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 | 16 Comments »

Chinese developers bring in security as buyers experience negative equity

Written by admin on April 5, 2014 – 5:35 pm

Under the front page headlines of Guarding the global economy’s biggest risk, the Weekend Australian Financial Review provides us a chilling insight to the cracks emerging in China’s unprecedented property bubble.

The Financial Review’s Angus Grigg writes

Security guards, wearing army green, provide the first hint of trouble. An even dozen of them line the stairs leading to a sales office on the fringes of this coastal city in eastern China. It’s a tunnel of camouflage, which prospective property buyers must pass through before entering the main building. And that’s just the outside security detail.

Inside, a further 31 uniformed guards stand stiffly around the perimeter, while 10 bulky men in plain clothes occupy all the available chairs. It’s hardly the ideal environment to buy an apartment in the 23-tower development under construction next door.

In a desperate move to offload properties, developers have been slashing 30 per cent off sale prices – overnight.

This has created a raft of buyers who have lost all their life savings and are now underwater, even though their apartments won’t be complete for another 18 months. Many are starting to protest in the streets, and this has lead New Century to bring in security guards by the bus load.

Negative equity, usually associated with Ireland or Florida, is a phenomena almost never seen in the 30-year history of private property ownership in China. Guan and the 700 other buyers in the “Noble Garden” development are in this situation because New Century began slashing prices on March 21, in a bid to clear excess stock.

While the developer refused to talk to the Australian Financial Review, buyers speculate New Century, like a growing number of developers are going bad and need liquidity quick smart.

You can read the entire story here:

» Guarding the global economy’s biggest risk – The Australian Financial Review, 5th April 2014.

» GFC2 – Will it be made in China? – Who Crashed the Economy, 30th June 2013.
» How China Fooled The World – Who Crashed the Economy, 20th February 2014.


Posted in China | 12 Comments »

RP Data shows Australian housing bubble out of control – RBA warns house prices ‘can fall and have fallen’

Written by admin on April 1, 2014 – 8:06 pm

As widely feared, Chinese appetite for Sydney and Melbourne real estate has caused house prices to surge in Australia at the fastest pace since records started 18 years ago.

According to data released today from RP Data, Sydney house prices have increased at an unsustainable 15.6 per cent year on year, followed by Melbourne at 11.6 per cent. Both Sydney and Melbourne left the rest of the country for dead and together, helped push up the combined capitals by 10.6 per cent.

On the weekend, under the headline House prices enter danger zone, the Australia Financial Review warned “House price growth picked up again this month and expected further increases risk pushing prices into the danger zone that previously has led to a market correction.”

The AFR warned, “Australia has now overtaken Canada as the most stretched housing market among English-speaking countries.”

With such a large bubble at hand, both the Australian Government and the Reserve Bank are now sitting on their hands – like a stunned mullet. Neither want to be blamed for doing something that will tip an increasingly unstable system, plunging Australia into a significant recession. Both would rather let surging unemployment or a China hard landing do the unpopular dirty work for them.

Canada is one of three countries in the world with negative gearing and until recently held the record for the largest housing bubble in English speaking countries, dethroned now by Australia. It has recently axed an immigration visa allowing Chinese to snap up its real estate citing it posed significant economic stability risks. Prior to making the decision, the Canadian Government opted to prudently freeze the visas while it carried out the 2 year inquiry.

The Abbott Government last month has asked the House Standing Committee on Economics to carry out a similar inquiry, widely seen as window dressing – demonstrating to the increasingly concerned Australian public that it is actually doing something, while allowing foreign investors to continue to flood the market. Many believe it is simply delaying tactics, with a final report due on the 10th October 2014. Any recommendations could take months to implement, if a decision is made at all.

Documents from the Reserve Bank of Australia, released under FOI, indicate the central bank was looking at macroprudent controls, similar to what New Zealand has implemented – the other country with negative gearing and a sizeable overheating housing market. But has now decided to do nothing. RBA Deputy Governor, Dr Philip Lowe transparently told a Housing Standing Committee on economics:

More generally, there is a lot of activity going on in different countries around the world in the macroprudential space and that is going to give us an opportunity to observe how those things work out. My tentative conclusion must be that it can work but it creates distortions, and in the end the distortions are quite costly and people work out how to get round the distortions. Macroprudential tools are very much like the tools we used in the 1970s and we ended up deciding we did not like those very much because you restrict one class of lenders, and the financial system is very flexible and another class of lenders comes up to fill.

But the Reserve Bank Governor does have a similar warning to that of the Australian Financial Review. In the same grilling from the House Standing Committee, RBA Governor Mr Glenn Stevens expressed the following concerns:

Credit to households for investment in housing is eight or nine per cent a year. I would say that is probably fast enough. I repeat what I have said before that in Sydney in particular—but not just Sydney now—there has been a very big run up in investor activity. That is okay, but people need to keep in mind that prices do not just rise; they can fall and have fallen. We need to be careful that we do not take on too much leverage on the expectation that ever-rising prices for the asset make that work out, because I think that would be a dangerous assumption

Blame Games

Both parties are sure to blame each other when the inevitable occurs.

In an interview with Neil Mitchell’s 3AW in September last year, Prime Minister Abbott shunned any responsibility for the Housing Bubble, saying it is up to the Reserve Bank to manage. “I am sure the Reserve Bank is very conscious of the fact that there are a whole range of things that need to be managed here and I would be confident that the Reserve has got its eye on housing prices and will appropriately manage the level of interest rates.”

When the House Standing Committee asked Mr Stevens about Foreign Investment underpinning Australian house prices, Mr Stevens quite rightly reminded the committee, “With all due respect, that is a matter for our parliament to manage.”

Monetary Policy Decision

The Reserve Bank of Australia decided to leave the cash rate unchanged at a record low of 2.5 per cent today.

In September last year, under the title, “Housing bubble has RBA backed into the corner” I expressed my concerns the RBA had just lost control of momentary policy:

If you can believe the real estate spruiker, emergency low interest rates have put a fire under Australia’s housing market. And as Australia already suffers the side effects of a large housing bubble developed over the past decade, investors will need to use extreme caution as signs emerge Australia’s central bank has just lost control of monetary policy.

We live in interesting times.

