than the Australian sheep.

And have those 34.1% of investors now buying Australian houses "picked up the slack" left by FHO's Not really. After four months of declining volume from October to January, February posted a slighter better result. But overall sales still look pretty tepid - about on par with January 2009, which as I recall was hardly a boom time. So what to make of the endless newspaper articles banging on about how 2010 has got off to such a boom start, many of which seem to get posted onto this forum. Well the property boom stories don't reconcile with the AFG data. Giben the slack volumes, it's just not possible, for example, that "houses are selling faster than were are getting new stock" - ie inventories are falling, which is something I read as quote in a newspaper from one enthusisastic agent. Just more property lies....

.

[blue skies]

Back to today. We notice that even the mainstream commentary over at Business Spectator is starting to get a bit antsy with all this 'economic recovery' thing.

Two articles yesterday, one from Karen Maley and the other from Robert Gottliebsen clearly warn - as we have - that things aren't as rosy as they seem.

Right now we'd say, hats off to these two mainstream commentators for saying it. However it's too late, much too late for it to have any impact.

As the saying goes, the die is cast. The bubble has expanded. It's like when you blow up a balloon. No-one likes having the thing pop right in their face, but there's still the temptation to try and make it a little bigger, and that's what's happening with the Australian economy now.

The only problem is that in mainstream economics they either don't believe that bubbles exist, or they believe they are caused by something else, or that even if bubbles do exist then they think they're smart enough to manage them.

I mean, they'll look at the last eighteen months and conclude they know the recipe for curing bubbles. So that even if another one is brewing, don't worry about it, they've 'fixed' it before, they can do it again.

Look at all the economic data that's been paraded before your eyes. As you know, we've been critical of the way the ANZ Job ad numbers have been reported.

Well, finally you could say the February job ads do look more impressive than some of the previous numbers. In February, ANZ Bank reports a total of 158,611 jobs advertised compared with just 109,177 in January.

You'd expect a pick-up in February, but still, it's a 45% increase over the previous month. Although, compared to the same time last year, when the economy was on the verge of recession, job ads are still down by 3,723.

And remember, we're using the original numbers, not the seasonally adjusted or trend numbers.

And then look at the other stats: "Australian economy continues to grow: ABS."

According to the Australian Bureau of Statistics (ABS):

"Latest ABS figures show that GDP, in seasonally adjusted volume terms, grew 0.9% in the December quarter 2009, after growing 0.3% in the September quarter."

The Australian economy continues to grow, grow, grow. That provides even more evidence to the mainstream that Australia has figured out how to perfectly direct and manipulate an economy to avoid collapse.

Although, the next paragraph from the ABS statement gave the real game away:

"Growth in the expenditure measure of GDP was driven by a 3.5% increase in private investment , a 10.2% increase in public investment and a 0.7% increase in household expenditure. Offsetting these increases was a fall in net exports. The fall in net exports was due to imports (up 7.7%) growing faster than exports (up 1.7%)."

Actually, we'll rephrase that. We're not sure it's really given the game away as everyone knows public spending - or public 'investment' as the public sector drones prefer to call it - is going mental: money spent to 'create' jobs, then more money spent to 'save' jobs, then another bunch of cash to compensate for jobs lost.

The madness never ends.

But that brings us back to the point we made above. While it's good that some in the mainstream press are starting to whiff a bit of trouble, it's all rather too late.

The time for warning about the nonsense idea that you can borrow to get yourself out of debt was a subject for twelve months or two years ago.

Yet at the time the mainstream press was too excited about making sure their elected representatives 'did something.' At the depths of the market meltdown, it wasn't the time to 'play politics' or get bogged down in 'economic theory.' It was the time to 'save jobs' and help those families who seemed to be constantly 'sat around the kitchen table.'

But the biggest problem right now is the sense of false security - or false sense of security, whichever you prefer.

