Australia Faces Its Demons

[Bloo Loo]

only 20% of it is mine, the rests the banks and no I dont feeel lucky, just sure

the losses fall on your bit first....leverage can really suck

[Bloo Loo]

Thats just it there isn't any losses, can any one tell me how does the gains work ?

its a new paradigm..told you:lol:

[aussieboy]

There are some transaction costs to be taken into consideration.

Depending on whether or not it was his own place then some CGT as were, if it was an investment 50% CGT at his marginal rate, if it was own 0%.

Good result either way.

Couple of % for selling fees. Not sure whether they've fiddled the CGT... parent of the owner live in Palm Beach so I have my suspicions they will not be paying marginal tax on the thing.

[aussieboy]

You are a neither, does this make you bullish or bearish on Aus property?

I have no idea which way it will go: as I say, with regard to short term transactions, I'm looking to trade up in the Eastern Bubs of Sydney so if I have any VI it's on the downside, although the last thing I want is zero liquidity. My interest is more trying to keep abreast of what's happening in the market at the moment.

Thing is, given that the state of the economy drives house prices (up to a point), and given that Australia seems to have survived the worst global downturn for 80 years relatively intact, and given the amount of capital and people that are coming here, I find it hard to see prices dropping significantly.

But you never know.

[Mmmm]

The following extract is from an article by GMO's James Montier. You can see the whole article here:

http://www.gmo.com/Asia-Pacific/MyHome/default

Was It All Just A Bad Dream? – February 2010

G

Lesson 3: The time is never different.

“There is no housing bubble to go bust.” (Ben Bernanke,

October 27, 2005)

A good working knowledge of the history of bubbles can

help preserve your capital. Ben Graham argued that an

investor should “have an adequate idea of stock market

history, in terms, particularly, of the major fluctuations.

With this background he may be in a position to form

some worthwhile judgment of the attractiveness or

dangers … of the market.” Nowhere is an appreciation

of history more important than in the understanding of

bubbles.

Although the details of bubbles change, the underlying

patterns and dynamics are eerily similar. The framework

I have long used to think about bubbles has its roots way

back in 1867, in a paper written by John Stuart Mill. Mill

was a quite extraordinary man: a polymath and a polyglot,

a philosopher, a poet, an economist, and a Member of

Parliament. He was distinctly enlightened in matters of

social justice, penning papers that were anti-slavery and

pro-extended suffrage. From our narrow perspective, it is

his work on understanding the patterns of bubbles that is

most useful. As Mills put it, “The malady of commercial

crisis is not, in essence, a matter of the purse but of the

mind.”

His model has been used time and again, and forms the

basis of the bubble framework as used by Hyman Minsky and Charles Kindleberger. Essentially

this model breaks a bubble’s rise and fall into five phases

as shown below.

Displacement

↓

Credit creation

↓

Euphoria

↓

Critical stage/financial distress

↓

Revulsion

Displacement: The Birth of a Boom. Displacement is

generally an exogenous shock that triggers the creation

of profit opportunities in some sectors, while closing

down profit availability in other sectors. As long as the

opportunities created are greater than those that get shut

down, investment and production will pick up to exploit

these new opportunities. Investment in both financial

and physical assets is likely to occur. Effectively we are

witnessing the birth of a boom. As Mill puts it, “A new

confidence begins to germinate early in this period, but

its growth is slow.”

Credit creation: The nurturing of a bubble. Just as fire can’t

grow without oxygen, so a boom needs credit on which to

feed. Minsky argued that monetary expansion and credit

creation are largely endogenous to the system. That is to

say, not only can money be created by existing banks,

but also by the formation of new banks, the development

of new credit instruments, and the expansion of personal

credit outside the banking system. Mill noted that during

this phase “The rate of interest [is] almost uniformly low

… Credit … continues to grow more robust, enterprise to

increase, and profits to enlarge.”

Euphoria: Everyone starts to buy into the new era. Prices

are seen as only capable of ever going up. Traditional

valuation standards are abandoned, and new measures

are introduced to justify the current price. A wave of

overoptimism and overconfidence is unleashed, leading

people to overestimate the gains, underestimate the risks,

and generally think they can control the situation. The

new era dominates discussions, and Sir John Templeton’s

four most dangerous words in investing, “This time is

different,” reverberate around the market.