» Capital city home prices surge most on record according to RP Data – Rismark index – The ABC, 1st April 2014.
» House prices enter danger zone – Australian Financial Review, 29th March 2014.
» Report into foreign investment in residential real estate could come too late – Who Crashed the Economy, 19th March 2014.
» Housing bubble has RBA backed into the corner – Who Crashed the Economy, 22nd September 2013.


Posted in Australian economy, Australian Housing | 21 Comments »

How China Fooled the World – Airing in Australia on the ABC

Written by admin on March 31, 2014 – 7:49 pm

The ABC’s Four Corners has tonight beamed the BBC’s doco on How China Fooled the World to the Australian public.

How China fooled the world, reported by Robert Peston and presented by Kerry O’Brien, goes to air on Monday 31 March at 8.30pm on ABC1. It is replayed on Tuesday 1st April at 11.00am and 11.35pm. It can also be seen on ABC News 24 on Saturday at 8.00 pm, on ABC iview or at abc.net.au/4corners.

» How China Fooled the World – ABC, Four Corners, 31st March 2014.


Posted in China | 5 Comments »

Union demands pay rises to offset housing bubble

Written by admin on March 25, 2014 – 6:28 am

In what is likely result in more job losses and business failures, the ACTU plans to lodge a submission to the Fair Work Commission on Friday calling for a rise in the minimum wage because of Australia’s unprecedented housing bubble.

The Sydney Morning Herald reports:

While the minimum wage was equivalent to 14 per cent of the mean house price in 1993, it is now at less than 7.5 per cent.

ACTU secretary Dave Oliver said a 250 per cent increase in average house prices in the past 20 years had made it impossible for those earning minimum wages to buy a home.

“For those on a low wage, home ownership is a now pipedream,” he said. “Someone on a minimum wage of $622 per week has enough to cover their basic costs and that’s about it. These workers tell us it’s impossible to save up a deposit, let alone afford the weekly repayments.”

Mr Oliver said the minimum wage had increased by 91.2 per cent from 1993 to last year, and would have needed to rise by 254.7 per cent – $1154.42 a week or $60,029.84 a year – to keep up with house prices.

Maybe the ACTU should be lobbing for the government on behalf of their members to do something about the cost of shelter in Australia, rather than trying to make Australia even more uncompetitive?

In February, we reported real wages have started to fall in Australia.

In January, Paul Howes, National secretary of the Australian Workers Union vented his frustrations about the housing bubble in an article in the Australian Financial Review saying:

“The housing rent-seekers’ constant squawking, and exploitation of the peculiarly Australian obsession with property, means reforms of the sector has become the third rail of Australian politics.”

“Yet if we continue kicking the can further down this particular road, it is tough to see how economic disaster can be avoided.”

“There are those using their SMSFs to invest in property debt today who will enjoy the swelling of the bubble during their retirement and die before it bursts.”

“Good Luck to them. But the job of government is to prioritise the long-term future of the majority ahead of the self-interested, short term gains of a minority.”

Howes announced his resignation yesterday.

» ACTU to seek rise in minimum wages as home ownership becomes a pipedream – The Sydney Morning Herald, 25th March 2014.


Posted in Australian economy, Australian Housing | 24 Comments »

Chinese liquidate Hong Kong RE to pay down mounting debts back home

Written by admin on March 20, 2014 – 7:56 pm

Reuters is today reporting, “Cash-strapped Chinese are scrambling to sell their luxury homes in Hong Kong, and some are knocking up to a fifth off the price for a quick sale, as a liquidity crunch looms on the mainland.”

Norton Ng, an account manager at a Centaline Property real estate told Reuters, “Some of the mainland sellers have liquidity issues – say, their companies in China have some difficulties – so they sold the houses to get cash.”

» As credit tightens at home, Chinese sell Hong Kong luxury real estate – Reuters, 19th March 2014.


Posted in China | 14 Comments »

Report into foreign investment in residential real estate could come too late

Written by admin on March 19, 2014 – 8:28 pm

Earlier this week, it was announced Treasurer Joe Hockey had asked the House Standing Committee on Economics to investigate foreign investment in residential real estate. Today, the Terms of Reference was announced.

Chaired by Ms Kelly O’Dwyer MP, the house committee will examine:

  • the economic benefits of foreign investment in residential property;

  • whether such foreign investment is directly increasing the supply of new housing and bringing benefits to the local building industry and its suppliers;

  • how Australia’s foreign investment framework compares with international experience; and

  • whether the administration of Australia’s foreign investment policy relating to residential property can be enhanced.
  • Submissions can be submitted by Friday 9th May 2014 and the committee will report by 10th October 2014.

    Australia’s foreign investment policy has been designed to allow foreigners to invest in new residential housing with the objective of creating new supply, but there is strong evidence foreigners are flouting the laws and using back doors to buy existing housing, putting upwards pressure on domestic house prices and creating heighten risk of economic instability.

    The Sydney Morning Herald Domain’s Lucy Macken reported today:

    Buyer’s agent Shane Clinton of Buying Houses Australia says overseas buyers often side-step requirements that they only buy new property by purchasing established dwellings in the name of already established family members.

    “The significant investor visa has taken a while to get traction, it’s building now, but it means that to date 99 per cent of my clients have been buying outside the recommended visa guidelines,” he said.

    In Mosman, where more than 30 per cent of prestige sales last year were to buyers from China, McGrath agent Michael Coombs said of the eight sales he made to Chinese buyers in the past six months, three were to visa holders and five were purchased in the names of a family member.

    The influx of foreign buyers purchasing existing homes has been pushing prices up significantly in the two capital cities Chinese immigrants favour the most. RP Data-Rismark indices show prices surged 13.4 per cent in Sydney and 11.9 per cent in Melbourne in the twelve months to January 2014. The inquiry will hold public hearings in both Sydney and Melbourne.

    Kelly O’Dwyer said late last week, “We need more homes, so foreign investment that increases the number of homes available is a good thing, particularly where it is housing for first-home buyers”

    “That is the objective of current policy, but we need to examine what is happening on the ground.”

    But O’Dwyer warns Chinese buyers could be pricing Australians out of their own market at a time when Housing affordability is at extremes (Bubble Territory). “The great Australian dream to own your own home is hard enough to achieve on two incomes, with years of savings and a large mortgage,” she said.

    “We need to make sure that we aren’t making it more difficult — which is why we are going to examine the facts in our inquiry.”