We've noticed quite a bit of excitement about all the increased profits Australia's robust and excellently run companies have made in 2009. Today's Australian Financial Review (AFR) trumpets, "Earnings return, are shares next", "Property turns the corner" and "How banks came out in front."

According to the AFR, 80% of Australia's companies reported profits in-line with expectations. It goes on, "Profits for industrial companies rose 3.8 per cent from a year earlier."

But the AFR does point out, "Cost-cutting was an important driver of profits in the half. Some big companies reported falling revenue but were able to increase profits by reducing their spending on wages, property and technology."

That's something we noticed last week. This is what we wrote to Australian Wealth Gameplan subscribers last Friday:

"Last week we conducted a simple exercise. We looked at the company results for that week as reported in the Australian Financial Review (AFR). It printed the earnings results for 131 companies - large and small. As you'll have read in the mainstream press, a lot of companies produced bumper profit results, such as Flight Centre [ASX: FLT]. What the mainstream press didn't report was the less than exciting news on the revenue figures. Of the 131 companies detailed, just over half (66 of them) reported lower sales revenues than the previous corresponding half-year or full-year."

It wasn't just 'some big companies' that reported falling revenue, it was half of those companies that reported during that one-week period.

What does that tell you? Well, as the AFR reports, many companies have slashed costs in order to beef up the bottom line. So the first question is whether they can keep doing that?

The other question is whether they can increase sales by as much as the market is now pricing in? Our guess is that will be much harder to achieve. And much of that is down to the sense of false security and the misplaced belief that the bright economists and central bankers have engineered Australia's escape from the global meltdown.

The economy is growing, companies are hiring again, miners are mining stuff, credit is booming, and everything appears to be ticking along as though nothing has happened.

And as for that old subprime stuff, well surely that's all fixed up, and no-one will make that mistake again. Trouble is, it's often forgotten that subprime wasn't the cause of the problem, it was the effect. The cause of the problem was excess credit and government interference.

Excessive credit simply manifested itself as subprime loans. Subprime borrowers were the means by which politicians could parade themselves as helping the poor, and by which bankers and young gun traders could earn themselves a bucket load of cash.

Therefore, solving the subprime problem will do no more than shift the excesses of credit elsewhere.

We've seen that before. Look at Enron. The trading guys at Enron weren't specialists in electricity trading. They were young kid traders sat in front of six computer screens who just had to click 'buy' or 'sell'.

As soon as Enron collapsed they went off looking for other things to 'buy' and 'sell'. Many of them probably ended up trading credit default swaps and other such derivatives. Financial instruments that they were just as ignorant of as the electricity market.

Solving the global meltdown by blaming it all on subprime and removing that risk is like taking the keys from a youngster who's been driving a sports car too fast, and instead handing him the keys to a 3000cc motorbike.

There will still be carnage it's just that it will look different.

As much as the mainstream commentators may claim that lessons have been learned and that Australia didn't have a subprime culture, it all misses the point. The old habits of excessive borrowing are still unchanged, and in fact are likely to get worse.

So the message is, if you're looking for the next big economic meltdown to come from the US subprime housing market, odds are you're looking in the wrong place. So where will it come from?

We'll look at that another day. But our guess remains that you need to look north. Because China is brewing up quite nicely right now.

Cheers.

Kris.

[mattyboy1973]

Here we go.

http://www.smh.com.au/business/home-loans-slump-most-in-a-decade-20100310-pxpp.html

Home loans slump most in a decade

CHRIS ZAPPONE

March 10, 2010 - 11:44AM

Comments 18

The number of home loans plummeted by 7.9 per cent in January, the biggest fall since June 2000, after the phasing out of last year's first-home buyers' grant increase and interest rate rises sapped demand.

January's result follows a 5.5 per cent drop in December, the Australian Bureau of Statistics reported, citing seasonally adjusted figures. Economists had been predicting a 2 per cent increase in January.

