Australia Faces Its Demons

[aussieboy]

Blueskies - if you're trying to reply to me, don't waste your time: you're on ignore (not that I haven't mentioned the fact a dozen times already).

[blue skies]

May 18, 2010, 6:02 PM EDT

More From Businessweek

* Spain Borrowing Costs Rise in Auction of 12-, 18-Month Bills

* Greek Banks? Credit Quality Is Main Concern, Deutsche Bank Says

* Rand Gains Most in Week as EU Says Debt Cuts Won?t Curb Growth

* German Investor Confidence Plunges on Debt Crisis (Update2)

* Portugal Sticks to Growth Forecast Amid Budget Cuts (Update1)

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By Aaron Kirchfeld, Niklas Magnusson and Elena Logutenkova

May 19 (Bloomberg) -- Europe’s banks are facing déjà vu as fresh tremors in the debt markets threaten to shake the financial system less than two years after the collapse of Lehman Brothers Holdings Inc.

This time the concern isn’t about subprime mortgages or exotic derivatives, it’s about banks’ holdings of bonds sold by European Union governments including Greece, Portugal and Spain. Pledges of $1 trillion in EU aid have failed to shore up the euro or dispel doubts about the region’s finances.

Investors have punished the shares of European financial firms and driven up the cost of insuring against default by banks and insurers on concern measures aimed at reducing the region’s budget deficits will choke economic growth. In a worst- case scenario, government debt restructurings could erode capital and spark another credit crunch, analysts say.

“There’s a concern this may be Lehman II,” said Konrad Becker, a Munich-based banking analyst at Merck Finck & Co. “The direct risks of writedowns and loan defaults combined with indirect ones such as mistrust between banks could lead to a systemic crisis.”

The rate banks say they charge each other for three-month loans in dollars rose yesterday to a nine-month high. The three- month London interbank offered rate in dollars, or Libor, reached 0.465 percent, the highest since Aug. 5, according to the British Bankers’ Association. The euro fell to its weakest against the dollar since 2006 on May 17.

Subprime Survivors Struck

Banks in Greece, Portugal and Spain, which mostly dodged losses from the financial crisis of 2008, have suffered the biggest share declines. National Bank of Greece SA, the country’s largest bank, dropped 43 percent in Athens trading this year. Spain’s Bankinter SA and Banco Bilbao Vizcaya Argentaria SA, Portugal’s Banco Espirito Santo SA and Italy’s Intesa Sanpaolo SpA each fell more than 28 percent.

The latest debt concerns spread across Europe just as EU economies were returning to growth and banks were emerging from the worst financial crisis since the Great Depression.

The credit crunch that began with the collapse of the U.S. subprime mortgage market and swept away New York-based Lehman in September of 2008 led to $542 billion of writedowns and credit losses for European financial companies, data compiled by Bloomberg show. UBS AG of Zurich and Edinburgh-based Royal Bank of Scotland Group Plc were among financial firms that needed government help to survive.

‘$1 Billion Question’

Greece’s public finances began rattling investors late last year, when the country more than tripled its budget deficit forecast for 2009 to 12.7 percent of gross domestic product. The shortfall prompted European Monetary Affairs Commissioner Joaquin Almunia to say Greece’s finances had become a “concern for the whole euro area.”

On April 22, the EU made an even higher estimate of Greece’s budget deficit for last year: 13.6 percent of GDP.

Standard & Poor’s cut Greece’s credit rating to junk on April 27, and also lowered Portugal to A-. It trimmed Spain one step to AA the following day.

The EU and International Monetary Fund cobbled together a 110 billion-euro ($136.4 billion) rescue package for Greece on May 2 to prevent contagion. About a week later, European leaders drew up an unprecedented emergency fund of as much as 750 billion euros to back countries facing instability and a program of bond purchases by the European Central Bank.

“The $1 billion question is will this money be enough to stabilize the market and entice investors to continue to put money into sovereign debt and also into bank funding,” said Dirk Hoffmann-Becking, an analyst at Sanford C. Bernstein Ltd. in London.

