Australia joins club deflation, cuts cash rate.

Written by admin on May 3, 2016 – 6:45 pm

The Reserve Bank of Australia (RBA) has today acknowledged the Australian economy is slowing more rapidly than forecast, deciding to slash the official cash rate by 25 basis points to a record low of just 1.75 per cent.

It follows ugly stats out last week from the Australian Bureau of Statistics (ABS), showing Australian consumer prices are now falling. In the March quarter, CPI fell 0.2 per cent on the back of weaker clothing and footwear prices (-2.6%), transport (-2.5%), communications (-1.5%), recreation (-1.0) and the all important staple, food and non-alcoholic beverages (-0.2%).

In a statement on today’s monetary policy decision, the central bank noted:

Inflation has been quite low for some time and recent data were unexpectedly low. While the quarterly data contain some temporary factors, these results, together with ongoing very subdued growth in labour costs and very low cost pressures elsewhere in the world, point to a lower outlook for inflation than previously forecast.

The big four banks, facing a tick up in bad debts provisions have acted immediately, passing on the full 25 basis points – all except ANZ. ANZ is arguing higher wholesale funding costs have forced it to only pass on 19 basis points. ANZ today announced its cash earnings have plunged 24 per cent to $2.8 billion due to problem loans resulting from low commodity prices.

» Statement by Glenn Stevens, Governor: Monetary Policy Decision – The Reserve Bank of Australia – 3rd May 2016.


Posted in Australian Economy | 5 Comments »

ABC Four Corners: Home Truths

Written by admin on May 2, 2016 – 8:59 pm

The ABC’s Four Corners has aired an excellent story tonight showing how tax distortions such as negative gearing has created one of the world’s largest housing bubbles:

Watch the 45 minute segment here.


Posted in Australian Economy, Australian Housing, Melbourne Property Bubble, Negative Gearing, Perth Property Bubble, Sydney Housing Bubble | 15 Comments »

Part 3: Let’s put politics aside. It’s time to fix the NBN.

Written by admin on April 25, 2016 – 9:51 pm

This article is part of a three part series. Part 1 examines the merits and problems experienced from Labor’s Fibre to the Premise Network. Part 2 investigates the Coalition’s multi technology mix using a smorgasbord of technologies and the challenge of using aging networks to deliver super fast broadband into the future. Finally, in Part 3, we examine if Australia’s largest infrastructure project can be saved with a combination of Skinny Fibre and FTTdp, and if sky high Connectivity Virtual Circuit (CVC) pricing and RSP consolidation is creating a monopoly white elephant, crippling Australian business and innovation.

CVC Artificially Scarcity

It’s an all too familiar story around the country. After waiting for what seemed like an eternity for a first-world broadband service, you receive that divine moment – the NBN “Ready for Service” card in your mail box. You spare no moment as you contact your RSP and get connected to the government’s new information super highway.

But excitement rapidly turns to dissatisfaction in a couple of days when your peak night time speeds plunge to a crawl. You wished you remained on your old ADSL2+ service.

MPs (Member of Parliament) mailboxes are filling up with complaints just like this from constituents according to Senate hearings. Many want to switch back to their old ADSL2+ service, but are unable.

Some individuals incorrectly blame the “second-rate” FTTN network, but truth be told, it effects the entire NBN.

As reported in Part 1, I was a happy camper come early November 2014 when my 50/20 FTTP connection finally went live.

On March 25th 2015, movie streaming Netflix officially launches in Australia. Much to the anguish of Rupert Murdoch, Netflix was an instant hit. Murdoch, 50 per cent owner of cable provider Foxtel, was an avid supporter of the coalition’s slower broadband network as expressed through his, somewhat biased and often factually incorrect, Australian newspapers.

Just days after the launch of NetFlix, my fibre connection started to grind to a halt. During the day, I could achieve a brisk 47 Mbps, but come 6 to 10 pm at night, I could only squeeze 6 Mbps. I fired a fault request off to my long term RSP, Internode, and waited for a response. They acknowledged there was insufficient capacity on my shared CVC – the link between the NBN POI (Point of Interconnect) and my RSP. Engineers had ordered additional capacity.

Within a week or two, I was once again a happy camper until June 2015. Again, my RSP had ran out of CVC capacity.

So what does a subscriber do if he is not getting what he pays for? He switches to a lower speed, and this is precisely what I did. By the 9th June, I had a 25/5 service. I’ve never switched back.

Even as I write this series, on Easter Monday night, my peak speed on fibre is 9.86 Mb/s.

NBN Wholesale Pricing

In simple terms, NBN’s wholesale price consists of two components – the AVC and CVC.

Each subscriber requires an Access Virtual Circuit (AVC) – think of it as a recurring port fee. A 12/1 connection costs $24 a month, 25/5 – $27, 50/20 – $34, 100/40 – $38, 250/100 – $70, 500/200 – $100 and for Senator Conroy’s fibre zealots on 1000/400 – $150.

But the AVC only gets the subscriber a port on the NBN. The RSP now needs a connection into the NBN called a Connectivity Virtual Circuit (CVC) to send internet traffic to the subscriber. This aggregate connection serves all subscribers connected to the POI.

The pricing of the CVC is considered the biggest threat to the sustainability of the NBN and has been an ongoing, controversial issue since day one.

CVC pricing was initially set by NBN at $20 a mega bit per second, per month. According to iiNet founder and now NBN board member Michael Malone, in October 2013 the price is roughly four times more than what it costs RSPs to deliver the same traffic on their own “on-net” infrastructure – that is their own DSLAMs installed in Telstra exchanges.

After a review and consultation period, an inconsequential 12.5% reduction was announced in November 2014, effective 1st February 2015. This would bring the price down to $17.50/Mbps.

Many argue the cost is a “virtual limitation” or “artificial scarcity” – most of the network cost is fixed and it costs NBN very little to offer higher speeds.

Optus Head of corporate and regulatory affairs David Epstein says “In effect, CVC pricing forces RSPs to have little or no throughput headroom in peak times, leading to adverse customer outcomes.” Epstein is of course referring to the congestion experienced by most ISPs at peak times.

According to figures presented by NBN Chief Bill Morrow during a Senate hearing in February 2016, 33 per cent of fibre subscribers are on 12/1 and 45 per cent are on 12/5. Only 16 per cent of subscribers are on 100/40. Subscribers on 1000/400, 500/200 and 250/100 range in the single to double digits.

This compares to New Zealand where 46 per cent of Chorus’s fibre customers on are on plans of at least 100Mbps.

In the same Senate hearing, Morrow reported 128 gigabytes per month was now being transferred over the NBN and as a result of the rapid increase in usage, thanks in part to NetFlix, NBN “have been evaluating a new pricing scheme for our CVC construct”. The increase in data saw ARPU (average revenue per user) rise from $39 in December 2014 to $43 December 2015, caused by a 30 per cent increase in data usage.

Earlier this month, NBN announced the overhaul of CVC pricing, introducing tiered discounts that scale with CVC bandwidth increases. The “dimension-based” pricing will start June 1st and will encourage ISPs to purchase more bandwidth.

Despite the change, RSPs still believe the charge is exorbitant. The CVC charges make up a good portion of NBN revenue enabling it to meet internal rate of return metrics.

High CVC costs can also help support the political agenda and artificially reinforce that there is little demand in higher speeds, but it comes at a big cost to innovation, business efficiency and country standing. In the most recent quarterly “state of the internet” report published by Akamai Technologies, Australia plunged to 60th rank in the world for internet speeds.

According to a recent World Economic Forum report, Australia is the lowest scoring country for affordable internet access. 57 per cent of households with incomes under $40,000 do not have internet access.

ACCC – The Anti-Competition and Consumer Commission

Australia’s broadband industry has seen rapid consolidation since the decision was made to have 121 points of interconnect in August 2012.

In a submission to the ACCC, dated the 1st February 2011, John Lindsay, General Manager Regulatory and Corporate Affairs for Internode said: “The 120 POI interconnect model will significantly increase the costs of interconnecting with the NBN which will inevitably result in smaller service providers either acquiring service from a sub wholesaler, which is financially inefficient, selling out to a competitor or exiting the market.”

On the 23rd December 2011, Internode does just that and sells out to iiNet. It followed iiNet’s acquisition of TransACT a month earlier. In the years earlier, iiNet had already acquired WestNet, NetSpace and AAPT’s consumer operations. In August 2013, iiNet also gobbled up South Australian based Adam Internet.

M2 Group purchased Primus Telecom in June 2012 and budget ISP Dodo in 2013. It also acquired Eftel, owner of the aaNet, Engin and Club Telco brands, in the same year.

By early 2014, TPG Telcom had swallowed AAPT wholesale. TPG already owned backbone fibre provider and PPC-1 submarine cable owner, Pipe Networks.

In August 2015, TPG Telecom with an estimated 748,000 subscriber base acquires iiNet with 975,000 subscribers. Number 2 telco at the time, Optus, had 975,000 subscribers. The ACCC initiates a public review under the Competition and Consumer Act 2010 that “prohibits acquisitions that would have the effect, or be likely to have the effect, of substantially lessening competition in a market” and rubber stamps the acquisition.

One month later, in September, M2 Group announce plans to merge with Vocus to create a $3.8 billion entity. The ACCC again rubber stamps the merger.

Australia, today, effectively only has four retail service providers – Telstra, TPG, Optus and M2.

With little retail competition, what incentive is there for retail service providers to invest in adequate connectivity virtual circuit capacity.

Skinny Fibre / Multi-Technology Local Fibre Network (MT-LFN)

As we learned in Part 1, the orignal FTTP NBN required above ground Fibre Distribution Hubs (FDH) to be scattered about the neighborhood. The FDH would optically split the signal and centrally service up to 576 connections. Together with thicker fibre optic cabling to support the 576 connections, expensive duct and pit augmentation was required.

What if you could have multiple smaller splitters scattered around in the pits?

