Reserve Bank’s housing bubble set to unleash more job losses

Written by admin on September 1, 2014 – 9:05 pm

Grave fears are mounting for the future stability of the Australian economy as new data released today shows the Reserve Bank of Australia’s housing bubble is surging at records not seen since 2003.

The RP Data statistics confirms reports of investor lead irrational exuberance in the Sydney and Melbourne markets. On an annualised quarterly basis, Melbourne surged an unsustainable 21.2 per cent, followed by Sydney at 13.8 per cent. The investor surge is both eroding rental yields and increasing vacancies causing many experts to warn of a bleak future for investors when capital gains slow to more sustainable levels, or worse – starts falling.

The boom stems from emergency record low interest rates set by the Reserve Bank of Australia – the lowest in over 5 decades. This latest data should force the central bank to either increase interest rates or bring in macro-prudential controls, although the bank has been happy to sit on its bum to date, opting to watch the bubble grow more top heavy.

Martin Conlon, Schroders head of Australian equities told Fairfax, “There is ample evidence that lower interest rates are fuelling nothing other than increasing asset prices, suppression of yields and misallocation of capital,”

David Murray, chairman of the Financial System Inquiry warns real estate is now the biggest risk to the Australian economy.

The surge comes at a dangerous time for the Australian economy, a time when jobs losses are mounting and wages are falling. Housing bubbles act as a leach to the economy, sucking the lifeblood from our already weak economy. It causes a misallocation of capital from productive sectors of the economy to unproductive sectors, and sucks household disposable income dry with huge mortgage serviceability requirements stemming from crushing household debt levels.

Official Australian Bureau of Statistics (ABS) unemployment data showed unemployment surged to 6.4 per cent last month, a 12 year high. Private gauge unemployment surveys from Roy Morgan more accurately place unemployment at 12.2 per cent.

The loss of jobs is putting pressure on wages. In the last two quarters, according to the ABS, wage growth has failed to keep up with inflation – i.e. real wage growth is negative. Wage growth is now the worst in 17 years.

But the biggest concern is in the youth unemployment sector. A report from the Brotherhood of St Laurence released today show youth underemployment is now at levels not seen in 36 years and unemployment is at 13 year highs. It has many social ‘scientists’ warning we are creating an entire generation that will be jobless. Housing affordability will be the least of their concerns.

It’s no wonder Tony Abbott wants to cut this cohort loose to save his budget.

» RBA flags housing risks but does nothing – The SMH, 1st September 2014.
» David Murray warns Australia’s financial risks concentrated in real estate – The ABC, 29th August 2014.
» Banks demand bail-out protection – The SMH, 29th August 2014.
» Record housing investment boom accelerates – 1st September 2014.
» Barely Working – Young and underemployed in Australia – Brotherhood of St Laurence, 1st September 2014.


Posted in Australian economy, Australian Housing | 17 Comments »

Majority of Australians believe property is overvalued : QBE Report

Written by admin on August 19, 2014 – 7:30 pm

The latest annual QBE report into mortgage and property market sentiment shows Australian’s perceptions towards the residential property market is deteriorating rapidly amid concerns the market is overvalued.

The survey found only 36 percent of respondents now believe it is a good time to buy property in the next twelve months. This is down significantly from a weak 42 percent in 2013. The reason appears to be the federal budget, with 59 percent intending to hold off and review the impact of the harsh budget.

But perceptions the market is overvalued could be holding just as many back. 59 percent now believe the Australian residential property market is overvalued, with 31% believing the market over-valuation exceeds 10 percent. This has also rapidly increased with only 20% believing the market was more than 10% overvalued last year.

But it is no longer just individuals doubting the fundamentals of Australia’s infallible property market. Billionaire Lang Walker, Executive Chairman and owner of Walker Corporation – one of Australia’s largest property developers, has warned this week house prices in Sydney and Melbourne has surged too much. He is now forced to turn to Malaysia to reduce risk and find growth.

Yesterday, Stockland – one of the largest residential developers in Australia, said double-digit house price growth is unsustainable, and could screech to a halt.

» An annual study of the mortgage market and associated insurance in Australia – QBE, 7th August 2014.

» Billionaire Lang Walker says Sydney, Melbourne house markets ‘too hot’ – The Sydney Morning Herald, 15th August 2014.

» Stockland says double-digit house price growth not sustainable – The Sydney Morning Herald, 18th August 2014.


Posted in Australian economy, Australian Housing | 27 Comments »

The Investors Club/Property Club embroiled in emerging Australian Subprime Crisis

Written by admin on August 12, 2014 – 10:23 pm

The Australian has today reported on an emerging wave of subprime repossessions in Australia as times start to get tough.

On Saturday, we reported how Australia has one of the largest property bubbles in the world, significantly larger than the USA subprime bubble. While evidence is emerging, our politicians are very much behind the bubble, you have to ask yourself, can Australia have such a large property bubble with prudent lending standards?

“We have been in denial for years as a nation that we don’t have a subprime problem, but we do,” Ms Brailey, President of the Banking and Finance Consumers Support Association said.

The Australian reports on a Perth disability pensioner who was enticed to take out a $370,000 investment loan with a mortgage broker five years ago. After last year halting her payments, the loan has ballooned out to more than $1 million. Now the subprime lender has launched Supreme Court action to recover the property and the $1 million debt owing.

At 8:30am, ABC radio in Brisbane started a talkback show on Australia’s subprime mortgage crisis. The segment discussed how it is our major banks, who are writing[falsifying] most of these loans. As times start to get tough and the property market turns, people defaulting on their subprime loans has surged to three times normal levels. You can listen to the 15 minute segment, here.

And Tonight, the ABC’s 7:30 report has reported on alleged loan fraud by The Investor’s Club, now known as the Property Club. Mr McNally and Ms Mathews were enticed into buying four properties through the “free” club, and are now struggling to keep the family home after being forced to sell their business. They are suing The Investor’s Club after it was found the club’s broker has allegedly falsified loan application forms, grossly overstating income and providing loans they could not service.

The ABC said there are now four other TIC investors who have evidence of falsified loan application forms suggesting the practice is wide spread within the club. No doubt, many others could emerge tonight after the story has gone to air. Other TIC investors have also lost significant portions of their wealth investing in TIC properties such as Kirribilli Heights and now feel The Investors Club has mislead them. The ABC claims some properties have dramatically lost value and the projections of rental incomes have not been achieved.

» Pensioner represents tip of $100bn sub-prime iceberg: advocate – The Australian, 12th August 2014.

» Australia’s subprime mortgage crisis – The ABC, 12th August 2014.

» The Investors Club, renamed as Property Club, sued by couple claiming they were misled into taking out $1 million in loans – The ABC, 12th August 2014.

» The banks and the battlers’ bad loans – A Current Affair (Channel 9), 14th August 2014


Posted in Australian economy, Australian Housing | 38 Comments »

Why Australia has one of the world’s largest housing bubbles

Written by admin on August 9, 2014 – 8:31 pm

The International Monetary Fund (IMF) recently reported Australia has, based on price to income ratio, the third most overvalued property market in quarter 4, 2013. Since then, according to the Australian Financial Review, we have leap frogged Canada to take second place honours, behind Belgium who has honours as the most expensive property market.