Strangling Growth

Europe’s banks had $2.29 trillion at risk in Greece, Italy, Portugal and Spain at the end of 2009, according to figures from the Bank for International Settlements in Basel, Switzerland. French banks had the most claims, at $843 billion, followed by Germany at $520 billion and the U.K. at $227 billion.

“The first problem is if the sovereign-debt crisis continues, European banks and insurers are going to have to write down their exposure at some point,” said Daniel Hupfer, who helps manage 32.3 billion euros at M.M. Warburg in Hamburg, including shares of Deutsche Bank AG and BNP Paribas SA. “The second is the economy: if European countries focus on saving, that could strangle growth.”

Leaving the Euro

One or more European economies may default on their debt and Greece and other “laggards” in the euro area may have to abandon the common currency in the next few years to spur their economies, New York University professor Nouriel Roubini said in an interview on Bloomberg Television on May 12.

The crisis engulfing the euro area is not over yet as Greece remains the “tip of an iceberg,” Roubini said in an interview with BBC radio broadcast yesterday. “What we’re facing right now in the eurozone is a second stage of a typical financial crisis.”

A restructuring of Greece’s sovereign debt could lead to as much as 75 billion euros of losses for European banks, based on estimates from Frankfurt-based Deutsche Bank.

Josef Ackermann, the chief executive officer of Germany’s largest bank, said in an interview on ZDF television last week that it’s imperative to avoid a restructuring of Greece’s debt for now, even as he expressed doubts about the country’s ability to pay back its borrowings in full.

An Overreaction?

Some analysts say the threat to Europe’s banks is overstated and that the EU’s rescue package will eventually bolster confidence. There’s little evidence so far that sovereign concerns are cutting into profits for most lenders. The 10 biggest banks by market value in the euro region earned almost $15 billion in the first quarter, company reports show.

“Almost all banks beat earnings estimates, but that’s been neglected because of the sovereign-risk issue,” said Johan Fastenakels, an analyst at KBC Groep in Brussels. “Markets are overreacting.”

European stocks gained for the first time in three days yesterday as concern eased that measures to control the region’s debt crisis will curb economic growth. The Bloomberg Europe Banks and Financial Services Index rose 1.8 percent.

Deficit Cutting

Europe’s debt-ridden governments are pushing forward with austerity plans to appease investors and avoid a contagion. Greece agreed to budget cuts amounting to 13 percent of GDP. Spain announced the biggest reductions in at least 30 years on May 12, and Portugal followed a day later, pledging to slash wages and raise taxes. Italian officials said the government may make an extraordinary reduction in public spending. France is slated to submit its latest tax and spending plans to the European Commission, the EU’s executive arm, this week.

European finance ministers said Greece’s debt crisis won’t unleash a continent-wide austerity drive and tip the economy back into a recession. Only high-deficit countries including Spain and Portugal will be ordered to make additional deficit cuts, while budget policies will remain untouched in better-off nations such as Germany and Finland.

“Not everyone will accelerate consolidation in a very uniform way,” European Union Economic and Monetary Affairs Commissioner Olli Rehn told reporters in Brussels after a meeting of ministers from the 16 euro countries yesterday. “That would lead to a very restrictive fiscal stance for the euro area as a whole, which would risk depressing economic growth.”

Political leaders are trying to put to work lessons learned in the subprime debacle.

“The advantage to the subprime crisis is we now are much more aware of how fragile our financial system is and we’re much more aware of what needs to be done to stabilize it,” said Hoffmann-Becking. “On the negative side is just the sheer scale of the sovereign debt problem: it’s larger than subprime. And whilst in subprime you could argue that a government will have to come and step in and save us, there is no government to save the government.”

[aussieboy]

See? No idea what you're typing.

But I bet it's great.

[blue skies]

Blueskies - if you're trying to reply to me, don't waste your time: you're on ignore (not that I haven't mentioned the fact a dozen times already).

An oxymoron (plural oxymorons, or sometimes the Greek plural oxymora) (from Greek ὀξύμωρον, "sharp dull") is a figure of speech that combines normally contradicting terms. They appear in a variety of contexts, including inadvertent errors such as extremely average, deliberate puns like same difference' or 'pretty ugly, and literary oxymorons that have been crafted to reveal a paradox.

See no idea what you are typing, its not so great.