As Mill wrote, “There is a morbid excess of belief …

healthy confidence … has degenerated into the disease of

a too facile faith … The crowd of … investors … do not,

in their excited mood, think of the pertinent questions,

whether their capital will become quickly productive,

and whether their commitment is out of proportion to

their means … Unfortunately, however, in the absence

of adequate foresight and self-control, the tendency is for

speculation to attain its most rapid growth exactly when

its growth is most dangerous.”

Critical stage/financial distress: This leads to the critical

stage, which is often characterized by insiders cashing

out, and is rapidly followed by financial distress, in

which the excess leverage that has been built up during

the boom becomes a major problem. Fraud also often

emerges during this stage of a bubble’s life.

Revulsion: The final stage of a bubble’s life cycle is

revulsion. Investors are so scarred by the events in which

they participated that they can no longer bring themselves

to participate in the market at all. This results in bargainbasement

asset prices. Mill said, “As a rule, panics do

not destroy capital; they merely reveal the extent to

which it has been previously destroyed by its betrayal

into hopelessly unproductive works … The failure of

great banks … and mercantile firms … are the symptoms

incident to the disease, not the disease itself.”

He was also aware of the prolonged nature of a recovery

in the wake of a bubble. “Economy, enforced on great

numbers of people by losses from failures and from

depreciated investments restricts their purchasing power

… Profits are kept down to the stunted proportions of

demand … Time alone can steady the shattered nerves,

and form a healthy cicatrice over wounds so deep.”

[Mmmm]

How long has the lucky country got?

By Edward Chancellor

Published by the Financial Times: February 28 2010 09:17

It is now generally accepted that housing bubbles contribute to financial vulnerability. Rapid credit growth has also been recognised belatedly as another red flag. The US, UK, and parts of continental Europe are still suffering from the aftermath of the real estate and credit binges. Yet the Australian housing market remains strong and consumers are still eager to borrow.

Between 1996 and 2006, US home prices rose by nearly 90 per cent in real terms. Australian home prices rose by roughly the same amount. Over this period, the US private sector increased its indebtedness by two-thirds of GDP. Australian private debt increased by a similar magnitude. Over the past three years, US home prices have fallen by 30 per cent, according to the S&P/Case-Shiller Composite Index. American households have started to deleverage. By contrast, Australian home prices have climbed 30 per cent since 2006 and households continue to pile on debt.

There are a number of explanations for this divergence. Unlike the US, Australia did not experience much growth in housing construction during the boom. So there was less excess supply to weigh down the market. Furthermore, Aussie banks behaved more responsibly. Australians were not deluged with “liar loans” and subprime detritus. Their greater prudence is best explained by the lack of competitive pressures in the Australian banking system, which is an oligopoly dominated by four large banks.

Furthermore, while American mortgages are mostly fixed rate loans, Australian homeowners tend to borrow at floating rates. Therefore, they gained more when central banks slashed rates during the credit crisis. Australia also benefited from last year’s rapid recovery of commodities, which account for nearly two-thirds of exports. Rising commodity prices also serve to boost capital investment.

Finally, there is the policy response to consider. While other governments expended their resources on shoring up busted banks, the Australian stimulus went straight to consumers. Fiscal transfers increased personal disposable incomes by 4 per cent, according to Professor Steve Keen of the University of Western Sydney. Canberra also bolstered the housing market, raising the subsidy for first-time home buyers to a maximum of A$21,000 (£12,200, €14,000, $18,600). Rising home prices arrested incipient deleveraging by Australian households. Outstanding mortgage debt has actually grown by 6 per cent of GDP since February 2009.

Australia may have been fortunate. But it is not out of the woods. For a start, the real estate market remains in bubble territory. Australian home prices are currently some 70 per cent above their long-term trend level. A recent survey by Demographia International finds that all of Australia’s major housing markets were valued at more than five times average incomes, and defines them as “severely unaffordable.” Initial mortgage payments for a home in Sydney or Melbourne are likely to exceed half of your disposable income, claims Demographia. The Australian housing market looks vulnerable to further rate rises.

Then there are the waning effects of the government’s stimulus to consider. The extra subsidy for first-time home buyers ended last year. The removal of this grant could have a similar effect on Australian real estate as the UK government’s reduction in mortgage interest relief in 1988, which killed off the frenzied Lawson housing boom. Prof Keen claims the first-homeowner’s grant has sucked people into the housing market who would not otherwise have bought. One report suggests many recent first-time buyers in Australia are already struggling to meet payments. This is eerily reminiscent of early stage delinquencies on subprime loans in the US back in late 2005. Australia is also exposed to the removal of China’s stimulus measures. China’s actions boosted commodity prices and improved Australia’s terms of trade. Now, Beijing appears more concerned about inflation and potential bad loans from uneconomic investments.