This is precisely what MT-LFN or Skinny Fibre technology sets out to achieve. There are no FDHs in this architecture, eliminating the requirement to have cabinets and the civil work associated with them (duct, augmented pits and concrete foundations).

The optical splitters are now distributed among new, smaller footprint multi-ports with integral splitters, while still maintaining the same 1:32 split ratio used in the existing GPON. The distribution fibre network is joined to the local fibre network with ‘Flexibility Joint Locations’. By embracing this architecture, smaller 12 fibre ribbon cables can be used, instead of thicker 72 fibre ribbon in the local fibre network.

This new technology is touted as zero civil. The smaller cables and integrated splitters can all fit in existing pit and duct infrastructure. No extra civil works are required, saving both costs and reducing the build time by weeks.

According to leaked documents, NBN overlaid MT-LFN on a distribution area in Gosford to better understand the architecture. They tested two scenarios – a smaller FDH both above and below ground, and a cascaded split GPON based on the architecture described above. The baseline was the current local fibre network architecture with above ground FDH and was costed at $542.69 per premise. The smaller FDH scenario achieved a 36.8 per cent cost saving at $343.02 cost per premise. The cascaded split GPON came it at $217.08 per premise, a substantial 60 per cent saving.

With a very favorable outcome, a decision was made to trial MT-LFN in two FTTP areas in Victoria – 3BRA-10 (Ballarat), and 3KAL-07 (Karingal) in the second half of 2015.

Broadspectrum undertook the project development services for both 3BRA-10 and 3KAL-07, and construction for 3KAL-07 only.

In a Senate hearing on Tuesday the 15th of March 2016, Broadspectrum Project Director and Executive General Manager was questioned about the costs, but both were extremely cagey. Broadspectrum had rolled out 3KAL-01 to -06 using the current local fibre network architecture and 3KAL-07 with Skinny Fibre. Broadspectrum did acknowledge the cable was thinner and no fibre distribution hubs were used, but would not comment on the final invoice cost for 3KAL-07.

As demonstrated by the trial of 4,500 premises in 3BRA-10 and 3KAL-07, Skinny fibre is a technology available today and can substantially reduce the cost of a FTTP rollout.

Fibre to the Distribution Point (FTTdp)

Fibre to the Distribution Point (FTTDp) is exciting new technology that could be Australia’s savior and an excellent, cost effective compromise between the political gridlock of Labor FTTP vs Liberal FTTH.

Labor proponents see this technology as a logical option to a full FTTP network, bringing fibre closer to the premises and confirmation of the long term future merits of a full fibre broadband network.

Liberal proponents argue FTTdp leverages the copper network, albeit only down your driveway, and is endorsement that copper still has a significant role to play.

But the consumer, fed up with politics and the wastage, see it as a choice. They can choose, perhaps at a small cost, to have fibre to the premises or to stick with copper down the driveway.

It also offers a reasonable upgrade path in the future without having to replace large chunks of the network, as is the case with FTTN or HFC.

One of the problems experienced with the FTTP rollout is the approximately 10 per cent of the lead in conduits (LIC) between the home and the street that are blocked, requiring some civil work. According to leaked documents, the cost impact was $991 per premise if a new LIC was installed as a bulk drop at the same time PCDs were installed, or $1291 if a contractor had to return later.

FTTdp effectively moves the DSLAM (fibre to copper converter) from the street cabinet down the road to the pit out the front of the home. Each FTTdp DSLAM, called a Distribution Point Unit (DPU) is expected to support 1 to 8 ports.

The DPU then uses the existing copper pair from the lead in conduit to bring broadband into the home.

The DPU converter is “reverse powered” from the end user premises. A special plug-pack, similar to a PoE (Power over Ethernet) injector would power the equipment in your pit, eliminating the requirement for NBN to provide power to road side cabinets and the associated OPEX costs. As we have found in part 2, getting power to the nodes have been a significant challenge, adding to delays and missed targets.

The DPU would also have a bypass PSTN mode facilitating on demand transfer to the NBN, just like with the FTTN rollout, today. The existing copper line from the exchange could service the premise via the DPU. Once the subscriber applies reverse power to the line, the copper lead-in would switch over to the NBN.

The very short copper lead-in between the house and pit would support faster connections than FTTN and would be upgradable to G.fast (150Mbit/s to 1Gbit/s). As there are no shared cables, there is no need for vectoring technology.

According to leaked documents, FTTdp is about $400 more expensive than FTTN per subscriber, but mitigates many operating costs such as electricity costs, copper maintenance and future capital costs in eventually upgrading the aging copper network to fibre.

On the 18th March 2016, NBN announced a small field trial of FTTdp to 30 premises in Melbourne and Sydney consisting of NBN staff. The trial will begin in April 2016.

Call for action

Australians are being forced to switch to a monopoly wholesale network with a broken wholesale CVC model. This is the single biggest factor driving down the take up of higher speed plans, not the technology being deployed to date. High CVC pricing is leading to artificial scarcity and adverse customer outcomes.

The NBN is not just a high speed network to watch 4K movies on, competing with Murdoch’s Foxtel. It is a network for the 21st century, it will help Australia innovate, create new jobs, work smarter and improve business efficiency though access to services such as the cloud. It will enable better provision of health & education through ehealth and telehealth initiatives, in video conferencing and access to online education.

If Australia wants to drive the “ideas boom” (Turnbull’s catch phase), artificially crippling the NBN though high CVC charges and internal rates of return is counter to his strategy.

To be a good economic manager, the government must have the foresight to look at life cycle cost analysis when comparing capital and operating costs of various technologies – in what is Australia’s largest infrastructure project. Band-aiding ageing copper and HFC networks might be cheaper, ignoring operating costs, but it will eventually need to be replaced with fibre in the future. It makes sense, where possible, to build the network properly the first time round.

Skinny fibre has been proven though a NBN trial of 4,500 homes in Victoria and should be incorporated into the build immediately, despite saving face. With FTTdp looking favorable, due consideration should be taken when entering into contacts regarding the HFC network (probably too late). Once successful trials of FTTdp is completed, a decision should be made to abandon the FTTN & HFC networks in favor for FTTdp.

Turnbull’s FTTB makes excellent sense for many MDUs and should continue to be pursued.


Posted in Australian Economy | 3 Comments »

Election battle lines drawn: Liberal party rules out changes to negative gearing sacred cow

Written by admin on April 24, 2016 – 7:23 pm

Prime Minister Malcolm Turnbull has today ruled out any changes to negative gearing and in doing so, has drawn battle lines on housing affordability for this coming election.

If Labor wins the election, it plans to reform negative gearing and the capital gains tax discount effective from 1st July 2017. The move, according to a scare mongering Turnbull, will “drive down home values,[and] drive up rents” – a claim he is yet to throw any evidence behind.

A report from The Australia Institute, shows Turnbull’s electorate of Wentworth as the biggest beneficiary of negative gearing, with property investors losing an average $20,248 each in the 2014 financial year.

» Who’s getting negative? The benefits of negative gearing by federal electorate – The Australia Institute, 29th April 2015.
» BIS Negative Gearing Blunder Embarrasses Government – Who crashed the economy? – 3rd March 2016.


Posted in Australian Economy, Australian Housing, Negative Gearing | 10 Comments »

McGrath Real Estate takes hit as Sydney experiences “unforeseen” slowdown

Written by admin on April 18, 2016 – 7:50 pm

Shares in McGrath Limited plunged more than thirty per cent today, after the listed real estate agents were forced to disclose an “unforeseen” slowdown in residential listings.

McGrath has continued to experience an unforeseen low volume of listings and sales in the first half of April, particularly in the North and North Western suburbs of Sydney.  The Company believes the fall in listings in the North and North Western suburbs of Sydney is in line with the market in those areas.

According to the trading update, there has been a 25 to 30 per cent decline in listings in the “Smollen areas” compared to the prospectus forecast released last year when the company listed. The descent emerged in the later part of March.

McGrath acquired ten franchises in Sydney’s mid to upper North Shore, North-West and Northern Beaches regions from Shane Smollen in October last year.

In addition to the decline in listings, there has been a marked reduction in Chinese buyer activity in the North Western Sydney according to the group.

The disclosure will put increased pressure on property spruikers who to date has claimed the market is still strong.

» Sydney housing market issued “sell” rating – Who crashed the economy, 21st February 2016.


Posted in Sydney Housing Bubble | 19 Comments »

Part 2: Let’s put politics aside. It’s time to fix the NBN.

Written by admin on April 13, 2016 – 9:45 pm

This article is part of a three part series. Part 1 examines the merits and problems experienced from Labor’s Fibre to the Premise Network. Part 2 investigates the Coalition’s multi technology mix using a smorgasbord of technologies and the challenge of using aging networks to deliver super fast broadband into the future. Finally, in Part 3, we examine if Australia’s largest infrastructure project can be saved with a combination of Skinny Fibre and FTTdp, and if sky high Connectivity Virtual Circuit (CVC) pricing and RSP consolidation is creating a monopoly white elephant, crippling Australian business and innovation.

Part 2: “Fast. Affordable. Sooner” – April 2013

The Coalition’s broadband policy, “Fast, Affordable and Sooner” was launched in Rupert Murdoch’s Sydney-based Fox Studios on the 9th April 2013.

The modest target was for every household to have a download speed between 25 and 100 megabits/sec by late 2016, and 50 to 100 megabits/sec by 2019. The Coalition claimed the plan chosen by most users in 2021 would be only 12Mbps. (As we learned in part one, just months later on the 30th June 2013 the average speed selected on the NBN Fibre network was already 39 Mbps.)

By leveraging Australia’s existing copper network infrastructure, it was forecast this affordable broadband rollout would cost $29.5 billion (comprising of $20.4 billion in capital expenditure) and would be 33 per cent less than the current government’s $44.1 billion. Not only cheaper, it could also be completed two years sooner, by 2019.