[ExecutiveSlaveBox]

Blueskies - if you're trying to reply to me, don't waste your time: you're on ignore (not that I haven't mentioned the fact a dozen times already).

He wasn't.

[blue skies]

Mortgage finance falters

Published in May 18th, 2010

Posted by Steve Keen in Debtwatch

46 Comments

A month ago some extraordinary headlines appeared in the Fairfax newpapers. The Sydney Morning Herald ran with: “House prices to plateau as buyers flee in droves“.

Alan Kohler wrote at the time in Business Spectator that ‘flee’ was too strong a word for what was happening – housing lending was continuing to fall in both number and value terms, but investors were continuing to borrow strongly and prop up the market. However, he did suggest that a price plateau in housing looked likely.

Now, with one more month’s data to hand, what’s strange is how quiet the major papers have gone on the genuinely alarming falls in home lending.

Bullish economists may have hoped that the temporary drop off in first home buyers— created by the bringing forward of demand by the First Home Owners’ Boost in 2009—would quickly pass, and that numbers and values of loans would begin to trend up again. This has not been the case – loan commitments for owner occupiers fell 3.4 per cent in March in seasonally adjusted terms, or 4.1 per cent in trend terms.

This led JP Morgan to observe in a note: “…the protracted nature of the payback is something of a concern, especially given that there are still at least two more interest rate hikes yet to flow through to the data, those delivered in April and May this year.”

But that ‘concern’ did not bother most commentators, who mostly seem to believe that the investors who are currently increasing their borrowing (it was up 3.0 per cent in March in seasonally adjusted terms or 1.1 per cent in trend terms) can pick up the market slack as younger buyers and first home buyers decide they can’t afford to enter the market.

Let’s think about that for a minute. Young Australians, the ‘bottom rung’ on the housing ladder, are disappearing from the housing market in droves. Meanwhile investors who are able to do so are gearing up and keeping demand in the market strong enough to keep clearance rates and prices up.

But why are they doing it? Are they investing in property for the rental yields the can earn? Absolutely not. Why would an investor buy a property yielding 3 or 4 per cent at a time when two-year bank deposit rates are as high as 8 per cent? The only logical reason to ignore secure high yielding returns and jump into housing at this time is to capture continued strong capital growth.

Those investors may be very disappointed. As JP Morgan noted, we haven’t even seen the effect on home lending/buying from the April and May rate hikes. One wonders how anybody can expect the current trend in home lending to turn around as the price of borrowing continues to increase.

So the trend that is already evident is almost certain to get worse – see charts below for an indication of how unprecedented the current falls in home lending are to anyone other than investors seeking capital gain. Both charts clearly show the huge drop in borrowing caused by the GFC, then a huge resurgence in borrowing caused by what I prefer to call the First Home Vendors Boost, then a frightening drop off in owner-occupier borrowing since mid-2009.

New investors entering the housing market are joining a classic Ponzi Scheme endgame. Owner occupiers are deserting the market, and yet investors still believe they can make capital gains by selling the same assets to other investors with the same views. Let’s see how long they can keep that game up.

The next two months’ data on home lending should be enough to confirm which way things are going. My guess is the Fairfax headlines from a month ago will be seen, in hindsight, as unusually prescient.

[blue skies]

See? No idea what you're typing.

But I bet it's great.

Your sliping up Bardon you have said some thing like this 2 or 3 time before

[aussieboy]

He wasn't.

Cool.

[Tiger Woods?]

Wishing very hard doesn't change the fundamentals of supply and demand nor the costs of production: it isn't all down to speculators.

Bardon / I posted a breakdown of how much it costs to build a typical cheapo newbuild - it certainly wasn't $150k. At the moment, infrastructure surcharges in Sydney amount to ~70k per new build. So even if all state governments zoned all their land for housing and gave it away, and if everyone crapped in their backyards and hiked to work, then perhaps Boral could be persuaded to provide materials at cost and the builders not pay their brickies or something.

Oh rubbish. There is a massive gulf between infrastructure + build costs and the current price of houses. The question you have to ask is, if it was possible to provide infrastructure, house and land for $120k in 2002, why can it not be done for less than $420k now? A lot of the infrastructure costs are nothing more than easy taxes/profits sucking on the teat of easy credit.