While economic reports both within Australia and abroad continue to ring warnings that housing is becoming a significant source of systemic risk for Australia (Think of what happened in the United States, Spain, Ireland, Greece etc), our politicians are quickly devising ways to make our bubble even bigger and far more dangerous. This had caused speculation that it is actually our politicians driving this bubble for their own personal greed.

Monday week, during a Senate Economics References Committee hearing in Adelaide, Senator Nick Xenophon said rules should be changed to allow first home buyers to dip into their super to help pay for a home. He said such a scheme was operating in Canada (remember they had the 2nd largest housing bubble, until we took that rank) allowing access up to $25,000 and it has lead to improved housing affordability.

“With more and more Australians finding it difficult to break into home ownership, adopting the Canadian scheme would make a difference to many thousands of Australians each year,” Xenophon said.

Everyone knows if you introduce – say a $7k First Home Buyers Grant, prices rapidly increase by $7k and any benefit of the grant is quickly eroded (until the next grant is announced…). Allowing Australian first home buyers to access $25k from their Superannuation accounts to fund a leveraged purchase into our property bubble will only help thrust property prices up another $25k. So why would you suggest such a ludicrous idea, let alone announce he will submit a bill into a spring session of Federal Parliament?

Australia’s property bubble is now quite a bit larger than the one the United States experienced at the height of 2008. One of the reasons for this has been the multiple government incentives the government comes out with when the market exhibits signs of collapse (50% capital gains discounts, First Home Buyers’ Grants (FHOG), First Home Buyers’ Boosts (FHOB), allowing practically unrestricted foreign investment etc – and that is on top of negative gearing and other tax distortions.) For example, Treasury executive minutes stated the FHOB was “short-term stimulus [..] designed to encourage people who had already been saving for a home to bring forward their purchase and prevent the collapse of the housing market.” – You can’t get more honest than that!

One of the most recent changes, in September 2007, has been allowing Self Managed Super Funds (SMSFs) the ability to leverage up into our property bubble, throwing good retirement funds after bad into speculative markets seasoned with quite a bit of gearing.

From a politicians point of view, this legislation has been extremely successfully. There is currently no shortage of potentially naive property investors jumping head first into the market and keeping a floor under property prices. From the view of the regulator, there is significant cause for concern. A review by the Australian Securities and Investments Commission (ASIC) found only 1 percent (yes, one percent) of SMSFs were getting “good” advice about leveraged property investment. It’s no wonder when most of this information is spruiked during high pressure property seminars. For an increasing number of Super Fund’s investing in property, it has been an unmitigated disaster with some funds losing 75% in less than two years.

Superannuation savings is seen by politicians as a good source of funds to keep the bubble inflated and staving off collapse. But one has to question the long term effects? Not only could individuals lose a significant portion of wealth stored in homes and investment properties, they could also see reduced retirement savings.

Senator Nick Xenophon’s suggestion to improve housing affordability (or make it worse depending on where you stand) has been ridiculed by thousands of Australians over the past two weeks. But it is also drawing International attention – all the way from Canada. Garth Turner from The Greater Fool even suggests Nick needs a “better research assistant.” Turner goes on to write:

Now, Nick, we’re reaping the bitter harvest sown when that dumbass legislation passed. Allowing first-time buyers to remove tax-free money to buy a modest home they could not otherwise afford, then restore it to their long-term retirement savings makes perfect sense in theory. In practice and experience, just the opposite.

To date the HBP [Home Buyers’ Plan] has been used about 2.5 million times, with roughly $30 billion removed from savings and investments and plowed into real estate. When combined with dirt-cheap mortgage rates (I notice Aussie banks just slashed five-year rates to an all-time low) and voracious, carnivorous bankers, it’s helped push home prices into the clouds. The cost of an average detached house in two of our major cities now exceeds $1 million. (I see median home prices in Sydney rocketed 17% in the past year, to $812,000. So you know what I mean.)

In other words, if you think letting people steal money from their financial futures in order to buy houses today which they really can’t afford is going to make real estate more affordable, you’ve been spending too many evenings with the goat. The opposite is probable. In Canada, it’s fact.

So maybe Xenophon just made an honest mistake and didn’t do thorough homework before proposing this idea?

Aussie Politicians and their $300 Million Property Portfolio

Earlier this week, research surfaced on our politicians and their sizeable investment portfolios. In an article titled The Propertied Federal Political Class, the authors write:

The public should ask “Are the property holdings of our federal politicians negatively influencing policy and causing them to ignore evidence?”

It’s a very good question.

Their comprehensive research show 226 members in both houses of parliament with an ownership stake in a total of 563 properties – an average of 2.5 properties per member.

The news spread like a virus, with Fairfax later picking up the story, The many houses of Parliament: property-rich pollies ‘have vested interest’ in high prices

Oh and Xenophon I hear you ask? He owns just eight….

» Nick Xenophon Wants The Rules Changed So Young Home Buyers Can Use Retirement Savings – Business Insider, 28th July 2014.
» Nick Xenophon’s Idea To Let First Home Onwers Access Super To Buy A House Is Misguided Helpfulness – Business Insider, 29th July 2014.
» Nick Xenophon’s dangerous idea on housing – Herald Sun, 9th August 2014.
» No kidding – The Greater Fool (Garth Turner), 6th August 2014.
» The many houses of Parliament: property-rich pollies ‘have vested interest’ in high prices – The Sydney Morning Herald, 6th August 2014.
» Garth Turner hammers Nick Xenophon – Macrobusiness, 7th August 2014.
» Aussie politicians’ $300m property portfolio – Macrobusiness, 6th August 2014.
» Investors face big losses when the honeymoon is over – The Sydney Morning Herald, 18th July 2014.


Posted in Australian economy, Australian Housing | 29 Comments »

Interest rate rise due soon to quell Sydney property bubble

Written by admin on August 4, 2014 – 8:17 pm

Australia’s official cash rate has remained at record emergency lows for twelve months now, a setting not seen in over five decades. But signs are now emerging a hike in interest rates is imminent to quell the dangerous and unsustainable Sydney property bubble.

Former RBA board member Warwick McKibbin, now a member of the CAMA RBA Shadow Board designed to mimic the actual RBA board spoke to the ABC’s Peter Ryan.

McKibbin believes the RBA has cut the official interest rate too low and cheap money is creating a dangerous housing bubble in Sydney. “It is pretty clear that as interest rates rise back to what is considered normal, that there will be some adjustment in the housing market” remarked McKibbin.

Inflation is now at 3 per cent, the top of the RBA’s comfort zone. He believes the RBA will have to start increasing interest rates within the next 6 months, to more normal levels.

The Bank for International Settlements (BIS) warned in its 84th Annual Report that record low interest rates were likely to fuel a new global financial crisis, as low interest rates fuelled rampant asset price speculation.

» RBA shadow board warns of housing bubble risks – ABC AM, 4th August 2014.


Posted in Australian economy, Australian Housing | 28 Comments »

Financial System Inquiry: Housing has become a significant source of systemic risk

Written by admin on July 16, 2014 – 7:35 pm

The Financial System Inquiry’s Interim Report released yesterday confirms what we already know – Australia’s tax system is broken as it encourages risky leveraged and speculative investment that will one day come back to bite Australia hard and “compromise the speed of a subsequent recovery in economic activity”.