Under a coalition government, once former OzEmail chairman, Malcolm Turnbull would be appointed as Communications Minister. The then opposition leader, Tony Abbott, invoked laughter in June 2013, when he proclaimed Turnbull virtually invented the internet in Australia:

“We have a strong and credible broadband policy because the man who has devised it, the man who will implement it virtually invented the Internet in this country. Thank you so much, Malcolm Turnbull.”

NBN Version 2: Multi-Technology Mix

On the 18th September 2013, a Liberal government was sworn in after winning the election. Shortly after, the new Communications Minister, Malcolm Turnbull, got to work asked for the resignations of the NBN Co board. By the 23rd September, the majority of the board had formally resigned.

Under the Multi-Technology Mix, a smorgasbord of technologies would be used including:

  • FTTP (Fibre to the Premises)
  • FTTN (Fibre to the Node)
  • FTTB (Fibre to the Basement)
  • HFC (Hybrid Fibre Coax)
  • Fixed Wireless
  • Long Term Satellite

Fibre to the Premises (FTTP) would continue to be rolled out in Greenfield sites and would eventually make up only 20 per cent of the NBN footprint.

Fibre to the Node (FTTN) and Fibre to the Basement (FTTB) would be the most prevalent technology, taking a 38 per cent share, while HFC would service the remaining 34 per cent of mainstream connections.

Unchanged from the previous government’s policy, 5 per cent would be serviced by Fixed Wireless and 3 per cent by Satellite.

Fibre to the Basement (FTTB)

One month following the change of government, on the 22nd October 2013, Malcolm Turnbull announced his first positive tweak – Fibre to the Basement.

As discussed in part 1, approximately 30 per cent of the Australian population lives in apartments or units (MDUs). Getting fibre optic cable though the core of these buildings was a challenge from both the physical roll out, and from the owner’s corporation/body corporate approval process.

The new plan would see fibre optical cabling laid to the basement or MDF (Main Distribution Frame) – the communications room of the apartment building. The building’s existing copper network would then deliver the last couple hundred meters, if that. This cabling was normally protected within the buildings core or cable risers and was considered to be in significantly better shape than incumbent’s copper access network.

The FTTB plan was to slash $800 million from the NBN costs. The owner’s corporation typically owned the cable beyond the MDF and hence Telstra’s approval was not needed.

Having lived in a 30 story apartment building in Chatswood, Sydney, it was something I personally believed was a deficiency in the previously government’s network. Walking the local neighbourhood, I was aware of the 5 – 8 story apartments that littered suburbs like Artarmon and Lane Cove.

Malcolm Turnbull was off to a positive start. But, could it last?

By the end of March 2015, NBN Co officially launches FTTB with approximately 2,000 subscribers.

Here we go again – negotiations with the incumbent 800 pound gorilla.

In the weeks prior to the election, Malcolm Turnbull expressed his views that Telstra would simply hand over their copper network for nothing, under the existing $11 billion agreement with NBN Co.

The original agreement was to utilise Telstra’s pit and ducts infrastructure, but now NBN Co needed access to Telstra’s last mile copper. The coalition also wanted NBN Co to use Telstra’s HFC network.

On the 14th December 2014, NBN Co and Telstra signed revised NBN Definitive Agreements. On the 26th June 2015, the ACCC rubber stamped the agreement.

Turnbull was right, it didn’t cost tax payers any more money. However, it cost valuable time.

Fibre to the Node (FTTN)

Fibre to the Node is the heart of the coalition’s fast, affordable and sooner multi-technology mix and the technology supporting the largest portion of subscribers – some 38 per cent of premises.

Copper broadband technologies such as ADSL, ADSL2, ADSL2+, VDSL and VDSL2 all suffer from speed degradation the further the subscriber is away from the exchange, or more precisely the DSLAM (Digital Subscriber Line Access Module) typically installed in the exchange, but which can also be found in street side cabinets and ‘top-hats’ of newer suburbs.

It is a problem that plagues current subscribers of the incumbent’s copper access network. In some areas the exchange could be as much as 7 kilometers plus away from the premise, crippling the maximum speed to a paltry couple of megabits a second, subject to copper pair diameter and condition. If you have thinner cable, a few plastic biodegradable bags, plastic PET bottles, faulty 3M gel caps or a bit of rain, then you could be out of luck.

ADSL2+, the most prevalent technology used on the incumbent’s network, by both the incumbent and competitors, has a maximum downstream speed of 24Mbps.

VDSL typically offers a maximum download rate of 55Mbps and VDSL2 increases this to 100Mbps. VDSL2 now offers an ingenious technology called vectoring that reduces crosstalk between cable pairs and helps deliver a higher bandwidth. With vectoring enabled, subscribers 400 meters or less from the node can expect to have a consistent 100/40 speed. As the length increases to 700 meters, this drops to 60/20Mbps.

If the Coalition’s plan is to have a download rate between 25 and 100 megabits by late 2016, and 50 to 100 megabits by 2019, then it would have to install tens of thousands of street side cabinets packed full with VDSL2 DSLAMs. These street side cabinets would then have to be connected to subscribers with the shortest copper runs.

And that was precisely the plan.

Few deny the fact that the incumbent’s aging copper access network is far from good shape.

Hansard from Wednesday, 23 November 1910 show transcript of the Member for Calare, Thomas Brown MP, arguing that “Copper is used [on the telegraph] for greater efficiency”. Iron had been used on the Telegraph for some 30 years and replacing it with copper was ridiculed as expensive, much like Fibre is today, one hundred and six years later.

In simple terms, the typical copper access network consists of a distribution cable containing 200 pairs from the exchange to a street side pillar. A standard pillar represents a distribution area (DA) of about 150 to 200 premises.

The pillar is a water tight, domed top metal cylinder invented in Australia and introduced into the Telecom Australia network in 1955, when Australia once led the world in Telecommunications.

Street distribution cables then connect from the pillar to the pit outside of individual homes in the distribution area. From the pit, a lead-in runs into the home or business.

In the FTTN model, a Node is placed as close as possible to the pillar. Each Node has 384 ports.

1,860 kilometers of new copper cable on order

During a Senate estimates grilling on the 20th Oct 2015, NBN Co CEO Bill Morrow declared NBN Co had purchased 1,860 kilometers of new copper cable, $14 million worth, from Sydney based Prysmian. Some commentators seized on the moment suggesting this was proof the copper network was in disrepair and needed replacing.

But the 1,860 kilometers of new copper cable is intended to be used to connect the new nodes to the pillar. Depending on the size of the distribution area, a single 100 pair or 200 pair cable will connect the new node to the pillar and subsequently the customer premise side.

To provide the transition period, allowing subscribers to migrate from the incumbent’s network, another 100 or 200 pair cable connects the new node to the pillar and back to the exchange, providing continuity of service. This cable becomes redundant in 18 months once every subscriber is migrated.

Copper Corroded Spaghetti – a 972% cost blow out.

A leaked document on the 3rd December 2015 finally provided the evidence experts were expecting. The dilapidated copper network could cost as much as $641 million to fix.

A risk assessment in the leaked document assessed the risk that the “state of copper network [was] considerably worse than expected, leading to extensive work beyond the node” and found it had a likelihood of “almost certain” and a consequence of “major”.

In strategic review number 6, one of many Turnbull commissioned hoping for a favorable outcome, the cost of copper remediation per node was put at $2,685. In the first operating plan (IOP 1.1), this figure exploded to $19,437 per node. In IOP 2.0, the cost ballooned out again to $26,115.

With 24,544 nodes, copper remediation beyond the node could now total $641 million.

The risk assessment indicated a “decision to minimise remediation during build could reduce speeds available, create additional burden on connect and hamper timely migration.”

It is currently unclear what testing or qualification of the copper network is being undertaken at build. This fundamental question was raised during the Senate Standing Committee and was taken on notice. It appears when a home install occurs, the installer will connect a “VDSL configure device” (modem) and record the Signal to Noise Ratio and Sync Rate.

For the self-install model, it is most likely no tests are actually performed on the line.

Utility Power to the Node

On the 29th February 2016, Fairfax papers had reported “NBN: Malcolm Turnbull’s ‘faster, cheaper’ roll-out falters”. It had obtained a leaked document, dated the 19th February 2016 comprehensively detailing FTTN rollout critical design metrics for the week of the 12th February 2016.

The target was to have the design completed for 1,402,909 premises, but NBN had only completed fewer than half – only 662,665 premises.

94,273 premises should have reached practical completion, and 5,943 be “Ready for Service.” Reality was only 29,005 premises had practical completion and zero were Ready for Service.

The documents highlighted the root cause for 41 per cent of the 740,244 design deficit was getting unmetered power approvals, with 91 per cent of the backlog in NSW and Victoria. In the previous government’s FTTP network, nodes are passive and do not require power, not only simplifying the network build but also reducing operating expenditure.

It is believed the 24,544 nodes planed in IOP 2.0 will pull approximately 1 kilowatt of power continuously – each. That adds up to one heck of a power bill. The original operating plan (IOP1.1) did not include power costs in the OPEX figures.

The 65,268 premise deficit for practical completion was attributed to delays in power connection (34%), power approval (25%) and material shortages (30%).

NBN Co COO Greg Adcock indicated connecting the Umina trial nodes to the Electricity network cost $6,250 each.

Fibre to the Node Commercially Launched

The Fibre to the Node product was commercially launched by NBN on the 21st September 2015.

According to the press release, NBN plans to have 500,000 FTTN premises ready for service by mid 2016 and 3.7 million by mid 2018.

Telstra & Optus HFC Networks (‘Operation Clusterfuck’)

Clusterfuck is a military term for an operation where multiple things go wrong. Operation Clusterfuck also happens to be the NBN Co internal codename for the upgrade of the Telstra and Optus HFC networks.

Under the multi technology mix, NBN Co will leverage the Telstra and Optus HFC networks built in the 1990s.

Telstra has a HFC footprint covering Sydney, Melbourne, Brisbane, Gold Coast, Perth and Adelaide.