Case in point. To split a block from our current land the local council wants $150k. Power and everything else runs right up to the boundary. The only thing required is some 50 yards of bitumen.

[blue skies]

No Bubble Here, Move Along Please

by Kris Sayce on May 19, 2010

Anyway, up in Sydney yesterday Luci Ellis, Head of Financial Stability at the Reserve Bank of Australia (RBA) spoke at an Australian Financial Review sponsored conference on housing. But for a start we’d like to grade her ‘F’ for the job she’s doing on overseeing financial stability considering how quickly the value of the Australian dollar continues to devalue thanks to inflation.

But best of all we liked this comment in her closing “Final Thoughts”:

“Recent data suggest that we do not have a credit-fuelled speculative boom on our hands. It would not be desirable for the current situation to turn into one.”

We have this image of Ms. Ellis standing in front of a large bubble that she’s tried to cover with an overcoat, insisting to passersby that there’s nothing to see.

But what “recent data” would Ms. Ellis be referring to?

I mean, it couldn’t be the data from the Australian Bureau of Statistics (ABS), the chart of which Ms. Ellis used to open her presentation:

ABS - Real Dwelling Prices

Because pardon us for commenting, that’s got bubble written all over it. Well, our version has anyway:

ABS - Real Dwelling Prices - Bubble

And obviously she hasn’t noticed the numbers contained on the RBA website which provide an insight into the, erm, non-existence of the “credit-fuelled boom”:

Non-existence of the Credit-fuelled Boom

Those numbers are in millions. We pointed out last week that residential borrowing had increased 50% in the last two-and-a-bit years.

Clearly that’s not a “credit-fuelled boom.”

But then Ms. Ellis would naturally deny the existence of a credit boom considering it’s her employers that have caused it. You know the rules, gotta tow the company line.

We do like how she used the following chart, which unwittingly should help to dispel the myth that rising population growth is necessarily linked to house price growth:

ABS - Dwelling and Population Growth

Prof. Steve Keen pointed out in an article for Business Spectator last week that if population growth running faster than new dwelling growth leads to rising house prices, why didn’t house prices fall between 1955 and 2004 when dwelling growth exceeded population growth?

The simple answer is that the real driver of house prices is easy credit. Plain and simple.

And when that stops – which it hasn’t yet remember… POP!

[blue skies]

Can all the wise old bears that said that the guvnor was warning of a bubble last time he was on the telly

Please stand up

and admit that you were very wrong then, you know who you are I know who you arte and there are many.

It was not Glen Stevens (the guvnor) who came out with (bubble what bubble)

Go on then admit it is you that is wrong

[blue skies]

Why Australian shares and the Aussie dollar are being slammed: Gottliebsen

Thursday, 20 May 2010 09:53

Australian currency and share dealers are being hit by a wall of selling from European and Japanese investors as it becomes clear that the government's horrendous mining tax mistake is affecting the sovereign risk of Australia.

Australia's currency and shares would have been expected to decline in line with the drop in commodity prices, but we are seeing panic selling of considerable proportions.

At this point I must add that the Australian Treasurer Wayne Swan vigorously disagrees with my stance on the mining tax and last night personally took me to task – which is his right – and I describe that development in a separate article.

Unfortunately the situation facing Australia gets even worse than a bear raid on our currency and share markets. I have been talking with some of the most senior bankers in the country and they say that the European sovereign risk crisis is going to make it more expensive for banks to borrow the vast sums overseas that are required to service Australian home mortgages and business loans.

Perhaps unfairly, the irrationality of the mining tax has lumped Australia into the high sovereign risk basket in the eyes of those overseas institutions who lend to our banks. In particular, the Japanese banks who have been prepared to borrow yen at token rates and lend to Australian banks in Australian dollars, have taken a beating which they may take years to forgive.

At the beginning of this month the Australian dollar was trading around 92.65 US cents. It has fallen an incredible 9 per cent in just under three weeks. Losses in yen have been worse. Over the same period the much maligned euro has fallen just over 6% against the American currency.

The Australian sharemarket has fallen much more steeply than the US share market and our declines have been much more akin those experienced on European exchanges, confirming that were are seen as a crisis country.