    The inquiry comes after Canada announced the axing of a 28 year old visa scheme (Immigrant Investor Program) designed to attract foreign residential real estate investment in Canada. Under the scheme if, as a foreigner, you had $1.6 million CAD in net assets and you could lend the Canadian government $800,000 CAD for five years interest free, you could expect permanent residency for you and your family and expedited citizenship.

    Citizenship and Immigration Canada (CIC) spokeswomen, Sonia Lesage, said the abused scheme contributed little to the Canadian economy, “Except the $800,000 interest-free loans, immigrants from the investor program contributed little to the economy.” In a statement, CIC said “Research shows that immigrant investors pay less in taxes than other economic immigrants, are less likely to stay in Canada over the medium-to-long term and often lack the skills, including official language proficiency, to integrate as well as other immigrants from the same countries”

    Canada’s decision followed debate that Canada’s already bubbly housing market, particularly Vancouver, was being overheated by Chinese investors and posed significant economic stability risks. Such investors are now likely to flood the Australian market instead.

    The other driver is believed to be China’s faltering economy. Chinese citizens are scrambling to shift their wealth out of wealth management products in their homeland as the country hits road bumps developing in the country’s shadow banking sector.

    Friday week, the House of Representative’s Standing Committee on Economics had a public hearing reviewing the Reserve Bank of Australia’s Annual Report for 2013. It spent quite some time questioning Governor Glenn Stevens, Deputy Governor Philip Lowe and Assistant Governor (Economic) Chris Kent on foreign investment in the residential housing sector. Below is an uncorrected proof of evidence taken before the committee:

    The role of foreign investors in driving up capital city house and the Canadian government’s decision to axe the Immigrant Investor Program:

    CHAIR [Kelly O’Dwyer]: I will move onto the issue of housing, because this is very much a barbecue stopper in Australia. With house prices continuing to soar in major cities, there is a lot of talk about foreign investment underpinning those house prices. Are you worried about the role of foreign investors in driving up capital city house prices? Also, we recently saw the Canadian government make it more difficult for foreign investors to buy homes in Canada. Will this have implications, in your view, for Australia?

    Mr Stevens: The question of how prominent foreign investors are is a difficult one to answer. I travel through Singapore a number of times a year on the way to interminable meetings in Basel. It is quite noticeable when you pick up a Singaporean newspaper on the plane to see advertising for Australian property, as well as property in other countries. So there is no doubt that wealthy foreign investors have an interest here. In particular parts of our cities, including where we are sitting right now, the role of foreign investors is quite prominent indeed. I suspect it is rather less prominent around most of the metropolitan areas than some of the headlines might suggest; nonetheless, there is a role. As a country we tend to feel that we should be open to foreign investment—we generally like that. This is a form of that, just as foreign investors buying shares in listed companies or doing direct investment in resource projects or whatever it might be is a form of it. It has its effect on asset values and the exchange rate, just like all the other forms of foreign investment.

    I suppose the question is really: how big a problem do you really think it is? Foreign investors are generally confined to buying new structures. That is where it is easiest for them to come in. It cannot be beyond our capacity over time to meet that demand and to meet the legitimate demands of our own citizens for structures as well, can it? If we cannot do that, if there is a supply side constraint, I would say that is an issue worth addressing in its own right. Beyond that, it probably goes to broader questions of how welcoming we wish to be to foreign investment generally. That can be a vexed issue at times. With all due respect, that is a matter for our parliament to manage.

    CHAIR: Certainly. I am sure there are lots of people with a range of views on that at this table alone.

    Mr HUSIC: I think that was the ‘over to you’ comment.

    CHAIR: I would like to pick up on the final part of my question, regarding Canada and their decision. Do you think that is going to have broader implications for us in Australia?

    Mr Stevens: I cannot say I am across the fine details of their decision, but perhaps your question is whether that will divert—

    CHAIR: Correct.

    Mr Stevens: I am not sure that I can give an informed answer or quantify that. I suppose decisions like that just show that this is an issue in a number of countries. I am aware that Canada has had a fair bit of investment from Asia into the west coast, and we have had some of that ourselves over quite a run of years. But I cannot quantify the extent to which that might lead to a spillover in our direction.

    Chinese Investment in Australian Residential Property and the Shadow Banking Sector:

    Mr HUSIC: On the issue of overseas interest in Australian property, particularly from the perspective of Chinese investment, how much do you see this as reflecting what is happening in China in terms of the growth of shadow banking there? Is the RBA keeping tabs on how the Chinese government is managing that issue and do you see that it is going to continue to grow in the medium term?

    Mr Stevens: We do put quite an effort into trying to understand what is happening in the Chinese economy and I think all the issues with shadow banking are really the key issues right now. I think public commentary really frets a little bit too much about monthly ups and downs in Chinese PMIs. I do not think that is really the issue. The issue is whether the build-up in credit that they have had through these sort of off-balance-sheet devices can be effectively managed. That term ‘shadow banking’ is in some ways a bit apt because it is not terribly transparent, from this distance anyway, and so it is very hard to know and to form a good judgement here. All I can say is that we are acutely sensitive to that set of questions. On whether shadow banking in China is the source of Chinese investment in Australia, I do not know, but I suspect that the bigger force is probably that the Chinese population, or segments of that population, have become quite affluent pretty quickly and, as people do when that happens, one of the things they do is acquire assets in other places. Just as Middle Eastern and Russian money likes to have places in London, I think there is a certain sense in which many affluent people in Asia—and it would not just be China, it would be other countries in Asia too—like to have property in Australia. That is a feature of the modern world.

    Mr HUSIC: Picking up on your point about shadow banking not been transparent. I have been alarmed at a dramatic description this is a Sino equivalent of subprime. Is there reason to be concerned if there is not an ability to get a handle on where this growth is headed and what impact it might have?

    Mr Stevens: People do like to dramatise things. I think it is likely that asset quality in some of these entities is poor. It is very likely that—and I do not think that the authorities in China would deny this—the big surging credit they had during the financial crisis when everybody was stimulating their economies by pumping a lot of credit into the system is problematical. In fact it is virtually certain that some of those loans, if they have not gone bad yet, will go bad. I think the question really is: how good a handle do the authorities there have on that problem? I would not have much doubt that they have the resources to fix it in time. The question will be how quickly they can get on top of it and get ahead of it. I cannot give you a very accurate answer to that, but my observation is that they are very competent people. They are acutely sensitive to this problem and so there is as much confidence as you can have that they will get on top of it.