HFC stands for Hybrid Fibre-Coax. The network, as the name suggests, consists of a fibre distribution network and coax cable with multiple amplifiers in the last mile coax segment. The module/converter between the fibre and coax networks is called a Cable Modem Termination System (CMTS).

The network is a shared medium. Each premise is connected to the same coax cable and shares the bandwidth in the segment. As more people connect to the segment and download data, the slower the network gets.

The current Telstra HFC network conforms to DOCSIS 3.0 (Data Over Cable Service Interface Specification Version 3) and supports speeds up to 100Mbps. NBN plans to upgrade to DOCSIS 3.1 in Q4 2016, providing a maximum 10Gbps downstream capability, with 1Gbps upstream.

Both Telstra and Optus currently have lead-ins to 2 million premises. According to the NBN Corporate plan, it is expected the HFC networks will serve 4 million premises or 34 percent of the population. The Telstra network is believed to be in much better condition than the Optus HFC network.

As the network is a shared medium, and as more premises are migrated onto the HFC network, it is the intention of NBN Co to undertake HFC node splitting – adding more CMTS head ends to reduce the number of premises sharing the bandwidth and improve the speed. Current CMTS can service only one segment, but with never CMTS it is possible to service two or four segments.

Current NBN design rules will see approximately 700 to 800 premises per segment and approximately 5,000 segments to service the 4 million premises in the HFC footprint. This is expected to be split to 17,000 segments in the future, reducing the number of premises per segment to approximately 235.

On the 23rd February 2015, NBN Co inked a $400 million deal with US based ARRIS to upgrade and integrate the HFC networks. The entire network would be upgraded to DOCSIS 3.0 with the option of DOCSIS 3.1 when NBN Co is ready. It is understood the first batch of 18,000 HFC NTDs are DOCSIS 3.0 are unable to be upgraded. These will be retrofitted to DOCSIS 3.1 at a later date.

Optus HFC

The Optus HFC network passes 1.7 million homes in Sydney, Melbourne and Brisbane.

On the 23rd June 2011, under the previous government, Optus signed an $800 million deal with NBN Co to progressively migrate HFC customers to the NBN and shut down its HFC network. It was approved by the ACCC on the 28th May 2012 and payment will be done in installments as customers migrate to the NBN.

Under the coalition, it was decided to use the aging network to deliver high speed broadband now and into the future. It had been hoped leveraging on the 1990’s network would increase the roll out speed and provide Australians broadband speeds, sooner.

The coalition renegotiated the earlier deal to obtain rights to use the tired network. This is known as the ‘Orion’ deal.

In a document titled “HFC Plan B: Overbuilding Optus” dated the 3rd November 2015 and leaked on the 25th November, NBN considered the Optus network not fully “fit for purpose”. It found some of the Optus equipment was “arriving at end of life” and would need replacing, segments were oversubscribed and will require splitting and existing Optus CMTS did not have sufficient capacity to support NBN services. In addition, it found degraded end-user speeds due to noise ingress into the network.

In order to provide “higher probability of success given the current state of the network” and “significant operational simplicity” NBN Co recommended overbuilding many of the 470,000 premises the network passed, migrating 240,000 subscribers to FTTP/FTTN/FTTdp and 30,000 to the Telstra HFC.

The recommended overbuilding option, the mix proposed above, would require a “significant peak funding” cost of $375 million and result in missing the HFC Ready for Service targets. Other options put forward had peak funding up to $600 million.

With NBN being a political football, some commentators were incensed the coalition had spent $800 million on an obsolete network, only to have to fork out hundreds of millions more to overbuild it.

Reality was, the previously government had already negotiated the $800 million to shut the network down, or more precisely $800 million for the migration of subscribers, not the actual network. The previous government had planned to overbuild the Optus HFC footprint with fibre. It should be noted the $800 million hasn’t yet changed hands, this will be done progressively as customers are migrated.

What it does highlight, however, is the significant challenge in cost effectively building a high speed broadband future on old, neglected and decaying infrastructure.

NBN claim no separate IT system is required to support the Optus HFC. The IT provisioning systems are HFC specific and will be used for both Telstra and Optus HFC.

TPG HFC

TPG owns HFC networks in Mildura, Ballarat, Geelong and Canberra. NBN CEO Bill Morrow has had talks with TPG but they are not interested in selling these networks. The Mildura and Ballarat networks were rolled out by regional Victoria provider Neighborhood Cable in 1996 to 2001. The assets were acquired by innovative Canberra based TransACT in 2008. In November 2011 iiNet acquired TransACT.

HFC Network Build

A three hundred premise NBN HFC pilot was undertaken in Redcliff, Queensland late last year. This has been expanded to 9,886 premises in Redcliffe, 790 in Emu Plains and 500 in Merrimac. The corporate plan states NBN will have 10,000 HFC premises ready for service by the 30th June 2016.

In 2015, just prior to Christmas, Telstra revealed it had signed a memorandum of understanding with NBN for the upgrade and expansion of its HFC network. The deal was estimated to be worth between $1.5 and $1.8 billion and would see Telstra design and project manage the upgrade. Only this week, Telstra announced the deal has been signed.

A similar deal is expected between NBN Co and Singtel-Optus, although due to the smaller reach of the Optus HFC network, it is not expected to be nearly as substantial.

Under Telstra’s very lucrative continuity deed, once NBN migrated one user to the Telstra HFC network, NBN committed to acquiring the entire Telstra HFC network. It cannot cherry-pick parts of the network.

Telstra has a contract with Foxtel for the supply of cable TV services, believed to be until 2025. NBN Co will now be responsible to Telstra for maintaining the HFC network for the provision of Foxtel until 2025. Rental payments are indexed to CPI and do not take into account the increased maintenance costs of an aging HFC network.

During the rollout, NBN cannot dispose of HFC assets transferred to it, without Telstra’s consent. After the rollout is complete, NBN cannot transfer the Telstra HFC assets to a large RSP or a third party which has credit rating below a specific limit.

In January 2016, NBN indicated Optus and Telstra are in construction trials, testing the lead-in rollout to premises passed by their network, but where the premise does not already have a lead-in. It is a construction trial only, customers are unable to connect. Special attention is being given to MDUs.

Medium to large MDUs are not well serviced by HFC. As a result, these premises as most likely to be serviced by FTTx.

NBN is also working with RSPs allowing a sandpit trial where they can connect and test their own equipment to the HFC. It is believed the NBN HFC will be one of few open wholesale HFC networks in the world.

According to a Senate Estimates hearing in February 2016, we can expect a commercial launch of the NBN HFC product in second half of 2016.

NBN Version 2 Progress

After lengthy delays in turning the ship around, commissioning a raft of inquiries/strategic reports and renegotiating contracts to purchase deteriorating copper and HFC networks, the NBN roll out is once again picking up speed. As of last week, the 7th April 2016, NBN Co have 1,969,933 premises declared “Ready for Service” and 917,350 premises activated. During the week ending 7th April, NBN Co declared another 8,674 premises Ready for Service.

On the 23rd August 2015, NBN Co announced peak funding costs have increased to $56 billion. Despite costing $56 billion, PricewaterhouseCoppers have valued a completed network at just $27 billion as a result of using a mismatch of obsolete technologies.

Comparing headline capital expenditure figures between a full FTTP roll-out and Multi Technology Mix does not take into consideration operating costs and the expected life of the asset.

When labor was confronted with needing new wheels, it brought a brand new car. Liberal on the other hand decided to upgrade the engine at considerable capital and is now faced with high maintenance costs, bald tires, a clunky gearbox and a corroded radiator.

The most recent quarterly “state of the internet” report published by Akamai Technologies found Australia fell to 60th rank in the world for average peak connection speeds, down from 30th place when the Coalition took office.

Coming up in Part 3, we examine if Australia’s largest infrastructure project can be saved with a combination of Skinny Fibre and FTTdp, and if high Connectivity Virtual Circuit (CVC) pricing and RSP consolidation is creating a monopoly white elephant, crippling business and innovation in the process.


Posted in Australian Economy | 6 Comments »

Part 1: Let’s put politics aside. It’s time to fix the NBN.

Written by admin on April 6, 2016 – 8:48 pm

This article is part of a three part series. Part 1 examines the merits and problems experienced from Labor’s Fibre to the Premise Network. Part 2 investigates the Coalition’s multi technology mix using a smorgasbord of technologies and the challenge of using aging networks to deliver super fast broadband into the future. Finally, in Part 3, we examine if Australia’s largest infrastructure project can be saved with a combination of Skinny Fibre and FTTdp, and if sky high Connectivity Virtual Circuit (CVC) pricing and RSP consolidation is creating a monopoly white elephant, crippling Australian business and innovation.

While former Prime Minister John Howard had tinkered with Broadband Connect and OPEL in 2006/07, the National Broadband Network, in its current form, came to fruition in the May 2009 budget.

With claims the Australian economy was struggling from the grips of the worse financial crisis since the great depression, the then government announced a $22.5 billion dollar Nation Building program comprising of infrastructure projects in road, metro rail, ports, clean energy, hospitals and health, tertiary education, research and innovation, and broadband.

The biggest slice of the fund went to broadband – some $4.7 billion. This was the first installment in what was expected to be a $43 billion dollar project over 8 years.

Australia had privatised its existing, aging copper telecommunications network and the incumbent had neglected the network in the pursuit of profit. Stories of technicians using plastic PET bottles and biodegradable plastic shopping bags to water proof the network was, unfortunately, all too common.

The incumbent monopoly owned the wholesale copper access network (CAN), while also operating, often anti-competitively, in the retail space. Competitors who tried to gain the upper hand by installing their own equipment in exchanges and utilising the incumbent’s last mile copper network would often be locked out when the incumbent “couldn’t find the keys to the exchange”.

A network for the 21st century

During the depression, the United States built the Hoover Dam to stimulate the economy. In the 21st Century, Australia would build a super-fast broadband network.