The government clearly not only did not understand the effect of the tax on the mining industry but had no concept that when you take such an action at a time when the globe is extremely nervous, there is grave danger that it will trigger a bear raid on Australia shares and currency and endanger our bank borrowing. And that's what has happened.

Bear raids can fade, especially when there is a degree of irrationality. We are not in the same position as the PIIGS. But once a bear raid gets under way it is multiplied by heavy shorting and panic selling and it can take shares and currency very low. In Australia's case we are probably overdue for a swing back, but if that swing back does not hold and we start sliding again, then we will fall even further. Remember that unhedged overseas investors are not only being hammered by the fall shares, but the currency as well. Our share market is one of the worse performers in the world to unhedged overseas investors.

The cabinet needs urgently to drastically change the RSPT. Changing it will not repair the damage because confidence has been lost, but it will stop an all-out collapse. Superannuation savings in Australia have already been hit. Another big blow would be devastating.

[Tiger Woods?]

So how muh will it cost to build a say 200m2 single story house only, ie what is the build cost only ?

Build cost of a 3 bed 2 bath garage, including profit is about $150k to $160k in local area. Similar houses are selling for $400k with land. So, land plus infrastructure is about $250k, which is absurd. That is, about 62.5% of the cost has nothing to do with the house. When we first built here, land plus infrastructure was on the order of 15% for a significantly larger block with better roads. Even at 33% for land plus infrastructure, one should be looking at $225k to $250K for such a house in this location, especially given the smaller plots, narrower roads etc. These latter figures are more in keeping with wage growth (for instance) during the same period. Land prices rise because of easy credit, together with, to a lesser extent, local councils and builders jumping on the band wagon increasing their profits/paying higher wages.

As I said before in 2002, similar house plus land was about $120k. Build cost was about $80k-$90k. In a stable system man hours to build is more or less the same in 2002 versus 2010, so costs should rise in proportion to wage changes. I can assure you, wages have not tripled in Australia since 2002, and build costs have followed wage changes (with perhaps a little bit of an overshoot, as might be expected in a boom.) The rest has been infrastructure and land costs...on the order of 500%. I presume this is mainly land costs, though given what the council want to charge us for cutting off a block, who knows (probably just protecting the big developers...I bet their infrastructure charges per block are nothing like the ones charged to "normal" people!)

There is no way $400k is justified for some of the houses I saw up north. There will be house price deflation in real terms at some stage in the next few years, but whether that is due to wage inflation or nominal house price drops is uncleaqr.

This is a land price bubble, and nothing more fueld by easy money. At some stage, land will regress to its long term inflation adjusted mean. It cannot be otherwise. There is only so much money an average human can earn in a lifetime, and that anchors house prices in the long run.

[aussieboy]

Build cost of a 3 bed 2 bath garage, including profit is about $150k to $160k in local area. Similar houses are selling for $400k with land. So, land plus infrastructure is about $250k, which is absurd. That is, about 62.5% of the cost has nothing to do with the house. When we first built here, land plus infrastructure was on the order of 15% for a significantly larger block with better roads. Even at 33% for land plus infrastructure, one should be looking at $225k to $250K for such a house in this location, especially given the smaller plots, narrower roads etc. These latter figures are more in keeping with wage growth (for instance) during the same period. Land prices rise because of easy credit, together with, to a lesser extent, local councils and builders jumping on the band wagon increasing their profits/paying higher wages.

As I said before in 2002, similar house plus land was about $120k. Build cost was about $80k-$90k. In a stable system man hours to build is more or less the same in 2002 versus 2010, so costs should rise in proportion to wage changes. I can assure you, wages have not tripled in Australia since 2002, and build costs have followed wage changes (with perhaps a little bit of an overshoot, as might be expected in a boom.) The rest has been infrastructure and land costs...on the order of 500%. I presume this is mainly land costs, though given what the council want to charge us for cutting off a block, who knows (probably just protecting the big developers...I bet their infrastructure charges per block are nothing like the ones charged to "normal" people!)

There is no way $400k is justified for some of the houses I saw up north. There will be house price deflation in real terms at some stage in the next few years, but whether that is due to wage inflation or nominal house price drops is uncleaqr.