    Foreign Investors are not Borrowing Money from our Banks, Thank-God:

    Mr BUCHHOLZ: Just picking up on the previous questions on that investment coming from offshore into the housing market, do you have not a concern but an opinion on the number of cash purchases that are coming in? Some of the reports are that we are seeing an increase in price, but some of the feedback from the banks is that mortgage data is not on the same trajectory, which would lead you to the perception—

    Mr Stevens: I do not think the foreign buyers are borrowing money from our banks.

    Mr BUCHHOLZ: No.

    Mr Stevens: Most of them are probably not borrowing money from any banks. As I said earlier, these are quite possibly quite affluent people. This is very anecdotal but, if you are sending your children to study in Australia, you are probably an affluent person and quite possibly, in some cases, you have purchased an apartment in which they would live or which you might come and stay in when you come to visit them. There are people who are wealthy enough to do that. So we do not really know. We do not have data. If they are borrowing from a bank in another country, obviously we do not know. I would hazard a guess that many of these people are not borrowing money.

    If we do see a surge of foreign Chinese buyers due to Canada’s decision to axe its Immigrant Investor Program and increasing instability in China’s shadow banking system propped up by new stimulus, then a report due in October 2014 and any action by the government (if any) at a later date might just be too late.

    » Australian Parliament releases terms of reference for foreign property investment inquiry – The ABC, 19th March 2014.
    » Rorting of Australia’s tough foreign property rules ‘prevalent’, insider warns – The ABC, 19th March 2014.
    » Putting a roof over your head is becoming a major challenge – Kelly O’Dwyer (Chair) for News Limited, 15th March 2014.
    » Inquiry into foreign investment in residential real estate – House of Representatives, Parliament of Australia – 19th March 2014.
    » Inquiry into foreign investment in residential real estate – Media Release – House of Representatives, Parliament of Australia – 19th March 2014.
    » Fears Chinese investors are pricing first-home buyers out of the market will be investigated by parliament – The Telegraph, 15th March 2014.
    » Do Chinese buyers like your neighbourhood? – The Sydney Morning Herald, 19th March 2014.
    » Shunned Chinese buyers to turn from Canada to Australia – The Sydney Morning Herald, 24th February 2014.


    Posted in Australian economy, Australian Housing | 10 Comments »

    Zhejiang Xingrun Real Estate Co. Collapses

    Written by admin on March 18, 2014 – 8:11 pm

    According to Bloomberg, Zhejiang Xingrun Real Estate Co. has collapsed with 3.5 billion yuan (USD $566.6 million) of debt. The collapse comes just days after China’s Premier Li Keqiang said China will “confront serious challenges this year” and warned to expect a wave of bankruptcies.

    » China Developer With $567 Million Debt Said to Collapse – Bloomberg, 18th March 2014.
    » China facing fresh ‘ghost town’ crisis after developer collapse – Sydney Morning Herald, 18th March 2014.
    » China property default threat stirs ghost town fears – The Australian Financial Review, 18th March 2014.
    » Chinese Property Developer Defaults on Loans – The Wall Street Journal, 18th March 2014.
    » Looming property default in China raises fears of broader crisis – The Telegraph, 17th March 2014.


    Posted in China | 3 Comments »

    Premier Li Keqiang: China to confront serious challenges this year

    Written by admin on March 16, 2014 – 2:08 pm

    Following China’s first corporate bond default last week, Li Keqiang, Premier of the People’s Republic of China has warned “We are going to confront serious challenges this year and some challenges may be even more complex.”

    The lack of a bailout last week is seen as a turning point for China as it decides on a course between civil unrest and moral hazard. To date, it has always bailed out troubled enterprises to prevent civil unrest, but doing so creates a moral hazard. Both enterprises and their investors have – to date – taken ever greater risks knowing if the worst does happen the government will be there to bail them out. The result, culminating with a warning from ratings agency Fitch last year saying China now has the largest credit bubble in modern history.

    Speaking after the annual session of the national people’s congress, Li said China must “ensure steady growth, ensure employment, avert inflation and defuse risks”

    “So we need to strike a proper balance amidst all these goals and objectives,”

    “This is not going to be easy”

    Li said we must prepare for a wave of bankruptcies signalling the end of an era when the People’s Bank of China was only a stone throw away and ready with a bailout.

    Li’s comments mixed with a raft of pessimistic data out of China has caused a turbulent week on world markets. It started with data from China showing February exports had fallen 18.1 per cent from the year earlier – the most since the global financial crisis. Economists had expected a rise in the vicinity of 7.5 percent and suggest the data could be distorted by the Lunar New Year. China lending data released Monday night show Shadow Bank Lending practically ground to a halt in January & February.

    Bloomberg reported on Friday that “China’s default risk has risen beyond that of Ireland, having been on par with France and Japan a year ago”

    “Growing concern over looming defaults led to a surge in demand for CDS as investors seek to insure themselves against a credit-default event,” said Saktiandi Supaat, head of foreign-exchange research at Malayan Banking Bhd. in Singapore. “Plans to rein in shadow financing imply that the government can no longer be counted on for a bailout, hence raising the possibility of more defaults.”

    The next potential default is speculated to be “Magic” Property with an investment in an office building in Chongging. Arranged by CITIC Trust, it is expected to come due on the 31st March. However, there are reports the local government has intervened, fearing social unrest after a unit buyer committed suicide when he/she could not obtain the title to the property. A report from the Bank of America indicates, “CITIC Trust tried to auction the collateral but failed to do so because the developer has sold the collateral and also mortgaged it to a few other lenders.”

    » China’s Li Keqiang warns investors to prepare for wave of bankruptcies – The Guardian, 14th March 2014.
    » China’s Exports Unexpectedly Drop Blow to Confidence – Bloomberg, 9th March 2014.
    » China Bond Risk Exceeds Ireland as Defaults Unavoidable – Bloomberg, 14th March 2014.
    » Markets hold breath as China’s shadow banking grinds to a halt – The Telegraph, 10th March 2014.
    » China shadow lending slows sharply – Financial Times, 10th March 2014.


    Posted in China | 5 Comments »

    China: Did the first Domino just fall in GFC2?