Apart from directly supporting “up to 25,000 jobs a year, on average, over the eight-year life of the project”, the objective of the National Broadband Project was to future proof Australia’s telecommunications network, providing up to 90 percent of homes and workplaces with speeds up to 100 megabits a second. It would completely replace the neglected, outdated and corroded copper network, Australia so heavily relied upon.

It would be a wholesale only network, offering a true level playing field to all retail service providers (RSPs). More importantly, it would allow Australian business to Innovate, work smarter and more efficiently. It would open up possibilities in e-health and tele-health, in video conferencing and improve access to online education.

The May 2009 Federal budget paper indicated “The National Broadband Network is the single largest nation building infrastructure project in Australian history.”

Add Australia’s dysfunctional political system, and it was inevitable something would go wrong.

NBN Version 1: Fibre to the Premise (FTTP)

According to ASIC, NBN Co Limited, ABN 86 136 533 741 was first registered on the 9th April 2009. It was tasked with building the High Speed Fibre to the Premise (FTTP) network covering approximately 90 per cent of Australia’s population.

While the most equitable objective would be to have all businesses and homes connected to fibre optic cable, the vast continent Australia is means this is not practically possible.

Where it is not practical to lay fibre, the remainder of premises were intended to be serviced by fixed 4G TD-LTE (Long Term Evolution) point to point links or via satellite.

NBN Co Limited would strive to achieve an internal rate of return of 7 per cent with the possibility of selling the network in the future. The rollout would begin in Tasmania.

An early, independent cost benefit analysis suggested the network build was achievable within the forecast budget and recommended extending the fibre network to 93 per cent of the population.

The majority of the network was based on GPON (Gigabit Passive Optical Network) technology. It would consist of a Distribution Fibre Network (DFN) – a redundant fibre ring connecting optical line cards – effectively the exchange to Fibre Distribution Hubs (FDHs) or cabinets scattered about the neighborhood. These hubs would consist of a passive optical splitter and being passive, would not require connection to the electricity network. A hub would typical serve 576 connections, a portion allocated for future expansion.

The Local Fibre Network (LFN) would be a starred fibre network from the distribution hub to the premises, via ‘multiports’ in the pits. Fibre cables in both the distribution and local networks were spiced, requiring skilled personnel.

Each dwelling would be fitted with a NTD (Network Termination Device) at NBN Co’s cost, providing two UNI-V interfaces/plain old analog telephone ports, and four UNI-D interfaces/broadband data ports. Each NTD was backed up with an alarm battery.

The ‘optical budget’ allowed the exchange housing the Optical Line cards to be up to 15,000 meters from the NTD installed in the customer’s premises.

The four data ports enabled four different services to be provisioned on each port. For example, you could have up to four broadband services, ideal for a share house where each occupant is responsible for their own data quota. Or in the future, you could provision dedicated IPTV services, private VPN links back to the office or remote CCTV / Alarm monitoring. The government had even considered a government network, providing access to Medicare and other services.

With four data ports, you could also provision a new broadband connection and test it, before canceling the old, ensuring continuity of service.

On the decrepit copper network, the incumbent would have to borrow inactive copper pairs to repair and patch active customers. To get a new connection on the copper access network where your lines were borrowed, it wasn’t unheard of having to wait 28 days and pay $299 for provisioning. On the NBN, with automated provision, this could be reduced to under one hour.

The network was considered mildly opulent, but a real asset for the future. Something that could serve the country for decades to come.

Points of Interconnect

NBN Co had initially designed its network around 14 points of interconnect (POI), roughly one or two points in each state or territory. A POI is where the Retail Service Provider (RSP) connects into the NBN to service local subscribers. The smaller number of POIs were thought to reduce barriers of entry for smaller ISPs and encourage competition. A smaller ISP who desired to only provide broadband services in one state, might only require one or two connections into the NBN. As they grow, they can connect into other POIs.

The Australian Competition and Consumer Commission (ACCC) argued such a design would give NBN Co monopoly over backhaul and instead supported 121 points of interconnect. This would require RSPs to maintain 121 connections into the NBN to service all of Australia, or utilise a third party wholesale aggregator. As we will learn later, this was believed to be one of the primary causes of consolidation within the Australian broadband industry, eroding competition.

An incumbent 800 pound gorilla called Telstra

Rolling out a high speed fibre network requires telecommunication pits and ducts. NBN Co could have dug their own, but it made sense to use existing infrastructure and reduce infrastructure duplication.

It also made sense to encourage the incumbent to decommission its network and migrate subscribers to the NBN to improve the commercial viability of the project. Some argued the later was anti-competitive and was simply creating another monopoly – although this time it would be a wholesale only monopoly.

But the incumbent 800 pound Telco gorilla in Australia goes by the name of Telstra and he doesn’t play well. The copper access network had been a cash cow for Telstra. Shutting it down would take some persuasion – and a two plus year protracted negotiation.

NBN Co had initially valued the use of duct and pit infrastructure, plus compensation for shutting the copper access network down at $8 billion. Telstra said they needed $12 billion.

Some persuasion stemmed from sweeping regulatory reforms in late 2009 when Telstra was instructed to structurally separate wholesale and retail operations.

A heads of agreement was reached between NBN Co and Telstra on the 20th June 2010 after 9 months of “detailed and complex negotiations” according to then NBN Co chief, Mike Quigley. NBN Co would pay Telstra $9 billion for access to infrastructure including pits and ducts and the government would pay another $2 billion towards structural separation issues and universal service obligations.

Another year passed before an announcement on the 23rd June 2011 with the signing of Binding Definitive Agreements. Under the agreement, NBN Co would access the Telstra infrastructure for a minimum of 35 years and pay Telstra progressively for disconnection of customers from Telstra’s “legacy fixed-line networks”, but excluding HFC pay-TV customers. Interim arrangements were negotiated for immediate access to Telstra infrastructure, enabling the network to begin roll out.

On the 7th March 2012, the then Communications Minister Senator Conroy announced definitive agreements had come into force.

Multiple Dwelling Units (MDUs)

One of the problems confronting a fibre network reaching 93% of the population is the thirty or so per cent who live in Multiple Dwelling Units (MDUs) – flats, apartments and businesses in shopping centers. Getting fibre to the premises or to the MDF (Main Distribution Frame) under Schedule 3 of the Telecommunications Act 1997 is reasonably easy. The act allows carriers to enter property to inspect, install and maintain infrastructure.

But getting fibre up the cores of buildings or through the common area is another thing. Depending on the structure and state or territory, it can involve the body corporate, owner’s corporation, building manager etc, etc. This can take considerable time and extra planning.

I’m one of the lucky few, privileged to have a NBN FTTP connection. However, I wasn’t so lucky when the twenty townhouses of which, one I occupy, was marked as being a MDU. This is despite each of the twenty dwellings having our own LIC (lead in conduit) to Telstra’s pit infrastructure.

On the 31st March 2014, our fibre serving area (FSA) went ready for service (RFS). This allowed single dwelling subscribers in our area to start ordering NBN connections. Under the agreement with Telstra, no more copper services would be connected and we would have 18 months before the copper network was shutdown.

But our MDU was not ready for service. Details of our premises were passed onto Downer EDI who had the contract for connecting the MDUs in my state. It took just shy of three months for Downer EDI to gain approvals from all the owners/residents, draw up comprehensive plans and install boxes (PCDs) on our walls. This was considered expedient for our simple site. It took another four months after the PCDs were installed, before the addresses went ‘SC2’ – ready for service with a PCD.

An almost instantaneous call to my RSP ensured a contractor visit within 7 days, only to have the NTD installed and find out the multiport in the pit was missing and that the problem would have to be escalated back to Downer.

For what should have been a simple site, and by prodding my fellow neighbours in my community plan to return correspondence to Downer, I was rewarded with a superfast 50/20 connection on the 10th November 2014, just over 7 months later.

But during that 7 months, I had neighbours who had moved in and were unable to connect to any fixed line network. They were left in limbo. As our fibre serving area was ready for service, Telstra would no longer connect any copper services, but our MDU was not yet ready for fibre either.

NBN Version 1 Progress

By the middle of election year 2013, the FTTP network was picking up steam. According to NBN Co’s Annual Report 2012-13, at the end of fiscal 2013, over 1.1 million fibre brownfield premises were either completed or had commenced construction. In the June 2013 quarter, more than 1000 premises/lots were being connected per day. This was expected to rise to 4 thousand/day over the next 12 months.

At June 30, 70,100 subscribers were now connected to the NBN via 64 POI, a fourfold increase over the previous year. The average speed provisioned across the fibre network was 39 Mbps – much higher than expected. On the 20th April 2013, NBN Co announced the intention to launch a 1,000/400Mbps (1 Gigabit) service by December 2013.

Politics aside, the NBN was progressing as well as could be expected for such a large scale infrastructure project. It got off to a very slow start with complex negotiations with the incumbent telco over access to its pit and duct infrastructure and the shutdown of the copper network which for so long had been the incumbent’s cash cow. It would have been naive to expect the incumbent to simply roll over.

In early 2013, Asbestos was found in the incumbent’s pit and duct infrastructure. Remediation works at one stage was halted after improper handling and dumping was observed. After risk assessments and contaminated pits were identified, contractors underwent training on asbestos further adding to delays. It is understood some 10 to 20 per cent of the incumbent’s ducts and pits are made of asbestos, the majority built by James Hardie.

The project suffered with an inadequate number of trained fibre splicers. There were reports many were learning on the job, resulting in faulty connections that then had to be remediated. NBN Co implemented measures in place to address “address challenges in [the]construction, including the training and employment of additional specialist telecom workers.”

Coming up in Part 2, we examine NBN Version 2: Multi-Technology Mix followed by , Skinny Fibre, FTTdp and CVC pricing.


Posted in
Australian Economy | 10 Comments »

“No one wants to move to Australia” : Tech Giant

Written by admin on March 16, 2016 – 6:48 pm

In his victory speech, Prime Minister Malcolm Turnbull said the Australia of the future has to be a nation that is agile, innovative and creative.

But founder of Australia’s largest tech company, Mike Cannon-Brookes, claims Australia is too expensive.