The report takes aim at negative gearing and the fifty percent capital gains discount that when combined has seen Australian households take on significant unsustainable leverage since 1999.

“Certain tax and regulatory settings distort households’ saving decisions towards housing, for both owner-occupiers and investors. Tax incentives also encourage investors to use more leverage than otherwise might be the case. Since the Wallis Inquiry, the increase in housing debt and banks’ more concentrated exposure to mortgages mean that housing has become a significant source of systemic risk”

The report indicates that increased finance to the unproductive housing sector may crowd out funding for other more productive sectors such as business at the detriment of the Australian economy.

It also goes some way to model and explain the possible consequences:

Housing is also a potential source of systemic risk for the financial system and the economy. Since the Wallis Inquiry, the increase in households’ mortgage indebtedness has been accompanied by banks allocating a greater proportion of their loan book to mortgages; the share of loans for housing has increased from 47 per cent in 1997 to its current share of 66 per cent. A large enough disruption to the housing market could have significant implications for household balance sheets, financial stability, economic growth, and the speed of recovery in household spending and broader economic activity following a shock.

As discussed in the Stability chapter, the FSI Secretariat conducted an analysis of a number of scenarios (Box 5.3). One of the scenarios considered the effect of a shock that resulted in a sharp and prolonged fall in house prices. In this scenario, household wealth would contract and there would be broader and, potentially, long-lasting effects on the economy and financial system. A sharp fall in house prices could push some households into negative equity and would amplify financial distress associated with any broader economic downturn. Deleveraging, combined with lower consumer confidence, would weigh on household consumption and broader economic growth. The extent of the damage to households’ balance sheets would determine, to a large degree, the speed of recovery of household consumption.

An extreme shock of this nature would also affect the quality of banks’ balance sheets and their capacity to extend new credit. This would include business lending, particularly for small businesses — which tend to use housing as collateral. Offshore wholesale funding would be likely to become more expensive and some banks might find it more difficult to raise funds, which would exacerbate pressures on the cost and availability of bank credit. Overall, the deterioration in bank balance sheets would compromise the speed of a subsequent recovery in economic activity.

» Financial System Inquiry Interim Report – Commonwealth of Australia, 15th July 2014.
» Call to ban borrowing by super funds – The Business (ABC), 15th July 2014.


Posted in Australian economy, Australian Housing | 53 Comments »

Reserve Bank : Probably cheaper to rent

Written by admin on July 14, 2014 – 10:07 pm

It’s the age old question that’s bound to attract heated debate from those with vested interests. Is it cheaper to rent or buy?

The bulk of comparisons have, to date, been flawed – deliberately – to swing the outcome in the way the author so chooses. A cursory glance normally detects gaping omissions.

Today, Australia’s independent central bank has released a research discussion paper titled “Is Housing Overvalued?”

The paper is written by Ryan Fox from the bank’s Financial Stability Department and Peter Tulip from the bank’s Economic Research Department. Full housing disclosure was given – Tulip brought a house during the preparation of the paper, while Fox continues to rent.

The comprehensive analysis examines the costs associated with home ownership such as council rates, repair/maintenance and expenditure, but excludes expenses paid by investors such as property agent fees and land tax. Significant one off fees are incurred when one buys and sells their home – stamp duty, conveyancing costs etc. The report estimates these can add as much as 7.25 per cent to the cost of ownership and it determines the median length of tenure is 10 years. These costs are amortised over the 10 year period.

The interest rate used in the calculations is the fixed 10-year mortgage rate and it assumes the opportunity cost of the owner’s equity is close to the mortgage rate.

It also discusses more subjective factors such as risk of capital loss, flexibility of moving, security of tenure, freedom to renovate etc and indicates “although these considerations are important at an individual level, at an aggregate level they seem to cancel out.”

While the paper indicates there is no signs of a bubble in Australia, it does come to the conclusion that it will probably be cheaper to rent than own. The uncertainly surrounds the future growth of Australia’s house prices. If real prices continue to grow by 2.4 per cent a year, the average rate of increase since 1955, then renting will be approximately the same price than buying. However, if real prices appreciate slower than the 2.4 per cent historical average, then renting will be cheaper than buying.

The report doesn’t provide much analysis on the future direction of house prices, but it does report on predictions from some forecasters that growth will moderate. The paper notes real price appreciation in the past ten years since 2004 is 1.7 per cent.

Above is real house prices in Australia (and the USA) dating back 134 years from 1880. You can see a upward trend since 1955 before house prices rapidly accelerated into bubble territory around the turn of the century.

Nobel prize winning economist, Robert Shiller is responsible for the U.S.A. real house price dataset. He found, historically, house prices do not increase much more than inflation, i.e real house price growth is close to zero. In 1880, Shiller’s index was 100. Just prior to the United States sub-prime bubble, the index was barely over 100 and after the bubble burst, the market made a trajectory back to mean. The concept is simple – if house prices rise more than inflation, each generation will find it harder and harder to purchase a home until a point where everyone is priced out of the market. While it is evident the current generation has been priced out by something the reserve bank refuses to call a bubble, historic growth of 2.4 per cent is not long term. Your parents paid roughly the same for housing than your grandparents and great grandparents.

If 120 years of history is not conclusive enough, Dutch economist, Piet Eichholtz created a Herengracht Real Location Value Index for homes on Amsterdam’s Herengracht Canal dating back 350 years. It also has the same outcomes. Prices do not rise much faster than inflation (if at all) and while the Herengracht Canal has seen many bubbles in the past 350 years, they have all corrected back to norm.

Expecting long term sustainable real growth of even 1.7 per cent might be a bit optimistic. Subjective factors such as risk aversion to capital loss (and being able to sleep at night) could be undervalued.

» Is Housing Overvalued? – Ryan Fox and Peter Tulip; Reserve Bank of Australia, 14th July 2014.
» The RBA says you’re probably better off renting – The Sydney Morning Herald, 14th June 2014.
» Reserve Bank paper states 2.9 per cent is the magic number for deciding whether to buy or rent – News Limited, 14th July 2014.
» Dutch history pointing to real estate fall – The ABC, 28th January 2008.


Posted in Australian economy, Australian Housing | 16 Comments »

Australian real estate center in Chinese money laundering racket

Written by admin on July 10, 2014 – 9:06 pm

A crackdown of money laundering in China is expected after the predominant state owned CCTV (China Central Television) aired undercover footage showing the Bank of China offers these services for a fee during a 20 minute bulletin.

A Business Spectator article republished in The Australian reports:

“We don’t care where your money is from or how you earn it, we can help you get it out of the country,” a Bank of China employee told CCTV. “We don’t care how black your money is or how dirty it is, we will find ways to launder it and shift it overseas for you,” according to a detailed CCTV investigative report.

China allows a maximum of $US50,000 to be sent off shore per year – simply not enough to snap up a bargain in Australia’s residential property bubble. Therefore investors need to go to a branch of the Bank of China who will help these citizens launder their money out of China. The scheme is marketed as ‘You Huitong’ translated as You Uncapped. According to the story, Bank of China staff colludes with Chinese immigration staff to disguise the origin of the funds.