    Written by admin on March 8, 2014 – 9:16 am

    As widely anticipated, troubled Shanghai Chaori Solar Energy Science and Technology Co. failed to make the scheduled interest payment on a bond this Friday, 7th March 2014. Chaori could barely scratch together five percent of the 89 million yuan due. Unlike Credit equals Gold No 1 no one stepped up to bail out Chaori.

    While small, some describe this as a “Watershed” or “Bear Stearns” moment.

    The default in the PV Solar Cell Manufacturer is expected to mark the first of many onshore bond defaults for China that will occur in industries suffering from overcapacity such as steel, nonferrous metals, coal, renewable energy & of course real-estate. The near default of Credit equals Gold No 1 on the 31st January resulted from a trust holding bad loans to and equity in coal miner Shanxi Zhenfu Energy Group who collapsed in 2012 and had since ceased production.

    Some analysts, including ones from Bank of America, call Friday’s default a “Bear Stearns moment” signalling the start of the Chinese shadow banking crisis, much like Bear Stearns was to the US subprime crisis.

    Overnight Copper prices posted the biggest decline since 2011 in heavy volume caused by concerns of slowing growth in China from rising debt and defaults.

    The default is expected to accelerate the number of individual bond holders who have been assessing risk and seeking out “less risky” investments such as Australian & Canadian Real Estate. On February 11th, Canadian Finance Minister Jim Flaherty announced the axing, effectively immediately, of a 28 year old visa scheme attracting wealthy foreigners to Canada. On the other hand, the Abbott Government is set to expand our residency visa scheme to the Chinese in what some suggest may cause an even greater housing bubble and further destabilise the already distorted Australian economy at a time when the Reserve Bank is sounding alarm bells.

    » Watershed moment for China markets with Chaori Solar bond default – The Sydney Morning Herald, 7th March 2014.
    » China Gets 1st Onshore Bond Default as Chaori Doesn’t Pay – Bloomberg, 8th March 2014.
    » China Bear Stearns Moment Seen by BofA in Solar Default – Bloomberg, 7th March 2014.
    » Copper tumbles after China bond default – The Financial Times, 7th March 2014.
    » Shunned Chinese buyers to turn from Canada to Australia – The Sydney Morning Herald, 24th February 2014.
    » Visas for wealthy to be expanded – The Australian Financial Review, 8th March 2014.
    » Credit equals Gold No 1. – Who Crashed the Economy, 29th January 2014.
    » GFC2 – Will it be made in China? – Who Crashed the Economy, 30th June 2013.


    Posted in Australian Housing, China | 19 Comments »

    Roy Morgan unemployment hits 12.3% – highest in 20 years

    Written by admin on March 5, 2014 – 8:14 pm

    Roy Morgan unemployment figures released yesterday show an estimated 1.561 million Australians are now unemployed. This represents 12.3 per cent of the workforce and is now the highest figure since February 1994, some 20 years ago. An additional 1.08 million Australians are classified as underemployed, working part time while looking for more work.

    Australia’s deteriorating jobs market was cited by the Reserve Bank of Australia (RBA) as one reason the bank left the official cash rate at an emergency 2.5 per cent yesterday.

    “The demand for labour has remained weak and, as a result, the rate of unemployment has continued to edge higher. Growth in wages has declined noticeably,” the RBA media release noted after the Banks’ monthly meeting. “Looking ahead, the Bank expects unemployment to rise further before it peaks.”

    Rising unemployment is expected to put pressure on Australia’s housing bubble, but the market exhibited little stress in the December 2013 quarter according to analysis by ratings agency Fitch. A study of Australian Residential Mortgage Backed Securities (RMBS) show the rate of arrears for the December 2013 quarter was 1.21 per cent, the lowest figure since 2009 according to Fitch.

    But Fitch warns lenders not to be complacent and drop lending standards warning “Higher levels of unemployment, a slowdown in the housing market, and rising interest rates, could lead to servicing pressure, and in turn, higher delinquencies.”

    » Roy Morgan Unemployment jumps in February (up 1% to 12.3%) – highest for 20 years since February 1994 (also 12.3%). Unemployment amongst 18-24yr olds rises to 28.0% (up 6.8%) – Roy Morgan, 5th March 2014.
    » Statement by Glenn Stevens, Governor: Monetary Policy Decision – Reserve Bank of Australia, 4th March 2014.
    » Mortgage arrears at lowest December level in four years – The ABC, 5th March 2014.
    » Roy Morgan unemployment hits 11.3% – highest in 19 years – Who Crashed the Economy, 4th February 2014.


    Posted in Australian Housing, Unemployment | 6 Comments »

    D day looms for Shanghai Chaori Solar Energy Science and Technology

    Written by admin on March 5, 2014 – 6:51 pm

    China Wealth Management Product Credit equals Gold No 1 narrowly missed default on the 31st January 2014 with a mysterious saviour bailing the fund out and averting an emerging crisis in China’s troubled shadow banking system.

    Time is now running out for Shanghai Chaori Solar Energy Science and Technology Company who has announced it can not pay the 89.8 million yuan interest payment owning on its Chaori bond due this Friday, 7th March.

    » China’s Chaori Solar poised for precedent-setting bond default – Reuters, 4th March 2014.
    » China Is Headed For Its First Domestic Bond Default — And Here’s Why That’s A Good Thing – Business Insider, 5th March 2014.
    » First China Onshore Default Looms as Chaori to Miss Payment – Bloomberg, 5th March 2014.


    Posted in China | 1 Comment »

    How China Fooled the World

    Written by admin on February 20, 2014 – 7:42 pm

    The BBC in the United Kingdom has aired a program this week titled “How China Fooled the World – with Robert Peston”

    It re-enforces many of the posts we have made over the years and is well worth a watch.

    » How China Fooled the World – with Robert Peston – The BBC.
    » Credit equals Gold No 1. – 29th January 2014.
    » GFC2 – Will it be made in China? – 30th June 2013.
    » Fitch says China credit bubble unprecedented – 18th June 2013.
    » Concerns on China’s property bubble – 4th March 2013.
    » China property bubble close to ‘Tipping Point’ : Zhiwe – 28th September 2011.
    » China’s chief auditor warns of mounting debt – 26th June 2010.