Mike Cannon-Brookes, a founder of Nasdaq listed software company Atlassian, headquartered in Sydney, is having trouble attracting good staff to its Sydney offices. Australia’s high cost of housing, transport and education was a significant obstacle in attracting software engineers and senior developers.

Cannon-Brookes explained to the Australian Financial Review Business Summit, “We’re trying to pull the best talent out of [Silicon] Valley. A lot of those guys and girls have four other options down the street, so how am I going to convince them to move to Sydney?”

Junior staff were easier to attract as they were young, single and adventurous. But for senior staff, Sydney was too expensive to establish a family and settle down.

“So, whatever we can do to change that cost of living would make a big difference,” claimed Cannon-Brookes.

Sydney house prices have surged 50 per cent in just three years, sending Australia’s total real estate assets to GDP upwards to 3.8 times. This is higher than experienced at the peak of the Ireland and Japan housing bubbles. Australia now have the highest level of household debt to household disposable income in the world.

Australia is expected to lose more jobs and opportunities as it prices itself out of the global market.

» ‘Nobody wants to move to Australia’: Tech billionaire founder of Atlassian says he can’t attract foreign talent because housing, transport and education are all too expensive – Daily Mail, 16th March 2016.


Posted in Australian Economy, Australian Housing | 40 Comments »

BIS Negative Gearing Blunder Embarrasses Government

Written by admin on March 3, 2016 – 6:34 pm

A flawed report claiming Labor’s plan to quarantine negative gearing to new homes would result in rents surging by up to ten percent, and new home builds falling 7,200 annually, has embarrassingly backed fired for the government.

The BIS Shrapnel report, riddled with significant errors such as Australia’s GDP being only a paltry $190 million, made sensationalist front page news in most News Limited tabloids today. (Negative gearing: Adelaide renters to be hit hard by Labor plan, BIS Shrapnel study shows)

News Limited claimed, “Consulting firm BIS Shrapnel will on Thursday release modelling showing Labor’s proposed changes to negative gearing would hurt tenants, landlords and the economy.”

Later, It was declared the report was written late last year and had nothing to do with Labor’s policy. In fact, the modelling made many different policy assumptions such as investors could only deduct losses against their property portfolio, while Labor will allow losses to be deducted against other investment income.

It comes at a bad time for the government as it tries to argue that negative gearing doesn’t distort the market, yet claims serious adverse consequences if negative gearing is quarantined to new investments only.

Early polling shows the majority of voters are in support of Labor’s negative gearing curbs.

» A Low-Cost way to Derail the Housing Debate – Inside Story, 3rd March 2016.


Posted in Australian Economy, Australian Housing | 30 Comments »

Australia’s housing market “insane” : Jonathan Tepper

Written by admin on February 24, 2016 – 9:03 pm

At nine thirty last night, I sat in my allocated seat – G-6, in cinema ten of Event Cinemas’ Marion Megaplex. As a “renter class” citizen, I had just paid the budget price of $12.50 (Cheaper Tuesday) to see The Big Short, a true story of hedge fund manager, Michael Burry, who diligently discovered the American subprime housing bubble unfolding and boldly shorted it.

As the previews rolled, it became increasingly apparent I was the only one in this session. I had the entire cinema to myself. No chip packets rustling, no one chatting.

Waiting for the film to start, I pondered to myself. Why is the cinema empty? Is it a reflection of Australia’s complacency? Are any other cinemas in the complex, empty? Should I be shorting Amalgamated Holdings, the owner of Event Cinemas, instead of the banks? Just how much disposable income has our housing bubble leached from everyday Australians, that they can no longer afford cheaper Tuesdays?

And last, but not least… If a film is projected onto the screen, and there is no one to see it, does it still show?

Granted, I had taken 6 weeks to watch it. Had I not been overseas on the 14th January, when The Big Short opened on the big screens in Australia, I would have been eagerly in the audience that opening night.

But the timing was somewhat perfect.

Today, on the front page of the Australian Financial Review was an article by Anne Hyland. It was towards the bottom of the front page, where yesterday lobby group, the Property Council of Australia, had paid for a banner advert promoting the benefits of negative gearing (Don’t play with negative gearing), a tax incentive thought to be contributing significantly to Australia’s ballooning housing bubble. Hyland wrote:

It was like a scene from the film The Big Short. A hedge-fund manager and an economist pose as a gay couple on a combined income of $125,000 and tour Sydney’s western suburbs viewing housing developments and meeting mortgage brokers for research to determine if there’s a housing bubble.

The conclusion is it’s worse than they thought.

I could immediately relate.

As the story goes, a misplaced phone call to hedge fund manager, Mark Baum (played by Steve Carell) alerts him to a credit default swap being placed on the American housing market. Curious to understand why someone would short something as safe as houses, Mark Baum undertakes extensive research. He visits suburbs with high mortgage defaults, talks to mortgage brokers and interviews hookers with multiple investment properties funded by time bombed adjustable rate mortgages. Later he visits the American Securitisation Forum in Las Vegas and ratings agency Standards and Poor’s. The more he digs, the bigger the scale of the fraud becomes.

Had you watched 60 Minutes on Sunday night (Home Groans), you will already know what Hyland is referring too.

Australian based Bronte Capital’s chief investment officer, John Hempton has been showing founder of Variant Perception, Jonathan Tepper around town for the past couple of weeks.

Jonathan Tepper had predicted the housing bubbles in the United States, Ireland and Spain. In Spain, according to 60 Minutes, he was made enemy of the state for simply telling the truth.

During a weekend auction in Sydney, Tepper described the irrational frenzy as “mad”. “I’ve never seen anything like this in my entire life. This is truly crazy,” he remarked on 60 minutes.

Tepper says the price to income ratios for Australian housing is totally out of wack and predicts falls in house prices of between 30 to 50 per cent for Sydney and Melbourne.

“Have no doubt it will burst, the only question is when,” he told 60 minutes reporter Ross Coulthart.

The Australian Financial Review today reveals Tepper and Hempton has been touring suburbs across north-west and south-west Sydney, and has met with some 20 mortgage brokers. Mortgage brokers had repeatedly encouraged the two, posing as a gay couple, to lie on loan application forms about their income.

They have also spoken to many investors who were able to get revaluations on their investment portfolios to increase equity for further speculative property purchases. “We met one who was able to do this 20 times in a year with their property portfolio.”

Mortgage brokers were upfront what big four banks would revalue investment properties quickly. “They wanted to put you in 10 to 15 apartments. The only way they could do that was getting the bank to revalue the property so you could borrow more money. They were acute about which banks had bad practices.”

2012 Property Investor of the year, Kate and Matt Moloney featured predominantly in the 60 minutes report. They are now close to bankrupt, owing the banks millions. One of their downfalls were accumulating too many investment properties, too rapidly with little to no equity.

According to the AFR, “Tepper writes of getting a ride with an Uber driver who said he had his own house, had bought five investment properties in Queensland with no cash deposits, and went guarantor for his daughter who bought a $2.2 million home.”

In Tepper’s report, he warns “Australia now has one of the biggest housing bubbles in history”. Australia’s real estate assets to GDP is now 3.8 times. Ireland and Japan, two of the world’s largest housing bubbles in history, had multiples of 3.5 times at their peak.

Hempton discloses has a short on the Australian housing market. Tepper has told 60 minutes, he will probably do the same.

» Uncovering the big Aussie short – The Australian Financial Review, 24th February 2016.
» Home Groans – 60 Minutes, 21st February 2016.
» The charts that suggest the housing bubble is out of control – The Sydney Morning Herald, 24th February 2016.


Posted in Australian Economy, Australian Housing, Melbourne Property Bubble, Sydney Housing Bubble | 37 Comments »

Sydney housing market issued “sell” rating.

Written by admin on February 21, 2016 – 1:00 pm

Performance Property Advisory believes Sydney property prices have “reached a classic peak” and have issued a “sell” rating according to the Australian Financial Review (‘Sydney and Melbourne property ‘set for price correction.’) The group provides market research and analysis for medium to high income professionals.

According to the Domain, Sydney house prices have surged 52.5 per cent in the past three years. Over the same period, CPI increased just 6.2 per cent meaning house prices outpaced inflation almost 8.5 times.

“The market is just too expensive to keep running. The bulk of potential buyers cannot afford to compete. We will have to see three to four years of wage growth before it returns to normal levels, ” commented David McMillan, a principal at Performance Property Advisory.

McMillan was unwilling to speculate on how far prices will fall.

We reported last year (‘NAB restricts lending in 34 Sydney bubble suburbs‘ – Sep 28th) the banks had made decisions to restrict lending to many suburbs “exhibiting characteristics that may indicate future deterioration in credit risk”.

According to the Domain Group, Sydney house prices have now recorded their largest quarterly fall on record, plunging 3.1 per cent in the December 2015 quarter.

Economists who study housing bubbles and long term price trends have found, logically, house prices generally do not appreciate faster than household income, or the ability to service the mortgage/debt. In comparing markets, they often compare the change in the ratio of house prices to income and house prices to rents. In a normally functioning market, both should rise at roughly the same rate and should be flat (cancel each other out), like in the case pre-bubble 2001. Once the bubble bursts, these ratios generally return to mean like was the case with the USA subprime housing bubble.

Our data would suggest Sydney house prices are 48.8 per cent overvalued on a price to rent metric and 52.2 per cent overvalued on a price to income metric.

Both rents and incomes have increased faster than inflation during the boom years, and are now showing signs of stress. (‘Rental growth slowest in 21 years‘), (‘Falling wages to upset household debt dynamics‘) Larger falls could be witnessed if rents and wages were to fall, or if confidence is eroded to the point that the market undershoots. The real house price index (Price to CPI), suggests Sydney could be as much as 57.4 per cent overvalued.

» Sydney and Melbourne property ‘set for price correction’ – The Australian Financial Review, 19th February 2016.