This is a land price bubble, and nothing more fueld by easy money. At some stage, land will regress to its long term inflation adjusted mean. It cannot be otherwise. There is only so much money an average human can earn in a lifetime, and that anchors house prices in the long run.

"Rubbish" he says and then proves my point.

[ExecutiveSlaveBox]

"Rubbish" he says and then proves my point.

Well argued BardBoy.

[Tiger Woods?]

"Rubbish" he says and then proves my point.

Your position, as I understand it, was that $400k houses were justified or at least that houses couldn't be $220k as land would have to be free. My point is that you should be looking at $225k including land. Recall, you stated that infrastructure was $70k and hence land would have to be free for houses to be $220k. I'd also argue that the $150k for the price of a house is more than it would cost if there wasn't a bubble. You were also arguing that you and Bardon didn't think houses could be built for $150k, yet my local property rag has half a dozen companies offering 3 beds, 2 bath, 2 car for that price.

Hence your statement was rubbish.

(You also made some comments about student rentals etc. - at $300k for a flat the gross let alone net return is well below what you can earn in the bank. Without significant capital growth, it makes no sense. That capital growth requires, in the long run, equivalent wage growth. The latter I do not see.)

Housing blocks has risen 500% in the past 8 years in my region (whilst getting smaller). It is a classic land price bubble supported by immigration and easy credit. Neither of those things can go on forever.

Edited May 20, 2010 by D'oh

[buyerbeware]

AUD is down 10% in a fortnight. So houses are already 10% cheaper for me when I move but I am looking for 40%. Judging what happen at end of 2008 and similarities to now this could be on the cards. The AUD is inheritably unstable and moves of 40% in year are not uncommon.

Edited May 20, 2010 by buyerbeware

[blue skies]

Well argued BardBoy.

What Bardon or "Bardboy" is doing to D'oh is his standard practice.

First he identifies a part of his sports argument that he may be able to use.

Than he will keep hammering away asking for the impossible, even when the answer is fair.

After he feels he has his pound of flesh, it is time for him to turn to personal abuse.

If you can be bothered looking through the rubbish bin that is Bardons posts, you will see what I mean.

[Tiger Woods?]

AUD is down 10% in a fortnight. So houses are already 10% cheaper for me when I move but I am looking for 40%. Judging what happen at end of 2008 and similarities to now this could be on the cards. The AUD is inheritably unstable and moves of 40% in year are not uncommon.

Not quite that unstable - the recent move of 40% relative to the £ is significant. However, you are right in that it is quite volatile. When people start worrying about China, or at least demand from China, then the AUD will suffer horribly.

[7clubs]

Not quite that unstable - the recent move of 40% relative to the £ is significant. However, you are right in that it is quite volatile. When people start worrying about China, or at least demand from China, then the AUD will suffer horribly.

As a certain simian-like weather forecaster is wont to say - Crash! Boom! Opera! (All puns intended).

By the way, relax, Blue Skies, the marked difference in the standard of punctuation and spelling between Aussie Boy and Bardon puts them poles apart.

[aussieboy]

Your position, as I understand it, was that $400k houses were justified or at least that houses couldn't be $220k as land would have to be free. My point is that you should be looking at $225k including land. Recall, you stated that infrastructure was $70k and hence land would have to be free for houses to be $220k. I'd also argue that the $150k for the price of a house is more than it would cost if there wasn't a bubble. You were also arguing that you and Bardon didn't think houses could be built for $150k, yet my local property rag has half a dozen companies offering 3 beds, 2 bath, 2 car for that price.

Hence your statement was rubbish.

(You also made some comments about student rentals etc. - at $300k for a flat the gross let alone net return is well below what you can earn in the bank. Without significant capital growth, it makes no sense. That capital growth requires, in the long run, equivalent wage growth. The latter I do not see.)

Housing blocks has risen 500% in the past 8 years in my region (whilst getting smaller). It is a classic land price bubble supported by immigration and easy credit. Neither of those things can go on forever.

No - you picked a block that had the road running past the front door with utilities at hand. The big developments that are going on here need a tad more than that infrastructure: complete roads, schools, shopping centres, set aside for parks, sewers and the rest. That is why it's 70k.