All up, the number of commitments for owner-occupied housing fell to 51,056 for the month. Total housing finance by value fell by 3.3 per cent in January, seasonally adjusted, to $21.2 billion.

''While consumers are shrugging off interest rate hikes, rising borrowing costs are clearly hurting the housing market," said Moody's Analytics economist Matthew Circosta.

''This marks the fourth consecutive decline in housing finance since the Reserve Bank of Australia commenced tightening monetary policy, suggesting momentum in the property market is fading,'' Mr Circosta said.

''Buyer enthusiasm may come under more pressure with more monetary tightening expected by the RBA, after surging job ads signal the economy will add more jobs and expand robustly in the first half of this year.''

The Reserve Bank raised its cash rate to 4 per cent last week, its fourth increase since October, as it lifts lending rates to more normal levels. Australia was one of the first developed economies to begin reversing its monetary policy in the wake of the financial crisis.

The dollar eased on the news, dropping from about 91.5 US cents to 91.36 US cents, as investors pared their forecasts for another rate rise when the RBA board meets at the start of April.

First-home buyers

The number of first-home buyer loans as a share of total borrowing edged down from 21 per cent of the total in December to 20.5 per cent in January 2010.

Over the same period, the average loan size for first-home buyers fell $5,400 to $284,700, while the average loan size for all houses fell $200 to $282,800, the ABS said.

Home loans for new houses dropped 13.2 per cent to 2146 in January, while loans for established dwellings dropped 8.2 per cent to 42,303.

[blue skies]

As is widely known, I will be walking from Australia’s Parliament House to Mount Kosciousko–a distance of 225km–as the result of losing part of a bet with a well-known “bull” on property in Australia, Rory Robertson. I am obliged to wear a T-Shirt with the words “I was hopelessly wrong on house prices: ask me how” emblazoned on it.

As I explain on www.keenwalk.com.au, I was ambushed with this bet in front of an audience of 80-100 people at Parliament House. I have responded in kind by turning the walk into a protest about the manner in which keeping property prices high has come to dominate economic policy in Australia, with what I prefer to call the First Home Vendors Boost the most outrageous example of that.

The designs for the T-Shirt continue this theme. I will produce at least 3 of designs shown below.

Design No. 1 highlights the impact of the First Home Buyers Grant over the last 30 years. It was first introduced in 1983 by the Hawke Labor Government, then expanded in 1988 as a way of boosting the economy when it was feared that the economy could enter a recession. It was reincarnated by Howard in 2000 as a temporary boost to help the housing sector adjust to the GST, then temporarily doubled in 2001 as part of a stimulus package to avoid a recession, and of course most recently doubled again in September 2008 by the Rudd Government as part of its anti-GFC package.

The First Home Owners Grant and House Prices

The First Home Owners Grant and House Prices

The graph shows the ratio of house prices to household disposable income from 1980 until now, with the dates on which the Grant was either introduced or doubled marked by the dotted lines. It’s obvious that the Grant triggered growth in the real cost of housing every time, with its most spectacular “successes” being in 1988 and 2001.

Unlike some commentators, I don’t blame the government entirely for the house price bubble–there I point the finger at a financial system which is always willing to finance a Ponzi Scheme when one can be found. But it’s clear that the First Home Owners Grant seeded the Ponzi Scheme by setting off a buying frenzy every time it was introduced.

Design No. 2 highlights what has always been the main game for me: the growth in Australia’s debt to GDP ratio, driven by lending for speculation rather than lending for productive investment. This is the third debt bubble in Australia’s economic history since 1860, and it is by far the biggest.

Debt: the engine beneath the bubble

Since nothing has been done about this debt level–in fact, Australia has in part got out of the GFC by encouraging debt levels to grow once more–this is still the force that I expect to see dominate Australia’s future economic performance. If private debt continues to rise, then the apparent post-GFC boom will continue. But if the household sector joins the business sector in deleveraging, then the change in debt will drive aggregate demand down and Australia will find that the GFC is not quite behind it.