According to the Business Spectator:

A senior manager with one of the big four Australian banks told the CCTV reporters that the Bank of China was crucial to the bank’s migration business.

“The money is very safe and will leave the country in a very grey channel. The Bank of China is the same as an underground bank [a Chinese term for black market operators that launder money],” he told CCTV.

He said the Bank of China has a huge business network abroad and only the Bank of China could carry out operations on such a large scale.

According to the CCTV bulletin, one sub-branch of the Bank of China in Guangdong – alone – has sent $970 million USD abroad this year.

But some Chinese do it alone, without the help of the Bank of China. The Sydney Morning Herald reports today that Brisbane Customs have intercepted two Chinese women arriving from mainland China with a suitcase full of $155,000 in US and Chinese currency.

A NAB survey released today shows the share of foreign buyers purchasing established Australian property fell to 10.2 per cent in the June quarter down from 13.9 per cent in the March quarter and the weakest in two years. Any imminent crack down by the Chinese government could have significant effects to foreign demand for Australian property in the months coming.

» CCTV Accuses BOC of Money Laundering – CRIEnglish, 9th July 2014.
» Australia’s SIV scheme a target for money laundering – The Australian, 9th July 2014.
» Chinese ‘washing cash’ in Australia – The Australian, 10th July 2014.
» Bank of China denies money laundering allegations – The Australian, 10th July 2014.
» Brisbane customs officials uncover $155k in luggage – The Sydney Morning Herald, 10th July 2014.
» Foreign demand for property easing, NAB survey shows – The Australian, 10th July 2014.


Posted in Australian economy, Australian Housing | 20 Comments »

Negative gearing – Failed policy that will cost everyone dearly

Written by admin on July 9, 2014 – 8:40 pm

The negative gearing debate is back in the media.

On Monday, the ABC’s Michael Janda warned everyone will lose in the long run when our investor lead property bubble bursts. (‘Few positives to be found in negative gearing‘)

Today, The Business Spectator’s Callam Pickering is singing the same tunes (‘Why negative gearing is Australia’s biggest policy failure‘) saying “Unfortunately the government, through inaction, is supporting speculation and rising indebtedness, and in the process has left households increasingly vulnerable to economic shocks.

A recent International Monetary Fund (IMF) report shows the three countries with such favourable negative gearing schemes, Australia, Canada and New Zealand were ranked in the four top most overvalued property markets it surveyed, leaving these countries extremely vulnerable to significant financial crises when their property bubbles burst. So concerned of a bigger property lead crash than the GFC, the IMF has set up a website to monitor housing bubble activity – Global Housing Watch.

Losing money hand over fist with negative gearing in the pursuit of speculative capital gains is regularly spruiked to naive property investors through free property seminars. According to the ABC, the consumer affairs departments of the Western Australia, New South Wales and Victoria state governments have launched a crackdown property spruikers writing to them and “warning them they must abide by Australian Consumer Law or could be hit with penalties of up to $1.1 million.” The fear is vulnerable investors, many of whom lost a small fortune in the GFC are being lured into the “risk free” but unprecedented property bubble.

» Property spruikers put on notice by states The ABC, – 8th July 2014.
» Few positives to be found in negative gearing – The Drum, ABC, 7th July 2014.
» Why negative gearing is Australia’s biggest policy failure – The Business Spectator, 9th July 2014.


Posted in Australian economy, Australian Housing | 9 Comments »

BIS: The debt trap – Interest rates are too low

Written by admin on June 30, 2014 – 9:22 pm

The Bank for International Settlements (BIS) has warned record low interest rates could fuel a new global financial crisis, one much more severe and prolonged than experienced in 2008.

In the bank’s 84th Annual report, released on Saturday, it raises the phenomenon it calls the debt trap. When debt bubbles started bursting in 2008, central banks were supposedly forced to dramatically reduce interest rates to stimulate and cushion the economy. These low interest rates are now fuelling significantly larger asset bubbles that will also eventually burst. Global private debt outside of the banking sector is now 30 per cent larger than prior to the GFC.

“More generally, countries could at some point find themselves in a debt trap: seeking to stimulate the economy through low interest rates encourages even more debt, ultimately adding to the problem it is meant to solve,” the BIS report said.

Ironically, it was low interest rates after the bursting of the Tech Bubble in 2000 that ultimately lead to the GFC in the first place.

This phenomenon is clearly evident in Australia with our 50 year low interest rates causing property speculators to leverage up into the property bubble like never before. Data released today by the Reserve Bank of Australia show loans for housing hitting a record high of 60.6 percent in May, at the detriment of more productive lending to business now representing only 33.2 percent – an all time low.

» Bank for International Settlements warns low interest rate policies may generate next global financial crisis – ABC, 29th June 2014.

» 84th Annual Report – 1 April 2013–31 March 2014 – Bank of International Settlement, 29 June 2014.


Posted in Australian economy, Australian Housing | 43 Comments »

Australian housing overheating and could eventually face a correction: Moody’s

Written by admin on June 29, 2014 – 8:43 pm

On Thursday night, Moody‘s Investors Service warned Australia’s real estate market may be overheating and it “appears to be increasingly likely to get caught up in a positive price-feedback loop and eventually could face a correction.”

Echoing warnings from the International Monetary Fund (IMF) last week, Moody’s indicate “both price-to-income and price-to-rent ratios [are] reaching levels well above historical averages. Housing prices continued to rise in Q1 2014 as average year-over-year growth in the eight largest cities inched up to 8.3%, marking the highest growth rate in nearly four years.”

Moody’s indicated our 50 year low interest rates were “playing a dominant role in fuelling the housing market”, but also warned on the role of foreign investors pushing up prices.

The third public hearing into foreign investment in residential real estate was held last week.

Consistent with the Moody’s report, Reserve Bank assistant governor Christopher Kent, told the inquiry its low interest rate setting was more responsible for driving housing prices than foreign investors.

The Australian Bureau of Statistics told the inquiry, data on foreign investment is “patchy”. It regularly scanned trade magazines and newspapers to try to ascertain the level of foreign investment.

“We do scan press reports and real estate specialist magazines to try to identify purchases of real estate, and [to] record those and record valuation changes from those. But I have to say, that’s a bit hit and miss,” assistant statistician Paul Mahoney said.

Foreign Investment Review Board (FIRB) statistics for the three quarters to March show approvals surged 93 per cent representing some 13 per cent of Australian real estate turnover. While it was noted the 93 per cent surge represents approvals and not all approvals are likely to lead to a sale, it also noted many foreigners were flouting the rules and this is likely to cancel each other out. On Friday, the inquiry heard from property industry experts suggesting the latest FIRB are in fact representative of the current market.

Committee chair Kelly O’Dwyer said she believes the rules are being bent, but is unclear how significant the issue is given the lack of data, “I am not prepared to put a figure on it.”

“Suffice to say, it is a very real concern. Evidence has been presented to the committee that would give us cause for that concern.”

One concern is the lack of compliance and enforcement. Some foreign investors considered the $85,000 fines for buying existing dwellings, not new ones, as the cost of doing business in Australia.