Posted in Australian Economy, Australian Housing, Sydney Housing Bubble | 26 Comments »

Turnbull scare campaign: House prices to be ‘smashed’ under Labor’s negative gearing policy

Written by admin on February 19, 2016 – 7:40 pm

He promised informed economic debate.

But today, Prime Minister Malcolm Turnbull’s credibility in delivering much needed economic debate evaporated, as he launched a massive scare campaign claiming Labor’s negative gearing policy would result in house prices being “smashed”.

After some debate over the past month, Turnbull has backed away from increasing the GST to 15 per cent claiming it would contribute very little to economic growth, “After you take into account all of the compensation that you would need to ensure the change was equitable, it simply is not justified in economic terms.”

But he had left other reforms on the table including changes to negative gearing. It was understood, Treasury was preparing modeling on various changes to the sacred cow.

But with no clear policies from Turnbull, Labor seized the moment last Sunday, announcing bold changes to negative gearing and the fifty percent capital gains discount, throwing Australia’s severe housing affordability at the forefront of the next election.

If labor wins the next election, it will quarantine negative gearing to new homes only, from July 2017. Additionally, it would cut the capital gains discount from 50 percent to 25 per cent.

» Independent modelling backs Labor’s negative gearing policy – The Sydney Morning Herald, 19th February 2016.
» Labor’s negative gearing reform proposal is economically responsible and fair – The Guardian, 19th February 2016.


Posted in Australian Economy, Australian Housing | 17 Comments »

2012 Property Investor of the year…. broke owing 5.8 million.

Written by admin on February 14, 2016 – 9:09 am

“Our fifth annual Investor of the Year Award has revealed some of the country’s most shrewd investors yet, as we present the property powerhouses who are showing the rest of Australia how it’s done” boasts Your Investment Property Magazine in 2012.

Showing the rest of Australia how it is done, were winners Kate and Matt Moloney. They had built a solid portfolio of 16 properties, with an estimated value of $8.5 million and retired at the age of just 24.

Ten of the properties were in the coal mining boom town, Moranbah, three in Mackay and the remainder in Townsville, Fitzibbon and Miles.

The judges were impressed. Tim Lawless from RP Data said, “They picked the market cycle in Moranbah well, purchasing their properties in the early part of what turned out to be a very strong growth phase.”

David Hows, MD of Real Estate Investar applauded, “At just 24, Matt and Kate have achieved more than most investors do in a lifetime. They’ve shown significant skills across investment strategies and have seen amazing results. They also have a plan to ensure this is just the start.”

Tyron Hyde, director of Washington Brown said, “It’s obvious that Matt and Kate are on the path to glory! They have clear goals and stick to them, in fact, beat them. I particularly like the ‘de-risking’ strategy they are aiming for now, replacing mining income with more secure and diverse areas.”

None of the property experts understood the macro environment and China’s fixed asset investment boom that was creating insatiable, but unsustainable appetite for coal. (Has the mining investment boom come to an end?’ – Who crashed the economy?, 24th August 2012)

Yep, you guessed it, “They picked the market cycle in Moranbah well.” Just three years on, and a 75 percent plunge in Moranbah property prices according to Kate, has left her in a “debt disaster”. If Kate and Matt were to sell their portfolio now, they would “still owe the banks about three million of dollars (not including arrears interest and selling costs)” describing it as a “financial cancer.”

» Kate Moloney – Love and Wisdom


Posted in Australian Economy | 36 Comments »

Rental growth slowest in 21 years

Written by admin on January 27, 2016 – 8:23 pm

Australia’s rental market is starting to resemble a disaster zone as an oversupply of rentals flood the market at a time of anemic wage growth. Australian Bureau of Statistics figures released today show rent growth is now the lowest in 21 years, at just 0.82 per cent for the year to December 2015.

Mining dominated cities Perth and Darwin are leading the way with rents falling 2.22 per cent and 2.43 per cent respectively for the year. Most of the declines were attributed in the last quarter with rents falling in Perth 1.34 per cent and Darwin, 1.32 per cent.

Canberra notched up its tenth quarter of falls or zero gains. On average, rents there have been steadily falling 0.39 per cent per quarter.

But experts say the figures could be distorted as desperate landlords of vacant rentals resort to providing free iPads, removalists, gift vouchers and rent free periods in an increasingly worsening market.

Agents are encouraging landlords to provide free gifts rather than slash rents to help “prop up” the figures and keep the banks at bay.


Posted in Australian Housing | 27 Comments »

Perth property correction to continue into 2016

Written by admin on January 4, 2016 – 5:00 am

2016 is set to bring more pain for Perth property punters as prices continue to fall on the back of diving commodity and energy prices, rising unemployment, stagnant wage growth, surging vacancy rates and plunging rents.

With more mines destined for care and maintenance resulting in more job losses and pay cuts forecast this year, there are no signs of bottoming for the troubled property market.

The state government’s mid-year review in December disclosed a blowout in the state budget deficit to $3.1 billion by the end of the financial year, attributed to slumping GST revenue, declining mining royalties and a collapse of business investment capex.

WA Treasurer Dr Mike Nahan said “Put that into context, that’s the biggest revenue shock government, state or federal, has experienced in Australia since the Great Depression of the 1930s.”

Immediately following the mid-year update, the government enacted a recruitment freeze, with the only exception, police and teachers. Yesterday, WA Health Minister Kim Hames confirmed 1,163 full time equivalent positions would need to go in the Health Service in the coming months.

The latest Australian Bureau of Statistics labour force data for the month of November, reported a 13-year high jobless rate of 6.6 per cent for WA.

According to SQM Research, the rental vacancy rate for Perth is now 3.9 per cent in November, up from sub 1 per cent just three years ago. The rising vacancy rate has been a joy for renters who have seen rents fall 8.5 per cent for houses and 8.1 per cent for units over the past year.

Realmark executive director John Percudani told News Limited, “Vacancy rates have been enormous and rental adjustments have been huge and that’s because so much of the stock has flown into the rental market at a time when the market is obviously diminished, people who weren’t able to sell for the price they wanted moved their homes into the rental market”

Accurate statistics on residential property prices are hard to come by. The ABS show prices have fallen 3.41 per cent in the June and September quarters. More timely data from RP Data suggest prices have fallen 4.9 per cent and outgoing National Australia Bank chairman, Michael Chaney, has been quoted for saying “The housing market here has fallen almost 10 per cent in the last year and is pretty soft.”

But nowhere has the pain been more felt than in the mining towns.

Investors who didn’t get the memo that the surge in many commodity prices were based on a temporary, but significant mis-allocation of capital in China, naively sent property prices in mining towns into the Stratosphere. They are now licking their wounds.

Data compiled by SQM Research show house prices in Northern WA is down another 21.6 per cent last year, bringing the three year decline to 35.5 percent. Unit prices are down 19.0 per cent for the past year, or 34.0 per cent for the past three years.

Rapidly falling prices are not the only worries of landlords in Northern WA. Plunging rents, and high vacancies are making it difficult to repay loans taken out at the top of the bubble.

Rents for homes in the area are down 38.5 per cent for the year, and 63.1 per cent over the past three years. If you can find a tenant for your unit, asking prices are now 26.2 per cent cheaper than a year ago and 59.6 per cent than three years ago.

And remember the 1960s three-bedroom, one-bathroom fibro and iron house the ABC reported was brought for $1.3 million in 2011? The article, published in February last year, stated it was passed in at auction $360,000 and later relisted for $590,000. We can now report realestate.com.au indicates it is under offer for an undisclosed price. SQM reports Port Hedland house prices are down another 13.9 per cent last year and 40.0 per cent over the past three. Let’s hope the finance doesn’t fall though and the investor can finally put this nightmare loss to bed.

Economists who study housing bubbles and long term price trends have found, logically, house prices generally do not appreciate faster than household income, or the ability to service the mortgage/debt. In comparing markets, they often compare the change in the ratio of house prices to income and house prices to rents. In a normally functioning market, both should rise at roughly the same rate and should be flat, like in the case pre-bubble 2001. Once the bubble bursts, these ratios generally return to mean.

Based on this, it could be concluded on a price to rent basis, in September 2015, Perth houses prices were 47 per cent overvalued. On a price to income metric, it’s closer to 49 per cent. One could assume the market has quite a way further to fall.

» Perth house prices down almost 10% – Sky News, 18th December 2015.
» WA deficit blowout of $3.1b revealed in mid-year review – The ABC, 21st December 2015.


Posted in Australian Economy | 33 Comments »

Destocking of China’s residential housing continues to drag heavily on Australia’s largest export

Written by admin on January 1, 2016 – 5:00 am

According to China’s National Bureau of Statistics, real estate inventory reached 686 million square meters at the end of October, up 18 per cent from a year earlier. With the average size of an urban Chinese home 60sqm, this represents an excess of approximately 11 million unsold homes.

At the height of the GFC, Beijing instructed local governments to invest heavily in infrastructure. Unable to borrow, local governments set up LGFVs (Local Government Finance Vehicles) to invest in fixed assets and in many cases SoEs (State Owned Enterprises) to build them. The majority of the stimulus was sunk into building new cities that the western world argue lie mostly empty.

Not surprisingly, the unsustainable residential construction boom entered a downturn in 2014 with weak demand and burdening oversupply, and has failed to recover in 2015 despite the central bank cutting benchmark interest rates five times and slashing banks’ reserve ratios.

Land sales represent a large chunk of local government fiscal revenue and has plummeted 32% in the first 8 months of 2015. Many local municipalities need land sales to remain solvent.

The challenge on what to do with the vast number of new, empty homes was a topic for discussion at the three day Central Economic Working Conference, held in December.

Following the conference, it was announced rural residents relocating to urban areas will be able to register as city residents, allowing them to either purchase or rent property. China has a household registration system more commonly known as “hukou” that prevents migrant workers from purchasing property in urban areas. The government also plans to launch a low-rent public housing program, and to support rental enterprises.

Analysts are skeptical the move will fuel sufficient demand to fend of a crisis. Migrant workers simply don’t make enough to afford China’s exuberant urban house prices, let alone rent them.