Aussie house prices have not fallen since the early 1950s. A certain complacency is therefore understandable. Yet not long ago many Americans also believed that domestic home prices could never fall. So far Australia has avoided its day of reckoning. But how long will the lucky country’s luck last?

Edward Chancellor is a member of GMO’s asset allocation team

Copyright The Financial Times Limited 2010.

[aussieboy]

So far Australia has avoided its day of reckoning. But how long will the lucky country’s luck last?

Edward Chancellor is a member of GMO’s asset allocation team

Copyright The Financial Times Limited 2010.

Who knows?

Certainly not Edward Chancellor, it would seem.

[Mmmm]

RBA governor Glenn Stevens says rates on the way up, warns against borrowing too much

RBA governor Glenn Stevens has taken the unprecedented step of being interviewed on commercial TV, warning property buyers not to borrow too much and indicating rates are on the way up.

Some analysts have interpreted the unusual appearance as indicating that the Reserve Bank is concerned that the property market may become overheated.

In a pre-recorded interview with Channel Seven's Sunrise program, RBA Governor Glenn Stevens reaffirmed that interest rates were on the way up, countering a belief held by some that rates would remain low after the global financial crisis.

In the first of a series of excerpts from the interview, being broadcast on Sunrise this week, Mr Stevens cautioned against property investment as a "riskless'' path to riches.

"I think it is a mistake to assume that a riskless, easy, guaranteed way to prosperity is to be leveraged up into property,'' he said.

"It isn't going to be that easy.''

Mr Stevens repeated the RBA's message that interest rates must move gradually towards more normal levels, indicating that the normal cash rate of about five per cent was based on the average for the cash rate since the early 1990s.

"We cut interest rates to what we called emergency settings when we had an emergency, when we thought we really were going to face a big downturn and we wanted to try and get ahead of that,'' he said.

As the economy strengthened, interest rates were unlikely to stay low.

"Once the emergency's passed and things gradually look more normal, then it's not wise to leave interest rates down at rock bottom any longer than you need,'' Mr Stevens said.

"And you shouldn't assume they'll stay that low because that assumption will prove to be unfortunate.''

Asked whether he was preparing the public for further interest rate rises, Mr Stevens replied: "I think it would be not doing people any favours to have a prolonged period of very low rates and then hammer them unexpectedly.

"And of course the banks that are lending the money should be, and I'm sure are, testing the potential borrower: can you handle some rise in interest rates?''

JP Morgan interest rate strategist Sally Auld said the Governor's television appearance signalled his concern with the booming residential property sector.

"I think it's quite an extraordinary event to have the governor talking to Mel and Kochie,'' Ms Auld told AAP.

"It shows how worried they are about the housing market.''

CommSec chief economist Craig James said it was the "first time'' the Governor had spoken in a television interview.

The RBA Governor's public utterances usually are confined to setpiece speeches and regular appearances before federal parliamenary committees.

Mr James noted that Mr Stevens also confirmed the RBA's inflation target range of two to three per cent, indicating that once the target band was lifted, it became more difficult to control inflationary expectations.

Mr Stevens also said that, in the current economic environment, it was important to watch what borrowers were actually paying for loans, so there was more attention on variable mortgage rates.

[Mmmm]

From the transcript of Glenn Steven's interview:

KOCH: When you look at things at the moment, is there anything that we should be thinking about, concerned about?

STEVENS: I think it is a mistake to assume that a, you know, riskless, easy, guaranteed way to prosperity is just to be leveraged up into property. You know, it isn't going to be that easy. And I think if we think about property prices as parents - you're a parent, as am I - I've got kids that within not too many more years are going to want somewhere of their own to live and you wonder, you know, how is that going to be afforded because the prices are getting quite high.

[blue skies]

They always have known what is going on

Not so ! dont forget Glen Stevens responce to the GFC was to put interest rates up!

Ha Ha Ha the things that come out of your mouth

[blue skies]

Did I miss the bit where he identified the bubble in the housing market as I couldn't see him saying that in the quote ?

KOCH: When you look at things at the moment, is there anything that we should be thinking about, concerned about?