It is believed the committee is considering a special tax or stamp duty for foreign buyers to help prevent the Australian property market from further overheating that could lead to even more severe economic stability risks.

Canada faced the same issues Australia now faces. Citizenship and Immigration Canada (CIC) said its foreign investment scheme was “abused” and contributed little to the Canadian economy. It suspended its Immigrant Investor Program (IIP) in July 2012 while undertaking an inquiry into the scheme. In February 2014, it axed the program effective immediately. This action is though to be leading to more demand for Australian real estate.

» Moody’s Warns on Australia House Prices – The Wall Street Journal, 26th June 2014.
» Moody’s sounds alarm bell on housing prices – The Australian Financial Review, 27th June 2014.
» Moody’s warns on Aust house prices – Business Spectator, 27th June 2014.
» Is the bubble about to burst? Australian property market ‘in danger of overheating’ – The Daily Mail, 27th June 2014.
» ABS has ‘patchy’ figures on foreign investment in homes – The Sydney Morning Herald, 26th June 2014.
» Cashed-up foreign real estate investors view $85k fines as cost of doing business, parliamentary committee told – The ABC, 27th June 2014.
» Special taxes considered by parliamentary inquiry into foreign real estate investors – The ABC, 28th June 2014.


Posted in Australian economy, Australian Housing | 24 Comments »

Beijing housing sales falls 35% – Iron Ore falls through $90

Written by admin on June 17, 2014 – 9:39 pm

Data released today from Beijing’s municipal bureau of statistics show housing sales in Beijing has plunged 39.4 percent year on year to May, a further sign China’s property market is cooling. Sales of commercial buildings, which include residential and commercial property, slumped 33.6 per cent over the same period.

Today, the Australian Financial Review reported 23.3 per cent of China government-subsidised housing is vacant. The paper reports on data from Professor Gan, the lead researcher on the China Household Financial Survey suggesting there is about 50 million homes vacant in China – a vacancy rate of 22.4 per cent. This is double what the United States had during the sub-prime crisis.

According to a survey conducted by Soufun published last week, total land sales across China fell 45% year on year to May and 19 percent for the month. It reported some cities recorded no land sales at all.

As a result, Iron Ore – a raw material in steel used to build China’s homes and commercial buildings – and Australia’s largest export has been hammered this year. China’s residential property sector absorbs 24 per cent of worldwide steel consumption. The Iron Ore price fell 2.1 per cent last night, plunging through the $90 US metric tonne. Bloomberg reports Iron Ore reserves at China’s ports are up 31 per cent year.

» Beijing housing sales slump 35% – The China Daily, 17th June 2014.
» China’s real-estate market sees land sales plunge – Market Watch, 9th June 2014.
» One-fifth of all China’s subsidised homes are empty – The Australian Financial Review, 17th June 2014.


Posted in Australian economy, China | 44 Comments »

Global House Price Bubble Flares Up Again

Written by admin on June 16, 2014 – 8:19 pm

The International Monetary Fund (IMF) has warned another devastating global housing crash, reminiscent of 2008, is on the cards if governments around the world fail to take decisive action. Global house prices are now at a level that could pose significant systemic risk to economies around the world.

In a bid to share “cross-country information, analysis on housing markets, and discussions on the effectiveness of policy response”, the fund has created a new website – Global Housing Watch.

According to the IMF, Australia had the third most expensive housing on a house price to income metric, and the fifth most expensive on a house price to rent ratio in the 4th quarter of 2013, noting they are “well above the historical averages.”

While over 20 advanced and emerging economies have taken action through macro-prudential polices, Australia continues to do nothing and this “benign neglect” has put Australia firmly in the sights of the IMF.

The Fairfax’s Clancy Yeates wrote last Thursday under the headlines, “House prices among world’s most expensive”:

Australian homes are among the most expensive in the world when household incomes and rents are taken into account, International Monetary Fund figures show.

As part of a move to push governments to act against housing bubbles, the fund unveiled comparative data on Thursday morning intended to underline the high cost of homes.

It shows rising prices have pushed two key measures of home values – the ratios of house prices to incomes and prices to rents – well above their long-term averages.

On Friday, British Chancellor of the Exchequer, George Osborne announced he will give the Bank of England the power to limit house prices to help limit financial instability.

It is common understanding the frothy housing bubbles that burst in 2007-09 were created by interest rates being set too low after the tech bubble. Cheap credit fuelled the housing bubbles.

But that was over 10 years ago, now only a distant memory. Lending Finance data released by the ABS on Friday show investor credit demand in markets such as NSW is out of control, once again fuelled by 60 year low interest rates.

Warwick McKibben, a former RBA board member told the Australian Financial Review last week he believes the RBA has cut too far, creating unsustainable booms in both housing and stocks.

Of course, macro-prudential controls, if used early, could have allowed the central bank to lower interest rates thus cushioning jobs, while preventing a destructive housing bubble from forming.

World economic system is ‘madness’ and close to collapse: Pope Francis

Pope Francis has made a scathing attack on the World’s economic system, calling it “madness”. He commented that some countries had a youth unemployment rate exceeding 50 per cent, and warning the global economic system is close to collapse because of a “throwaway culture” of greed.

“Our world cannot take it any more. Our global economic system can’t take any more. We discard a whole generation to maintain an economic system that no longer endures.”

“I think we are in a global economic system that is not good.”

Generation Jobless

With our country drowning under high household debt levels, a new crisis is looming – a entire generation of long term unemployed.

On Thursday, the ABS released labour force figures showing the jobless rate for youth aged 15-24 is now 13.1 per cent and the portion of young Australians with a job is now at lows not seen for two decades.

Piers Akerman of the Sunday Telegraph writes today under the headlines Increasing youth unemployment a threat to the ongoing stability of the nation, “FORGET Generation X, Y and Z; the real threat to the ongoing stability of the nation is Generation M — M for Missing.”

Akerman reports on quotes from Australian Chamber of Commerce and Industry (ACCI) CEO Kate Carnell saying a lost generation is being created. “There’s a clear disengagement and if they’re disengaged at 25, they’ll be disengaged at 45 and they’ll become long-term unemployed,” she said.

This comes at a time when the Abbott government has cut unemployment benefits for Australians under 30 in the recent Federal Budget. Once passed though parliament, anyone under 30 who loses their job will have to wait 6 months for unemployment benefits.

But as Dan Harrison of the Sydney Morning Herald reports, unemployed youth must apply for 40 jobs a month in the 6 months before obtaining benefits and be expected to pay their own way for transport, phone calls, internet and other expenses while they undergo a search for a new job. And don’t even consider Australia’s expensive housing – They will probably have to move back in with Mum & Dad.

Opposition Leader Bill Shorten said the changes would create a “forgotten generation of Australians – shut out of the workforce.”

This can’t be good for the sustainability of the Housing Ponzi Scheme, can it?