    Posted in China | 9 Comments »

    Real wages start to fall

    Written by admin on February 19, 2014 – 9:45 pm

    In January’s predictions for this year, we commented one shock for average Australians will be “income growth or rather the lack thereof” (2014: The year the world is taken off life support):

    The other shock will be income growth or rather the lack thereof. Treasury’s chief economist David Gruen told a conference in November last year, “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.” This comes from an expected decline in Australia’s terms of trade and is consistent with views from the International Monetary Fund (IMF) and the Australian Productivity Commission. (Slowest living standards growth in ‘our lifetimes’ – SMH)

    Late last year an Organisation for Economic Co-operation and Development (OECD) report (House prices, labour costs leave economy vulnerable: OECD – AFR) showed Australia had the largest appreciation in relative unit labour costs in the OECD effectively putting Australia at a competitive disadvantage to the world. This coupled with the high cost of living and constrained discretionary spending from Australia’s housing bubble (High housing costs make Australia’s economy uncompetitive – ABC) and household debt overhang is expected to see unemployment continue to accelerate this year.

    As hinted at last year (Holden closure confirmed; Has Australia’s housing bubble played a role?), Toyota announced the closure of its Australian manufacturing plants earlier this month, signalling the closure of the entire Automotive industry in Australia. But the job loses continue to escalate, with Alcoa announcing yesterday 1,000 jobs will go in the closure of its Point Henry aluminium smelter and two rolling mills. Today Sensis announced 800 jobs will go from its phone directory business. But for every high profile announcement hitting the media headlines, many more jobs are silently lost.

    Other businesses are negotiating pay freezes, for example the much publicised SPC Ardmona at Shepparton.

    For individuals, the lack of job security has made many reluctant to ask for pay rises.

    Today, data released from the Australian Bureau of Statistics show annual wage growth is at the lowest level since records started in 1997 – even lower than during the depths of the Global Financial Crisis. In the December 2013 quarter, wages rose just 0.7 percent – and 2.6 per cent for the year. The wage growth is so weak, it has fallen below inflation meaning we now have real wage deflation.

    While sustained real wage deflation will cause a fall in living standards and provide headwinds for those hoping wage inflation will help quickly erode their mountains of accumulated household debt, it will – albeit slowly – start to make Australia competitive again. And this is a good thing.

    » ABS figures show annual wages growth slowest on record – The ABC, 19th February 2014.
    » Sensis to shed 800 jobs in digital refocus – The ABC, 19th February 2014.
    » Shepparton SPC workers agree to wage freeze as modernisation plan gets financial backing – The ABC, 14th February 2014.
    » Alcoa to shut down Point Henry aluminium smelter at Geelong in August – Herald Sun, 18th February 2014.


    Posted in Australian economy | 7 Comments »

    Australians hit the internet in record numbers searching for “Property Bubble”

    Written by admin on February 18, 2014 – 6:57 pm

    Back in October last year we reported on data from Google Trends showing an increased number of Australians hitting Google to research the term “Housing Bubble”.

    This month (February 2014) has seen a significant increase of internet searches and we are barely half way though the month (The last data point includes incomplete data from February).

    Searches for the term “Property Bubble” in Australia:

    Searches for the term “Housing Bubble” in Australia:

    This is good news if the mass population is starting to do their own research, rather than listening to the push media.

    » Google Trends – “Property Bubble”


    Posted in Australian Housing | 10 Comments »

    Roy Morgan unemployment hits 11.3% – highest in 19 years

    Written by admin on February 4, 2014 – 9:04 pm

    As widely expected, the Reserve Bank of Australia has left the official cash rate at an “accommodative” 2.5 per cent citing “on present indications, the most prudent course is likely to be a period of stability in interest rates.”

    This now has many calling a bottom to the interest rate cycle.

    The statement on today’s monetary policy decision reports, “The demand for labour has remained weak and, as a result, the rate of unemployment has continued to edge higher. Growth in wages has declined noticeably.”

    “Looking ahead, the Bank expects growth to remain below trend for a time yet and unemployment to rise further before it peaks.”

    Roy Morgan today released unemployment figures for January 2014 showing unemployment is now 11.3 per cent, the highest result since January 1995. 1.44 million Australians are now out of work and another 1.105 million are under-employed. Together, this makes up 20 per cent of the workforce.

    Since departing from ABS index in 2010, there is a distinct upward trend in the Roy Morgan unemployment figures with no signs of abating.

    Yesterday, MacroBusiness published insights from Saul Eslake (‘Eslake: Unemployment much higher than it looks‘) on expectations of continued deteriorating unemployment. Eslake noted, “The RBA has never raised rates while the unemployment rate is rising; indeed, it tends to keep lowering them.

    “Further, we argue that given the majority of the decline in participation is of prime working age people, rather than retirees, and therefore it is akin to uncounted unemployment. From this we conclude that the actual unemployment rate is significantly worse than official [ABS] figures suggest. As we continually stress, if the participation rate had remained at the 2009-11 average then the unemployment rate would be 7.1%. The increase in this adjusted unemployment rate has accelerated markedly over the second half of 2013. And it is this that leads us to believe that the RBA may be getting behind the curve on labour market weakness.”

    His analysis includes a graph, published in the Macrobusiness article overlaying the official unemployment rate, cash rate and a “participation adjusted” unemployment rate, clearly highlighting his claims the RBA is falling behind the curve on unemployment.

    » Statement by Glenn Stevens, Governor: Monetary Policy Decision – Reserve Bank of Australia, 4th February 2014.
    » Eslake: Unemployment much higher than it looks – Macrobusiness, 3th February 2014.


    Posted in Australian economy, Australian Housing, Unemployment | 42 Comments »

    Credit equals Gold No 1.

    Written by admin on January 29, 2014 – 7:33 pm

    A last minute bailout will see the 700 investors in a 3 billion-yuan wealth management product (WMP) called Credit equals Gold No. 1 recouping their full principal minus some interest averting an emerging crisis in China’s troubled shadow banking system – for now.

    The product, issued by one of China’s largest “shadow” banks – China Credit Trust Co, was widely expected to default on the 31st January 2014 after the marketer, Industrial and Commercial Bank of China (ICBC) said it had no plans to use its own money to repay investors. The product, promising 10 per cent yields consisted solely of bad loans to and equity in coal miner Shanxi Zhenfu Energy Group who collapsed in 2012 and has ceased production.