So add that in plus the cost of the land and the house itself and what do you get - Uncles Kev's $150k wet dream?

Hence, you failed to engage with the point of my posting. Particularly with the student comment - rooms around Randwick nr UNSW are renting out at $250+ pw.

I think that will do.

[aussieboy]

Well argued BardBoy.

Adding value again I see.

[Tiger Woods?]

No - you picked a block that had the road running past the front door with utilities at hand. The big developments that are going on here need a tad more than that infrastructure: complete roads, schools, shopping centres, set aside for parks, sewers and the rest. That is why it's 70k.

So add that in plus the cost of the land and the house itself and what do you get - Uncles Kev's $150k wet dream?

Hence, you failed to engage with the point of my posting. Particularly with the student comment - rooms around Randwick nr UNSW are renting out at $250+ pw.

I think that will do.

Go back and read what I said because you have the wrong end of the stick.

The block that I mentioned with the road running past it - council wanted $150k for infrastructure to allow it to be split from 1 into 2 titles. This was profiteering pure and simple, which was my point. The local councils make it prohibitive for anyone to develop land other than favoured developers. That was not the cost of building a house. That is what council wanted for "infrastructure."

This has nothing to do with the $225k estimate for a stand alone 3 bed house I made in a later post. These houses, built on new estates including the cost of infrastructure being added, planning permission and buying the land for development cost $120k 8 years ago. They now cost $400k on smaller blocks of land with poorer quality roads. The cost of building such a house is $150-160k, up from about $80-90k. The cost of the land + infrastructure component has gone from $30-40k to $200k+, an increase of 400% or more. If infrastructure and land costs increased at about the same rate as house build costs, we would expect $225k houses. It's pretty darn simple.

You cannot tell me that the true cost of infrastructure has gone up 400-500% in 8 years. That is complete and utter rubbish. So, if it is not infrastructure costs, then what is it?

Yes, a land price bubble induced by relaxed credit.

I should know, my family sold 30 hectares of prime development land in the middle of last decade, after it had increased in value 5 fold over a period of a couple of years and the developers thought they were getting it at a good price even then, as when they wanted to extend their option we told them money now or never, and they paid us upfront (which is very unusual.)

[Tiger Woods?]

That would be a 150m2 house and should inlude landccaping and driveay.

Your figures for build cots are noted. Not believed but noted.

The cost of houses in 2002 in my part of Australia is a matter of record. in 2001/2 they were about $120k. At that time a block of land was about $30-40K, ergo build costa bout 80-90k.

Hold on a minute now you have lost me. On the one hand you are saying that it is a land price bubble yet on the other you are saying that building costs ( labour and materials) have doubled you cant have two bob each way even on here. You really need to make up your mind as it shows through when you haven’t.

But houses including land haven't doubled. They have more than tripled. If everything had gone up in line with building costs, we'd be looking at $225k.

Anyway just to shed some light on the matter, it has always been the land price component that is subject to price variation most seasoned players in the market know that just as they know that a building depreciates in value.

Well, thank you for teaching me to suck eggs. We are at a stage where land price valuation is, historically, very high relative to the total cost of a house. The cost to build a house has gone up by a factor of 2, but the cost of the land has gone up by a factor of 5. I truly do not understand how you can hold that understanding in your head and not think that we are far away from equilibrium.

[Tiger Woods?]

we need to be talking m2 when it comes to building costs I said 200 for a 200m2 4/2/2 you said 150 for a 3 bedder you didn’t; mention if it was a double lock up I t could still be getting them built cheaper than you based on the info you have provided. You absolutely must start specifying units before you spurt off.

I was being generous with the pricing, and showing that even with that one should end up with house and land for 225k.

Okay, if we assume 200k for a 4/2/2, then we'd be looking at $275k, but not the $425k you'd pay for one now.

Every garage I have seen in this country is a lock up. You've got to be a real pauper to have a carport.

For the 30th time, the simple fact is, if land and infrastructure had only kept up with building costs as we might expect in a stable well ordered market, then we'd be paying 40% less for houses in my part of Australia than we are now.

Edited May 20, 2010 by D'oh