» Era of Benign Neglect of House Price Booms is Over – The IMF, 11th June 2014.
» It’s official: Australia’s property prices are out of whack – The Drum, ABC – 12th June 2014.
» Home prices outpacing earnings: IMF – The Sydney Morning Herald, June 12th 2014.
» RBA cuts went too far: McKibbin – The Australian, 13th June 2014.
» Reserve Bank of New Zealand lifts interest rates again – The ABC, 12th June 2014.
» Bank of England given new powers to bust housing bubbles – The Sydney Morning Herald, 13th June 2014.
» World economic system is ‘madness’, puts money ahead of people, Pope Francis says – The ABC, 14th June 2014.
» Increasing youth unemployment a threat to the ongoing stability of the nation, writes Piers Akerman – The Sunday Telegraph, June 15th, 2014
» Unemployed youth must apply for 40 jobs a month – The Sydney Morning Herald, 12th June 2014.


Posted in Australian economy, Australian Housing | 20 Comments »

Bubble Economics: Australian Land Speculation 1830 – 2013

Written by admin on June 15, 2014 – 2:51 pm

Paul D. Egan and Philip Soos has just had their new book published – Bubble Economics: Australian Land Speculation 1830 – 2013. It is available for download from the World Economics Association.

Egan and Soos looks back over Australia’s three Depressions showing how land bubbles attributed predominately to their creation and subsequent demise. They then explore Australia’s current unprecedented land bubble.

No doubt this book will be of infinite interest to many who frequent here.

» Bubble Economics: Australian Land Speculation 1830 – 2013 (6.4MB) – World Economics Association.


Posted in Australian economy, Australian Housing | 18 Comments »

Falling wages to upset household debt dynamics

Written by admin on May 30, 2014 – 10:56 pm

Last night at a gala dinner held at The Rocks in Sydney, Nobel prize winning economist Sir James Mirrlees voiced his professional opinion that Australia’s high wages cannot be sustained and must move closer to countries such as China, otherwise unemployment will continue to steadily grow as capital leaves the country.

“If you try to hold it back, if you try to keep the wages high then that is going to be mean growing unemployment,” he said at the event hosted by The Macquarie Graduate School of Management.

Sir James Mirrlees speech follows last Wednesday’s release of wage price data from the Australian Bureau of Statistics showing wages are growing at the slowest pace since the index started seventeen years ago in 1997. Wages grew at an annual rate of 2.6 percent, a rate slower than inflation.

Australia’s high cost economy is having dire consequences for the manufacturing sector most represented by the closure of the 90 year old Automotive Industry. On any particular day, there is a report of another business closure. Today, bus manufacturer Custom Coaches was placed in Administration threatening 100 jobs with the closure of its Adelaide and Sydney operations.

Earlier this month, The Boston Consulting Group released its Global Manufacturing Cost-Competitiveness Index tracking production costs of the World’s 25 largest goods-exporting nations. The index, which measures four critical aspects of manufacturing competitiveness – wages, productivity growth, energy costs, and currency exchange rates ranked Australia at bottom place of the top 25 countries. The findings are consistent with OECD data released last year showing Australia’s relative unit labour costs have surged 54.1 per cent since 2000, while for comparison, unit labour costs fell in Germany, UK, US and Japan by 14.6, 20.4, 25.9 and 46.2 per cent respectively. Some of this is attributable to our stubbornly high Australian dollar and our bad bout of Dutch disease.

But it is not only manufacturing jobs being hit. Multinationals are being forced to close up and move back office administration and finance off shore as high wages and commercial rents take their toll on business sustainability. Miners are turning to automation such as driver-less trucks, either autonomous or remote control, to rid cost as commodity prices slump.

Either way, falling wages or the lost of jobs is likely to result in falling living standards and could have a material effect on Australia’s housing bubble and household debt levels.

Last November, Treasury’s chief economist David Gruen told a conference, “Our estimates say that if we achieve productivity growth similar to its long run average, the next decade will see the slowest income growth in Australia for half a century by a lot.”

Many procrastinating first home buyers are accepting the advice of seasoned veterans that debt levels were also overwhelming when they brought 20 or 30 years ago, but if you get in early, the effects of wage inflation will soon make it insignificant. Household debt levels as a percentage of household disposable income aside, one has to question if we are about to enter a dangerous new world of wage deflation, and low inflation. These seasoned veterans might have fond memories when high inflation and wage growth eroded their – relative to today – minuscule debts away, but will it continue to play out for our first time buyers today? Worst still, what happens if the bubble bursts?

The other risk of low wage growth is what happens when emergency low interest rates start to rise? Of the first timers left, they are scrambling to get a foot in the door with boarder line serviceability, a 25 to 30 year mortgage, and at 60 year low interest rates with the hope they will have increased earning capacity when rates start to go up. The only positive, with Australia’s crippling household debt, low consumer confidence and poor consumption, it is hard to see rates rising in the foreseeable future. If anything, the official cash rate should resume its descent soon.

» Australian Wages are too high, say Nobel prize winning economist Macquarie Graduate School of Management, 29th May 2014.
» Nobel winner warns Australian wages will fall or jobless rate will rise – The ABC, 30th May 2014.
» Australian wages to fall, says Nobel laureate – The Sydney Morning Herald, 30th May 2014.
» Real wages growth worst in 17 years – The Sydney Morning Herald, 30th May 2014.
» Australian manufacturing priced out – Macrobusiness, 5th May 2014.
» Real wages start to fall – Who crashed the economy?, 19th February 2014.


Posted in Australian economy, Australian Housing | 66 Comments »

The resurgence of the for lease sign

Written by admin on May 24, 2014 – 11:00 pm

According to figures released by SQM Research, Australia’s national rental vacancy rate has increased by 0.3 percent in April and now sits at a record high of 2.3 percent, the highest since the index commenced in 2005.

The high vacancy rate is putting downward pressure on asking rents as Landlords fight to find and retain tenants. It has also caused the resurgence of the for lease sign, something unnecessary when the market was tight.

Roy Morgan research reports the number of investor loans since 2010 has grown by 34 per cent, rapidly outpacing the 4 per cent increase in owner occupier loans over the same period. Many Baby Boomers lost significant portions of their super during the GFC, and has turned to the perceived safety of Australia’s bricks and mortar to park what is left.

The Reserve Bank has warned first home buyers not to try to compete with investors, suggesting the market is “cyclical” and has urged patience.

Dr Luci Ellis, head of the RBA’s financial stability department last week told the CITI Residential Housing Conference in Sydney, that house prices over the past 15 years has accelerated faster than incomes and that transition is “now over.”

It’s fair to say that serviceability calculations are binding for first home buyers and less binding for trade-up buyers and investors. So it’s no surprise that as interest rates have fallen, it’s the trade-up buyers and investors whose demand has increased. Meanwhile first home buyers will feel squeezed out. This is probably more a cyclical phenomenon than a structural one. It is still probably quite disheartening for potential first home buyers. As such, it would not be a good outcome if they responded by overstretching themselves to try to get into the market during upswings. As well as being against first home buyers’ own long-run interests, that would increase risk in the financial system. As experience overseas has shown, you do nobody a favour by trying to solve an affordability issue by making it easier for people to borrow more than they can reasonably service.

RP data’s senior research analyst Cameron Kusher told the ABC, rental yields have fallen from a national average of 4.3 per cent in April last year to just 3.9 per cent in April 2014, saying “We wouldn’t see many instances in which you could find areas where the rental return would cover the cost of the borrowing,”

Kusher remarks, “The investor activity is still rising and at the highest levels we’ve seen in quite a number of years, so my thinking is that investors aren’t really focusing too much on those rental returns, they’re more looking at the capital growth potential,”

“They probably do need to consider the rental return because that capital growth is not going to be there forever.”