STEVENS: I think it is a mistake to assume that a, you know, riskless, easy, guaranteed way to prosperity is just to be leveraged up into property. You know, it isn't going to be that easy. And I think if we think about property prices as parents - you're a parent, as am I - I've got kids that within not too many more years are going to want somewhere of their own to live and you wonder, you know, how is that going to be afforded because the prices are getting quite high

Yep Bardon you missed that bit

[Mmmm]

Reading between the lines of various comments Glen Stevens has made over the last year in relation to the housing, I can't help wondering if he just thinks Rudd and Swann are total arses the way they have gone about over-stimulating the market. They don't exactly make his job any easier do they? Shame he can't say what he really thinks.

[Mmmm]

Displacement

↓

Credit creation

↓

Euphoria

↓

Critical stage/financial distress

↓

Revulsion

Euphoria: Everyone starts to buy into the new era. Prices

are seen as only capable of ever going up. Traditional

valuation standards are abandoned, and new measures

are introduced to justify the current price. A wave of

overoptimism and overconfidence is unleashed, leading

people to overestimate the gains, underestimate the risks,

and generally think they can control the situation. The

new era dominates discussions, and Sir John Templeton’s

four most dangerous words in investing, “This time is

different,” reverberate around the market.

As Mill wrote, “There is a morbid excess of belief …

healthy confidence … has degenerated into the disease of

a too facile faith … The crowd of … investors … do not,

in their excited mood, think of the pertinent questions,

whether their capital will become quickly productive,

and whether their commitment is out of proportion to

their means … Unfortunately, however, in the absence

of adequate foresight and self-control, the tendency is for

speculation to attain its most rapid growth exactly when

its growth is most dangerous.”

What part of the description of the euphoria stage of a bubble doesn't apply to the Australian housing market? I love that this description is based on a model developed in 1869.

I would say the euphoria in Australia is so powerful right now it's almost irresistable. People are so scared that if they don't buy now they will never be able to.

I recently read about Chris Joye dismissing the earnings/price ratio as a sign of unaffordability and banging on about his new measure of "houshold disposable income from all source". I felt strangely affirmed.

But of course this is a European model. Australia's different.

[blue skies]

Glen Stevens is faced with 2 evils

Allow cheep credit and fuel a second bubble

Raze interest rates and crush the fragile economy

Well talk is cheep! right now he is hoping to scare the market down. With his influence.

But how can you save people from there own stupidity and greed?

[Tiger Woods?]

Reading between the lines of various comments Glen Stevens has made over the last year in relation to the housing, I can't help wondering if he just thinks Rudd and Swann are total arses the way they have gone about over-stimulating the market. They don't exactly make his job any easier do they? Shame he can't say what he really thinks.

I've known Swanny since I was ten/eleven. I knew he was an **** then. Seriously, I remember the conversation I had with him that convinced me of it. It stuck in my mind for a long time, along with my the mental note I made (FU, you arrogant p****). Nothing has changed. He wanted to be prime minister back then and had tickets on himself. (Kev, watch your back mate.) He's been gunning for power for a long, long time, but as far as I can see, that is the point of his existence. He grew up in a Labour family, and I suspect it is just the vehicle he knows.

He popped into my parents' house a few years ago to get permission to film on our land, in the run up to the election, and I answered the door. I was a bit groggy from my afternoon nap so I wasn't quick enough on my feet to ask him what he thought was going to happen (this was early 2007 or 2006). I very much regret that as I would have liked to have known what he was thinking back then before he was in power and the shtf. I would be surprised if he had had the first clue as to what was coming.

Edited March 29, 2010 by D'oh

[Mmmm]

But how can you save people from there own stupidity and greed?

History says you can't.

[blue skies]

I think this bubble may keep going as long as there is cheep credit.

The property market dosnt need first home buyers to prop it up, Investers or should I say speculators will do that.

High interst rates and high unemployment thats what will crash things.

Government bonds are getting harder to sell.

the true state of the bad debts is just starting to become known.

Wages are under control as the workers are flooding in from countries feeling the GFC

My best gess is that it will be a death of a thousand cuts

[Mmmm]

I've known Swanny since I was ten/eleven. I knew he was an **** then. Seriously, I remember the conversation I had with him that convinced me of it. It stuck in my mind for a long time, along with my the mental note I made (FU, you arrogant p****). Nothing has changed. He wanted to be prime minister back then and had tickets on himself. (Kev, watch your back mate.) He's been gunning for power for a long, long time, but as far as I can see, that is the point of his existence. He grew up in a Labour family, and I suspect it is just the vehicle he knows.