The most recent data indicates that the bubble in household debt burst in the month that the First Home Vendors Boost expired. In “Home loans slump most in a decade“, Chris Zappone notes that the ABS has reported that:

The number of home loans plummeted by 7.9 per cent in January, the biggest fall since June 2000, after the phasing out of last year’s first-home buyers’ grant boost and interest rate rises sapped demand.

January’s result follows a revised 5.1 per cent drop in December, the Australian Bureau of Statistics reported, citing seasonally adjusted figures. Economists had been predicting a 2 per cent increase in January…

Total housing finance by value fell by 3.3 per cent in January, seasonally adjusted, to $21.2 billion.

Design No. 3 shows just how far out of line Australia’s house prices are with the rest of the world. Japan had its own Bubble Economy period in the 1990s, which drove Japanese real estate prices up to a peak from which they have spent the last 20 years descending; the USA’s bubble took off in 1998 and peaked in 2006; but both these are dwarfed by Australia’s roller coaster rise ever upwards.

The Kangaroo Bubble vs the Setting Sun and the Very Bald Eagle

Nominal prices only ever fell once–in 2008 prior to the First Home Vendors Boost, which set off the latest bubble. Unfortunately, both sides of Australian politics mistakenly identified falling house prices as the cause of the GFC, and therefore agreed to this policy to inflate house prices even further, which was disguised as a means of helping new buyers into the market.

(Of course, the real cause of both the apparent prosperity before the GFC, and the GFC itself, was not the bubble in house prices and its bursting, but the bubble in private debt that provided the leverage that drove house and share prices up, and its bursting in 2007-08. This real cause was ignored by all politicians–and all but a handful of economists–until it was too late.)

Design No. 4 shows that Australian house prices have fallen when adjusted for inflation, and Australia’s inflation rate has been higher than that of Japan or the USA. But even after adjusting for inflation, our house prices are twice as high as America’s, and 2.5 times as high as they were back in 1986 when the ABS began recording them.

The Kangaroo Bubble vs the Setting Sun and the Very Bald Eagle

Finally, Design No. 5 emphasises the folly of projecting current trends in asset prices into the infinite future. This is the famous Herengracht Index, which tracks the real price of housing on Amsterdam’s wealthiest canal from 1628–just before the Tulip Bubble–until 1973.

350 Years of data from the land of tulips

350 Years of data from the land of tulips

If you had been born in, say, 1735, you might have died as an 85-year-old, convinced that house prices always fall, compared to consumer prices, since for most of that period house prices did in fact fall in real terms. However if you had been born in 1820, you might have reached our modern retirement age convinced that you could live off rising wealth from your housing assets–since they would have risen since you were born–only to find them declining for the next 60 years.

Hey the charts are very scary, go to steve keen dedt watch if you want to have a look

[aussieboy]

"And remember, we're using the original numbers, not the seasonally adjusted or trend numbers."

Said with pride !!1!

[blue skies]

I can't wait for the second dip, and all those new comers will go back to were ever it was that they came from.

Just like Ireland new houses are bein built in Australia to house the transiant working population.

Look at Ireland now, empty houses on every street.

Seen this happen before it will be nothing new for Australia.

Very Interesting post earler on Investors buying at the tp of the market shows original thinking.

[ExecutiveSlaveBox]

Some would say that buying now is just past the bottom of the cycle. Timing these things can also be a bit tricky as no one really knows, you could do nothing and play it really safe as well I guess. It can be shown when it comes to property that time in market is better than trying to time the market.

One mans bottom of the cycle is anothers peak of a massive speculative bubble.

Some choice comments in the smh article mattboy linked.

thats nothing try melbourne. $1,000,000 for a 3 bedroom weatherboard cottage on 350sqm an hour from the cbd. ice berg dead ahead indeed!

smilingjack - March 10, 2010, 3:45PM

Here's the link again in case you missed it:

Home loans slump most in a decade