It’s a view shared by the RBA’s Dr Ellis. In her speech, Dr Ellis said “Housing prices are therefore going to be cycling around a slower trend than they did in the past. There will be more periods where prices are falling a little in absolute terms.”

The days property is seen as good investment could be numbered.

» Vacancy Rates Record Sharp Rise, Asking Rents Subdued – SQM Research, 19th May 2014.
» Growth rate in investment property loans outstrips growth in owner-occupied loans – Roy Morgan, 19th May 2014.
» Reserve Bank official urges first home buyer patience – The ABC, 15th May 2014.
» Space and Stability: Some Reflections on the Housing–Finance System – Reserve Bank of Australia, 15th May 2014.
Rents fall well behind home price surge – Yahoo 7 Finance, 23rd Mary 2014.


Posted in Australian economy, Australian Housing | 29 Comments »

Consumer confidence crashes

Written by admin on May 20, 2014 – 9:49 pm

Consumer confidence has crashed in Australia – just one week since the release of the Federal Budget.

According to the ANZ-Roy Morgan survey out today, consumer confidence plunged 3.2 per cent last week pulling down the monthly index by 14 per cent, as word started leaking onto the street of the fiscal policies due to feature in Hockey’s first horror budget. It is now the steepest decline in Australian consumer confidence since October 2008, the month after the collapse of Lehman Brothers.

It would be nice to think confidence is falling due to genuine awareness of the deterioration of our economy and knowledge of the factors driving it (China/mining, Dutch disease/high Aussie, high labour costs, household debt etc), but from the rhetoric reported in the main stream media over the past week, this is clearly not the case.

After years of being told Australia is a miracle economy – the envy of the world (‘Ten reasons Australia is the envy of the world – News Limited’), Australian constituents still expect unsustainable spending and big promises at a time when Commonwealth income is under a little bit of pressure. 22 years of continued economic expansion creates some heavy complacency. The weekend was meet with austerity style street protests as the axe fell on health and education spending.

It was clear Australians were starting to exhibit the effects of cognitive dissonance in the lead up to the election. Anxiety of significant budget cuts were cast aside by fierce debate on Australian government debt levels ranking some of the lowest in the world and why any cuts to spending were actually required. Few understood the connection between deficit and debt, and why you would need to balance the budget when you can spend yourself to prosperity.

The rhetoric drowned out warnings from the International Monetary Fund (IMF) a month out from the budget that, of the world’s 29 most advanced economies the IMF monitors, Australia’s budget position had deteriorated the most over the preceding 6 months. Also absence from the main stream media until this week was the fall in iron ore prices – Australia’s largest export – down approximately 21 per cent in the four leading weeks to the budget.

When colleagues asked my thoughts on the budget Thursday last week, (Wednesday they were still in despair) I started talking about the recent fall in the iron ore price. Just as I started to question what iron ore price the budget was modelled on and if our position had already deteriorated further, I was interrupted with the statement, “but I want to know how the budget will effect me?”

So it was an immense relief to find my sanity today when News Limited’s Terry McCrann wrote under the headlines, “Worry about the iron ore price, not the Budget”.

Terry McCrann writes:

JOE Hockey’s Budget has unleashed an unprecedented wave of fear and loathing.

But if you really want something to worry about, worry about the iron ore price.

Surely, you might respond, that’s Gina and Twiggy’s problem in particular, or the big end of town more generally. If they lose a billion or two, your attitude might lie somewhere between “what’s it to me, anyway?” and “they’ve got it coming to them”.

If so, think again. In the most direct way, Gina and Twiggy’s — billionaires Gina Rinehart and Andrew “Twiggy” Forrest’s — losses would very much also be your losses.

More specifically, what’s happening to the iron ore price could rip a huge hole in Hockey’s Budget, potentially far bigger and more immediately than the Senate and Opposition Leader Bill Shorten could do. But also, last into the so-called “out years”.

He even mentions our housing bubble:

More broadly, both the Budget and the economy are built entirely on the twin pillars of super iron ore profits and super bank profits, with the latter built almost entirely on the reborn strength in the property market.

A slump in iron ore profits would be bad enough — for the Budget and the economy; it really does not bear thinking about if property were also to hit the wall and bank profitability went into reverse.

So what is driving our reversal in iron ore fortunes? Frequent readers here will know it’s cracks in China’s stressed housing bubble.

China’s residential property sector absorbs 24 per cent of worldwide steel consumption. China’s National Bureau of Statistics reports new property construction has fallen 25.2 per cent in the first quarter this year.

But it is not the first time we have been witness to this. Overnight the Iron Ore price fell 2.2 per cent through the psychological $100 USD tonne to end up at $98.50. The last time this happened, on the 24th August 2012, I posted that day, (‘Has the mining investment boom come to an end?‘) reporting on the decision by BHP to delay the Olympic Dam expansion and China’s Fixed Asset Investment Binge. At the time, China’s housing bubble tried to burst sending Iron Ore prices plunging to sub $90 USD tonne in the weeks later before the Chinese government was forced to provide stimulus and prop the bubble back up.

Perhaps this is the reason few has been interested in the Iron Ore fall this time. Endless bailouts has built a thick layer of complacency.

But what happens if it is different this time?

China is now under the new leadership of Premier Li Keqiang, after assuming office on the 15th March 2013. While he served as first Vice-Premier under then Premier Wen Jiabao from 2008 to 2013, he brings refreshing views on economic sustainability and regularly voices objection to using short-term stimulus policies to boost economic growth.

Earlier this year we witnessed the first onshore bond defaults under new Chinese leadership (‘China: Did the first Domino just fall in GFC2?’). The expectation was for a bailout, but to everyone’s surprise no one stepped up to the plate. Many described the collapse of Shanghai Chaori Solar Energy Science and Technology Co. as a “Watershed” or “Bear Stearns” moment.

Not long after Premier Li Keqiang warned “We (china) are going to confront serious challenges this year and some challenges may be even more complex.” (‘Premier Li Keqiang: China to confront serious challenges this year’) Li said China must prepare for a wave of bankruptcies, which at the time many interpreted it to signal the end of an era when the People’s Bank of China was only a stone throw away and ready with a bailout.

In an article published in Qiushi magazine, Premier Li remarked, “Last year we avoided an economic hard landing and maintained stable economic growth. This achievement was largely because of reforms…If we had used short-term stimulus measures last year, they would have brought future pain.” In a speech in April, Li said “We will not use short-term strong stimulus policies because of temporary economic growth volatility.”

Time will tell if or at what point China will step in to soften the blow of one of the world’s great property bubbles.