He popped into my parents' house a few years ago to get permission to film on our land, in the run up to the election, and I answered the door. I was a bit groggy from my afternoon nap so I wasn't quick enough on my feet to ask him what he thought was going to happen (this was early 2007 or 2006). I very much regret that as I would have liked to have known what he was thinking back then before he was in power and the shtf. I would be surprised if he had had the first clue as to what was coming.

They do seem to be in it for the power and not because they have a clear political philosophy. I think they may lose the next election. A lot of people who voted Labor because they wanted change will not vote Labor again.

[blue skies]

The only reason Labour gets in is because in Australia it is compulsory to vote!

Most blue collar workers are at work or in the pubs, the mob has very little understanding of any thing out side of this narrow vision.

But we are a happy lot any way!

[Mmmm]

I think this bubble may keep going as long as there is cheep credit.

The property market dosnt need first home buyers to prop it up, Investers or should I say speculators will do that.

High interst rates and high unemployment thats what will crash things.

Government bonds are getting harder to sell.

the true state of the bad debts is just starting to become known.

Wages are under control as the workers are flooding in from countries feeling the GFC

My best gess is that it will be a death of a thousand cuts

Funding costs for the banks are slowly creeping up. The bond issue is a big deal. It looks like we've just passed the bottom of a 30 year downtrend in US bond yields. In other words we could be heading into a long term up-trend in interest rates. So yes in the absence of any unexpected shocks it could be a slow protracted death. But there could easily be another financial shock that will tip things, maybe even this year. The sovereign debt issue could blow up into another systemic crisis. It seems to be a huge unknown. With so much debt floating around the global economy is still quite vulnerable. Also, I'm not sure the market can sustain without FTB's, but we'll see.. so many ways this bubble could burst!

[Alan B'Stard MP]

The only reason Labour gets in is because in Australia it is compulsory to vote!

Not quite - but almost.

[aussieboy]

What part of the description of the euphoria stage of a bubble doesn't apply to the Australian housing market? I love that this description is based on a model developed in 1869.

I would say the euphoria in Australia is so powerful right now it's almost irresistable. People are so scared that if they don't buy now they will never be able to.

I recently read about Chris Joye dismissing the earnings/price ratio as a sign of unaffordability and banging on about his new measure of "houshold disposable income from all source". I felt strangely affirmed.

But of course this is a European model. Australia's different.

Every time someone pulls out this clever rejoinder with no effort to explain why Australia should be exactly the same as every other country, they're going to get me posting this piece of unaddressed selective statistical guff from the King of the Bears which actually shows an incredible amount of inter-country price variability over the last 25 years.

http://www.keenwalk.com.au/wp-content/uploads/images/T-Shirt/KeenT-Shirt01RealHousePrices02.jpg

"Notice he doesn't have the UK prices on his T Shirt.

Would anyone in the "all countries are the same" camp care to explain the vast inter-country differences on this chart?"

[Guest DissipatedYouthIsValuable]

Every time someone pulls out this clever rejoinder with no effort to explain why Australia should be exactly the same as every other country, they're going to get me posting this piece of unaddressed selective statistical guff from the King of the Bears which actually shows an incredible amount of inter-country price variability over the last 25 years.

http://www.keenwalk.com.au/wp-content/uploads/images/T-Shirt/KeenT-Shirt01RealHousePrices02.jpg

"Notice he doesn't have the UK prices on his T Shirt.

Would anyone in the "all countries are the same" camp care to explain the vast inter-country differences on this chart?"

You just need a bit longer on the x-axis.

[blue skies]

This is what Aboriginal people refer to as the Dreamtime.

I laugh when a new Australian pretends to understand the most interment things about this country.

Everyone has to pay for their education and Bardon you are going to pay more than most.

[JonoP]

Well, I found out how much a neighbour's place went for... looks like they made $250k in ~14m months. I won't include the rent they received for 12 months which was about cost of debt because I can't be bothered, frankly, but it all adds up to a well into double digit IRR for doing jack (renovations all managed by a builder).

And they will probably stick it back in to another property. Which will decline by $250K or more when the bubble pops.

This is just a transient delusion of wealth.