    “A default was bound to lead to systemic risks that China is unable to cope with, so in that sense a bailout is a positive step to stabilize the market,” said Xu Gao, the Beijing-based chief economist at Everbright Securities Co. “delaying the first default means risks are snowballing,” he said.

    Tight secrecy surrounds the details of the mysterious saviour, but the Financial Times reports on China media’s belief that the bailout involved ICBC, China Credit Trust Co and the government.

    It is estimated roughly 4 trillion yuan of trusts will mature this year, with many expected to have repayment problems.

    » GFC2 – Will it be made in China? (Wealth Management Products) – Who Crashed The Economy, 30th June 2013.

    » ICBC Offers Clients Option to Recoup Funds From Trust – Bloomberg, 28th January 2014.


    Posted in China | 18 Comments »

    Attitudes towards the Australian Housing Bubble are changing

    Written by admin on January 11, 2014 – 9:57 am

    Most Australians disagree rising house prices are “a good thing.” That’s the finding of a new polling by Ipsos and reported by Jessica Irvine in the News Limited papers today. Jessica writes:

    A majority of Australians now think rising house prices are bad for the country, with exclusive new polling showing more than half the population disagrees with the statement that “rising house prices are a good thing for Australia”.

    According to the survey of 1043 people conducted last November the following disagree with the belief rising house prices are a good thing:

    Australia Total 53.7%
    Aged 18-29: 50.8%
    Aged 30-49: 55.8%
    Aged 50+: 53.4%
    Hobart 70.0%
    ACT 53.6%
    Sydney 59.6%
    Adelaide 57.9%
    Brisbane 55.9%
    Perth 53.7%
    Melbourne 52.6%

    Attitudes are also changing towards Negative Gearing. In a poll conducted by Fairfax at Christmas, there was overwhelming support from 74% of 3831 readers to abolish negative gearing. The article attracted some 235 comments, with the vast majority in favour of axing the tax dodge.

    As attitudes of Australian voters change, it will make it easier for government to implement the required reforms to the domineering property sector without fear of extensive voter backlash.

    » Most Australians disagree rising house prices are “a good thing” – The Couriermail, 10th January 2014.
    » Cabinet Papers 1986-87: Negative gearing almost axed – The Sydney Morning Herald, 28th December 2013.


    Posted in Australian economy, Australian Housing | 40 Comments »

    What lobby group has the loudest voice?

    Written by admin on January 8, 2014 – 7:00 pm

    What lobby group has the loudest voice? In the last decade, without doubt it has been the property lobby. But there are signs the others are starting to wake up.

    In responding to yet another poor Australian Industry Group’s Performance of Services Index (PSI) the Retail Trader’s Association executive director Russell Zimmerman told the Australian Financial Review, “We need to see consumers free up spending, people are putting more money away or onto mortgage repayments.”

    According to the Australian Financial Review, “The Ai Group index indicated that retailers did not get the bumper Christmas sales season they had hoped for.” The index, measuring activity in the Australian services industry has contracted for the 23rd consecutive month, slipping 2.8 points to 46.1. A figure under 50 indicates contraction.

    The Retailers Traders Association is fighting with a housing bubble zapping more and more money out of the economy and having a negative impact on discretionary spending. As house prices continue to outpace wages and household incomes, retailers are forced to take a back seat, with a bigger portion of household income funnelled into larger and larger mortgages.

    Some are unable to keep their heads above water, resulting in job losses. The Herald Sun reported, “Ai Group chief Innes Willox said any uptick in festive-fuelled retail activity was more than cancelled out by a deteriorating jobs environment.”

    But they continue to fight on. Apparently we were suppose to have one of the best Christmas’s on record. Now the January sales is forecast to go gang busters. The concept is Australian’s are sheep. If they are lead to believe other people are spending up big, then hopefully you too will spend up big. Let’s see if it happens in January.

    But it’s not only the Retailer’s Traders Association that is waking up. In the same paper than Zimmerman’s quote, on page 38 Paul Howes, National secretary of the Australian Workers Union is warning about SMSFs adding to our debt-fuelled housing bubble.

    He makes reference to Grattan Institute calculations showing $36 billion a year is lost in revenue due to favourable treatment towards property. Let’s hope the May budget starts to address this.

    He suggests the reason why the sector is not being “checked” is “because it is the noisiest and most powerful group of rent seekers in the country.”

    Howes writes, “The housing rent-seekers’ constant squawking, and exploitation of the peculiarly Australian obsession with property, means reforms of the sector has become the third rail of Australian politics.”

    “Yet if we continue kicking the can further down this particular road, it is tough to see how economic disaster can be avoided.”

    “There are those using their SMSFs to invest in property debt today who will enjoy the swelling of the bubble during their retirement and die before it bursts.”

    “Good Luck to them. But the job of government is to prioritise the long-term future of the majority ahead of the self-interested, short term gains of a minority.”

    On Monday, Australia Industry Group also revealed PMI (Performance of Manufacturing Index) fell to 47.6 points for the month of December 2014.

    As jobs continue to be lost, will we see other lobby groups rise to the challenge and start to drown out the relentless self interest of the property lobby? One can only hope so, for the long term prosperity of this country.

    » Australian Industry Group Performance Indices – Australian Industry Group.
    » Super and Property a Heady Mix – The Australian Workers’ Union, 7th January 2014.


    Posted in Australian economy, Australian Housing | 9 Comments »

    2014: The year the world is taken off life support

    Written by admin on January 5, 2014 – 8:55 pm

    On the 18th of December 2013, the U.S. Federal Reserve finally announced it would begin to taper or wind down QE3 – an $85 billion a month shot in the arm to keep the economy afloat after the worst recession since the 1930s.

    Starting in January 2014, the Fed will wind total purchases down a notch to $75 billion a month. Depending on how the economy reacts, the Fed will continue to cut in each meeting throughout the year. Fed chairman Ben Bernanke said “If we’re making progress in terms of inflation and continued job gains, then I imagine we’ll continue to do, probably at each meeting, a measured reduction” in purchases. However, if the economy slows, Bernanke says they will consider skipping a reduction in a meeting or two, or if the economy accelerates could taper a bit faster.

    Reactions are mixed. Some believe the Fed will have difficulty removing the stimulus fast enough to prevent inflation, while many others believe the only reason there are signs of growth in the U.S. economy is due to the sheer size of QE3. Take it away, and the unsustainable, fragile economy will quickly falter.