And speaking of ours – the 2nd pillar of the Australian economy according to Terry McCrann – we all know it runs solely on consumer confidence as any real fundamentals left the market over a decade ago…

» ANZ-Roy Morgan Consumer Confidence: The Budget Blues – Confidence Weakens Further – Roy Morgan Research, 20th May 2014.
» China property slowdown to hurt Australia – The Sydney Morning Herald, 14th May 2014.
» Government won’t resort to short-term stimulus, Li says – The China Daily, 11th April 2014.
» China’s Property Bubble Has Already Popped, Report Says – The Wall Street Journal, 5th May 2014.
» China Housing Market Bubble Start to Pop as Economy Faces Hard-Landing – International Business Times, 14th April 2014.
» Chinese developers bring in security as buyers experience negative equity – Who Crashed the Economy, 5th April 2014.
» How China Fooled the World – Airing in Australia on the ABC – Who Crashed the Economy, 31st March 2014.
» Premier Li Keqiang: China to confront serious challenges this year – Who Crashed the Economy, 16th March 2014.
» GFC2 – Will it be made in China? – Who Crashed the Economy, 30th June 2013.


Posted in Australian economy, Australian Housing, China | 19 Comments »

The real debt crisis

Written by admin on May 6, 2014 – 7:25 pm

As Australians argue about the level of government debt and if we need a debt tax ahead of next Tuesday’s Federal Budget, the Australian Bureau of Statistics (ABS) has today released data showing where Australia’s real debt crisis is.

According to the ABS, Australian household debt at the end of 2013 now stands at $1.84 trillion dollars, or almost 180% of household disposable income. While the growth in household debt is slowing, it is still at the highest level than any time in the past 25 years.

With heated debate on Australian government debt at around 30 percent of GDP, Australian household debt now sits at 120 percent of GDP.

Earlier this year, Australia toppled Canada, snatching the accolade for having the largest housing bubble in the English speaking world.

» 4102.0 – Australian Social Trends, 2014 Trends in household debt – The Australian Bureau of Statistics, 6th May 2014.


Posted in Australian economy, Australian Housing | 47 Comments »

Market ready to pop?

Written by admin on April 24, 2014 – 6:05 pm

News Limited is today warning first home buyers to hold off buying now, spreading rumours the Australian property bubble is about to pop.

How irresponsible!

Maybe they hope to increase the number of listings in their newspapers and part owned RealEstate.com.au.

» Australian property prices ready to pop? – News Limited, 23rd April 2014.


Posted in Australian Housing | 32 Comments »

Property rorts targeted as budget rapidly deteriorates – but no budget emergency just yet!

Written by admin on April 13, 2014 – 8:55 pm

The International Monetary Fund (IMF) this week warned Australia’s budget position over the past 6 months is deteriorating at the fastest pace of any of the world’s 29 most advanced economies.

“Australia will need massive budget savings of about $90 billion if it is to stabilise its government debt by 2030, International Monetary Fund estimates show,” writes David Uren of The Australian.

Treasurer Joe Hockey this week told a Washington audience, “But I think there is a good understanding in Australia that the current settings we have in place are unsustainable. Australians know that,” (Let’s hope Australian’s do in fact have a good understanding….)

“Achieving long-run fiscal sustainability will require winding back some spending that our population have come to take for granted,” the Treasurer said. “This will require every sector of the community, including households, corporates and the public sector to make a contribution.”

Everything is now in the firing line including increasing the pension age to 70, breaking election promises by slashing ABC funding and yes, closing down many of the lucrative property rorts costing taxpayers billions and billions of dollars.

Latest NRAS (National Rental Affordability Scheme) Frozen pending Budget

First in the firing line is believed to be NRAS, the National Rental Affordability Scheme. The $4.5 billion dollar program was established with the aim to provide affordable rental accommodation to many of Australia’s neediest after negative gearing not only failed, but rather exacerbated the very issue it was suppose to address.

NRAS has been widely rorted by prestige universities and student accommodation providers, using taxpayer subsides to build student accommodation for wealthy foreign students. In the latest round, Sydney University had applied for $10,000 subsidies on each of 1,200 units to be built on campus. The university had claimed it was justified, suggesting the units would free up rentals elsewhere that could instead be occupied by struggling Australians.

Sydney University was not the only University in on the act. Monash, Australian National University (ANU) and the University of Canberra all claimed taxpayer subsidies under NRAS. According to the Australian, it is thought two of Monash’s NRAS blocks are over 70% occupied by foreign students.

The Australian also reports on numerous student accommodation providers with their fingers in the pie – Top end of town rorted NRAS scheme (15th March).

Over the weekend, The Australian reports that according to senior government sources, the current round of NRAS applications have been frozen ahead of significant revamps in next months budget designed to save taxpayers “substantial” savings.

This can only come as good news. Let’s hope any revamp is well designed and thought out. (Can’t say I have high hopes – the track record is not good!)

Negative Gearing

Negative gearing has always been considered a sacred cow, but with the budget deteriorating rapidly by the day, it is though nothing is sacred any-more.

There are now credible sources indicating Treasury and the Parliamentary Budget Office in recent months has been working on plans to grandfather negative gearing in next month’s budget. The plan is to abolish negative gearing for new investors of existing dwellings, while current investors will be allowed to continue to negatively gear. This is designed to prevent a mass exodus of investors at a time when the property bubble is precariously balanced, while taking some of the recent heat out of the market.

While it is unclear if Australia actually has a housing shortage, the plan will also allow investors in new housing stock the ability to negative gear in a bid to create more housing and drive down prices.

Budget Emergency? Nop, not yet

While the budget is rapidly deteriorating, one of the positives for Australia is our relative low level of Government debt as a percentage of GDP. The IMF has it at just a bit over 30 per cent.

Sadly, the same can not be said for households in Australia. Household debt is hovering just shy of 100 per cent of GDP, or over three times that of Government debt. As a percentage of household disposable income, household debt is now 148 per cent, still rising and still continuing to ring alarm bells.

One of the reasons why few saw the GFC coming, was simply because they were fixated with government debt.

Housing bubbles, like the size of the one Australia is experiencing, almost always lead to banking failures when prices come tumbling down. Banking failures require government bailouts. Following the last minute buyout of Bankwest in October 2008, preventing its collapse and potentially triggering the collapse of Suncorp, the government moved to passed legislation to set up the committed liquidity fund to the tune of $380 billion. This means, when the time comes, the government is better prepared and the Australian taxpayer will be ready to bailout the banks – thanks guys.

Overstretched household debt can very quickly turn into government debt. For example in 2008, Ireland had a government debt to GDP of just 25 percent, less than Australia today. In 2013, it was 117.4 percent, following the devastating collapse of its housing bubble.

If the government can’t get our housing bubble under control, then today’s budget emergency will pail in comparison.

» Fiscal Monitor – International Monetary Fund, April 2014.
» IMF says budget fall fastest of all – The Australian Financial Review, 1-th April 2014.
» IMF warns of $90bn debt rescue – The Australian, 10th April 2014.
» Joe Hockey tells G20 finance ministers that upcoming budget will cut spending Australians ‘take for granted’ – The ABC, 10th April 2014.
» Australian house prices: Taking a fresh look at negative gearing – The SBS via AAP, 4th April 2014.
» Budget boost as ‘flawed’ rent scheme put on ice – The Australian, 12th April 2014.
» Sydney Uni taps NRAS for on-campus units – The Australian, 1st April 2014.
» Deakin puts NRAS row to beds – The Australian, 26th March 2014.


Posted in Australian economy, Australian Housing | 18 Comments »