The 11 million new unsold homes, don’t include the many, many more that are considered “commodity homes”. In 2010, a report indicated there were 64.5 million urban electricity meters that recorded zero electricity consumption over a 6 month period. In 2014, a survey from China’s Southwestern University of Finance and Economics found as many as 1 in 5 homes, or 49 million, in China’s urban areas are sold, but vacant. Outstanding mortgages on these vacant loans total 4.2 trillion yuan, according to the University.

As property prices have only gone up in this relatively new economy, citizens purchase empty homes as an investment or store of wealth. Many are concrete shells, that the buyer will need to fit out at a later date. Malcolm Turnbull wrote in an article for the Sydney Morning Herald in June 2010, One property analyst was very candid when asked why there were so many apparently unoccupied flats in Beijing as there were no lights on at night: “The flats are occupied. Cash is living there.”

Other homes are brought for the future, be that for their children or retirement. Some are even brought as a means to launder money. Its also been suggested that land sales are a boom for local governments, but people moving in is a burden as it starts to cost local government operating costs such as public transport and waste management. For this reason, there is an incentive to keep cities empty for as long as possible.

Turnbull went on to write:

Asset bubbles are like a Ponzi scheme – everything is fine until the cash dries up and asset prices stop rising. Like it or not we are exposed to the Chinese property bubble. The iron ore China buys from Australia is turned into steel, and most of that goes into building apartments and infrastructure. Our bauxite and alumina exports are turned into aluminium, of which about 40 per cent goes into construction in China.

So at the same time as we congratulate ourselves on escaping from the consequences of the property bust in the United States, the resources boom that underpinned our strong economic performance is itself based on another debt-fuelled property boom in China.

Iron ore

The Chinese construction sector is the biggest consumer of industrial metal. The slowdown in the past two years has reaped havoc for commodity prices, none more than Australia’s largest export, iron ore.

The latest Resources and Energy Quarterly from the Office of the Chief Economist, Department of Industry, Innovation and Science reports:

China’s steel consumption is estimated to have fallen by 3.5 per cent in 2015 to 714 million tonnes, following a fall of 3.3 per cent in 2014. China’s steel consumption has been heavily affected by weakness in residential construction, following a rapid increase in housing supply over the past few years. The China Academy of Social Sciences estimates there are nearly 18 million unsold apartments across China.

Given the lacklustre performance of the housing sector through 2015 and the significant amount of housing inventory still to be cleared, residential construction is not expected to be a significant driver of China’s steel consumption in 2016.

According to the report, the Department has downgraded the iron ore price for 2016 to $US41.30 a tonne.

In recent days the iron ore price has made a comeback, but analysts are confident it will be short lived. Chinese domestic buyers are bringing forward some purchases prior to seasonal supply decreases in January and February.

A poll conducted by Reuters, suggests iron ore could fall below $US30 a tonne in the next few months, forcing high cost producers to the wall.

» Chinese debt binge is fuelling a dangerous property bubble – The SMH (Malcolm Turnbull), 16th June 2010.
» Resources and Energy Quarterly, December 2015 – Office of the Chief Economist, Department of Industry, Innovation and Science, December 2015.
» China to destock housing inventory – Xinhua News Agency, 21st December 2015.
» China to destock housing inventory: key meeting – China Daily, 21st December 2015.
» China unveils new policies to help farmers buy homes in smaller cities – South China Morning Post, 10th December 2015.


Posted in Australian Economy, China, Iron Ore | 11 Comments »

US Fed charts path to normal

Written by admin on December 17, 2015 – 6:32 pm

After a prolonged 7 years of extremely accommodating, near-zero interest rates in the United States, the Federal Reserve has today tightened interest rates to between 0.25 and 0.5 per cent.

Today’s historic move is the first increase in almost a decade, and came as no surprise to anyone with the Fed noting, “The economic recovery has clearly come a long way.”

The Fed policy statement indicated further increases will be “gradual”. Markets are expecting four rate rises next year, the first in March and subsequent rises each quarter. Looking further, economists expect the federal funds rate to be 2.25 per cent at the end of 2017, suggesting a further four rate rises in 2017.


Posted in United States Economy | 13 Comments »

Tax Office to probe 32 years of property records

Written by admin on December 8, 2015 – 8:41 pm

The Australian Taxation Office (ATO) is preparing to embark on an unprecedented data matching program, today asking state authorities for extensive records relating to real property from the period of 20th September 1985 to 30 June 2017.

In a notice published today in the Government Gazette, the ATO indicates “The purpose of this data matching program is to ensure that taxpayers are correctly meeting taxation and other program obligations administered by the ATO in relation to their dealings with real property. These obligations include registration, lodgment, reporting and payment responsibilities.”

The ATO will seek the following records from Rental Bond Authorities:

  • Rental bond number of identifier for rental bond
  • Unique identifier for the landlord
  • Full name of the landlord
  • Full address of the landlord
  • Date of birth of the landlord
  • Contact telephone numbers for the landlord
  • Unique identifier of the managing agent
  • Full name of the managing agent
  • Full address of the managing agent
  • Unique identifier of the rental property
  • Full address of the rental property
  • Period of lease
  • Commencement and expiration of the lease
  • Amount of rental bond held
  • Number of weeks the rental bond is for
  • Amount of rent payable for each period
  • Period of rental payments (weekly, fortnightly, monthly)
  • Type of dwelling
  • Number of bedrooms
  • The ATO will also seek the following records from revenue and land titles authorities:

  • Date of property transfer
  • Full street address of the property transferred
  • Municipality identifier of the property transferred
  • Property sale contract date
  • Property sale settlement date
  • Property land area
  • Property sub-division date
  • Total property transfer price
  • Land usage code
  • Transferor’s full name
  • Transferor’s full address
  • Transferor’s share percentage and manner of holding
  • Transferor’s date of birth
  • Transferor’s Australian Company Number (ACN) or Australian Business Number (ABN)
  • Transferee’s full name
  • Transferee’s full address
  • Transferee’s property share percentage and manner of holding
  • Transferee’s date of birth
  • Transferee’s ACN or ABN
  • Land tax and applicable exemption details
  • Purchase duty and applicable exemption details
  • Valuation details
  • » ATO hunts 32yrs of foreign buyer records – Macrobusiness, 12th December 2015.


    Posted in Australian Economy | 16 Comments »

    RBA chills out as expected

    Written by admin on December 1, 2015 – 8:06 pm

    Melbourne and Sydney has witnessed substantial property price falls in November as auction clearance rates took a tumble.

    According to CoreLogic RP Data, Melbourne property prices fell a sizeable 3.5 per cent in November, followed by Sydney notching up a 1.4 per cent decline for the month. Australia’s two largest property markets sent the Australian index of prices in the eight capital cities down 1.5 per cent.

    As we reported back in May, (“Passive foreign investment watchdog relieved of enforcement duties“) and September (“Residential property worth over $1 billion now under investigation by Foreign Investment taskforce“) new laws on Foreign investment come into force today.

    In response to a question about the cash rate raised last week at the Australian Business Economists (ABE) Annual Dinner, RBA governor said “We’ve got Christmas. We should just chill out, come back and see what the data says.”

    True to his word, the Reserve Bank chilled out today leaving the official cash rate on hold at 2 per cent.

    Some of the data Stevens refers to has been weak.

    Last Thursday, the Australian Bureau of Statistics released business investment spending for the September quarter down 9.2 per cent. The annual result was a 20 per cent fall. The quarterly figure was the worst on record for the 28 year-old survey, with CAPEX down across the board, not just mining. Building and construction was down 9.8 per cent, and services and hospitality down 10 per cent. There had been hope, the services sector would pick up some of the slack from the mining downturn.

    Market Economics managing director Stephen Koukoulas told the ABC, the figures were “horrid.”

    “Across the board, it is pretty grim and there’s no evidence that a pick-up in business confidence has translated into business investment,”

    Stevens concluded his ABE annual dinner speech with what he called “My final, fairly uncontroversial predictions:”

    The business cycle will continue. There will be economic downturns from time to time. If one of those turns out to be a big one, it will be very new experience for quite a lot of Australians. Close to half the workforce has never seen really high, nationwide unemployment. A lot of people in business have, I suspect, not seen how tough conditions can become when virtually every industry and region is contracting. That they have not seen this is a good thing – in the sense that it results from the fact that we have not a really serious downturn for a long time now. But if one comes, it will be a shock.

    » RBA’s Glenn Stevens planning on a ‘chill out’ Christmas despite nit-pickers – The Sydney Morning Herald, 26th November 2015.
    » Business investment spending down 20 per cent, ‘grim’ across all sectors – The ABC, 26th November 2015.


    Posted in Australian Economy, Australian Housing, Monetary Policy | 38 Comments »

    Oops. Banks find $50bn of Investor mortgages under the carpet

    Written by admin on November 5, 2015 – 5:36 pm

    Australia’s investor led housing bubble could be worst that first thought.

    The Reserve Bank deputy governor, Dr Philip Lowe, today revealed the central bank has been concerned about the banks significant upwards revision on investor mortgages.

    Reviews over the past 6 months has found $50 billion in investor mortgages incorrectly classified as the banking regulator implements a 10 percent speed limit on growth of investor mortgages.

    The ten percent increase revises upwards the portion of investor loans to 40 per cent, from the 35 per cent originally reported.

    Dr Lowe said, “As lenders have looked more closely, what they have found has surprised and, to some extent, concerned us,”

    The revelations today come as Barclays indicate Australia’s house prices are 22 per cent overvalued and will experience a “long period of broad stagnation.”

    » Australian banks understated the value of investor loans by $50 billion: RBA – The ABC, 5th November 2015.
    » RBA ‘surprised’ by banks’ $50b home loan error
    » House prices set for long period of ‘stagnation’: Barclays – The Sydney Morning Herald, 5th November 2015.


    Posted in Australian Housing, Banking Regulation | 101 Comments »