    Opinions also vary as to why the Fed has announced the taper. While some believe the U.S. economy is showing good progress. Others some warn QE3 has only served to create more asset bubbles – namely a stock and new housing bubble, but has done little to improve the broader economy and support job growth. And now the Fed needed to act decisively to prevent these bubbles getting much bigger.

    The only thing for certain is after such a large and prolonged stimulus, the result to global stability of the tapering will be a wildcard this year – Anything could happen.

    China Economic Growth Model “Unsustainable” – Deputy Finance Minister Wang Bao’an

    The other global wildcard for 2014 is China and has far greater implications for Australia. Last year we raised the question if the second stage of the GFC would be made in China and if WMPs would replace CDOs as the buzz word in this crisis. (GFC2 – Will it be made in China? – June 30th 2013)

    At the time, a credit freeze in China had caused the Shanghai Interbank Offered Rate (Shibor) – a measure of the cost of commercial banks to lend to each other, to surge. After a couple of days of abstaining, the People’s Bank of China (PBoC) was forced to intervene and inject liquidity into the market. Only two weeks prior, ratings agency Fitch warned China’s credit bubble was now unprecedented in modern world history.

    In the days before Christmas, and not long after the Fed taper was announced, it was happening again with lending benchmark rates hitting the highest levels since the June crisis. Once again, the PBoC came to the rescue injecting 29 billion Yuan to provide short term relief. Minsheng Securities Macroeconomics analyst, Zhang Lei told the Global Times “The cash injection can only ease the problem in the short run, Banks will face tight liquidity until mid-2014, as an increasing number of financial instruments will be maturing in the first half of next year.”

    The concern is a plethora of loans taken out by State owned Enterprises (SoEs) to fund public infrastructure and real estate investments, many empty or under utilised and with low returns – if at all. The projects are an attempt to keep economic growth chugging along, but at some stage the debt must be refinanced.

    In an rare and unusual stand, China’s Deputy Finance Minister Wang Bao’an wrote an article in the latest issue of Qiushi, a bi-monthly political theory periodical of the Central Committee of the Communist Party of China saying China’s current economic growth model is “unsustainable.” He described the Chinese economy as “high input, high resource consumption, high pollution, high growth” with “low output, low efficiency, low profit, low tech”.

    In a recent column for the Project Syndicate website, billionaire investor George Soros believes the biggest risk in the World Economy now is China – you can forget the USA. No doubt we will see more in this space as the year progresses.

    Australia

    Back home, trends are somewhat clearer barring any external shocks. The Australia Dollar is expected to continue falling this year resulting in broad price increases on imports. The RBA said it will be comfortable with 85 cents. One of the world’s largest investment firms, BlackRock, believes the dollar could fall to 80 cents this year (Aussie dollar headed for US80¢ with RBA to cut rates again, says BlackRock – SMH.) A crisis in China could push it below 80.

    After an approximate 15 per cent fall since April, already we are starting to hear the odd whinge about petrol prices at $1.65 litre. Most Australian’s have taken the overpriced Australian dollar for granted without a second though – cheap petrol, cheap electronics, cheap apparel even cheap overseas holidays. The depreciating dollar is coming as a shock. It’s not so much of a case of prices are getting expensive, but a case that prices were abnormally cheap and are just returning to where they should have been had we not had a resource boom. In December, we quoted from Professor Ross Garnaut’s latest book – “No developed country has experienced as large a sustained appreciation in its real exchange rate as Australia has through the China resources boom,” “In turn, this means that no developed country has ever successfully worked through such a fall in the real exchange rate and associated contraction of incomes.”

    The other shock will be income growth or rather the lack thereof. Treasury’s chief economist David Gruen told a conference in November last year, “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.” This comes from an expected decline in Australia’s terms of trade and is consistent with views from the International Monetary Fund (IMF) and the Australian Productivity Commission. (Slowest living standards growth in ‘our lifetimes’ – SMH)

    The Australian Bureau of Statistics (ABS) Wage Price Index for the September 2013 quarter reported an seasonally adjusted 0.5 per cent increase, the second lowest increase since the introduction of the Index in 1997. Over the year to September, wage growth was 2.7 per cent, the lowest annual rate since 2000 (Tech Wreck).

    Late last year an Organisation for Economic Co-operation and Development (OECD) report (House prices, labour costs leave economy vulnerable: OECD – AFR) showed Australia had the largest appreciation in relative unit labour costs in the OECD effectively putting Australia at a competitive disadvantage to the world. This coupled with the high cost of living and constrained discretionary spending from Australia’s housing bubble (High housing costs make Australia’s economy uncompetitive – ABC) and household debt overhang is expected to see unemployment continue to accelerate this year.

    All eyes will also be on the May budget after the Mid-Year Economic and Fiscal Outlook (MYEFO) showed a substantial deterioration in the domestic economy. During the boom years, Australia’s wealth was squandered on various tax relief’s. Cuts will now need to be made placing Australian households under even more pressure.

    Finally, there seems little scope for double digit house price growth the experts are once again predicting (annual tradition around the holiday period). As per the Australian headline, House prices [are] at the mercy of the budget (outside of an external shock). In the article, Dr Andrew Wilson talks some sense, “Nothing will stop a housing market quicker than a declining business cycle and that’s certainly what we have the prospects for in NSW and Victoria,” “Rising unemployment will cause lower wage growth, which reduces the capacity of buyers to borrow.”

    What are your predictions for 2014?

    » Slowest living standards growth in ‘our lifetimes’ – The Sydney Morning Herald, 21st November 2013.
    » Low wage growth, job fears hold inflation down – The Australian, 18th November 2013.
    » Aussie dollar forecast to fall to 80 cents in 2014 – The ABC, 31st December 2013.
    » U.S. and China: When the giants unwind Commentary: Withdrawal of stimulus could well cause a fresh crisis – Market Watch, 30th December 2013.
    » Vice-minister calls for new economic growth model – China Daily, 3rd January 2014.
    » China tries to deal with its mountain of debt – The Sydney Morning Herald, 30th December 2013.
    » House price growth at mercy of budget – The Australian, 1st January 2014.
    » China move calms credit concerns – The BBC, 24th December 2013.


    Posted in Australian economy, Australian Housing, China, US economy | 15 Comments »