Media’s ‘property porn’ fuelled housing bubble

Written by admin on March 29, 2015 – 8:31 pm

The Oireachtas banking inquiry, underway in Ireland, has heard of expert accounts on the vital role the Irish media played in hyping one of the world’s largest property bubbles.

University College Dublin academic Dr Julien Mercille told the inquiry, “A number of journalists simply acted as cheerleaders for the property sector.” He said the Irish Times and Irish Independent both had investments in property related websites and made money from property advertising that impacting editorial standards.

It’s a claim refuted by former editor of the Irish Times, Geraldine Kennedy who said Editorial standards where not compromised by revenue from property advertising. “There was no trade-off between editorial and advertising. Advertising features were clearly signposted. Advertisers did not write editorial copy,” she told the inquiry.

In Australia, Fairfax Media owns the Domain Group, while News Limited has a majority 61.6 per cent stake in ASX listed REA Group Ltd that operates Both news outlets print property lift-outs. In 2006, Fairfax Media acquired property data provider Australia Property Monitors who makes money providing research reports and property price information to “banks, real estate agents, property developers, government agencies, media organisations and consumers,” and employs the regularly interviewed Senior Economist, Dr Andrew Wilson.

Dr Mercille told the inquiry, the media’s ineffectiveness in predicting an impending crash was contributed by three factors – close ties with corporate and government interests, reliance on advertising, and the sourcing of stories. Quoting independent Irish politician and former business editor of the Sunday Independent, Shane Ross, Dr Mercille said “advertising would go elsewhere” if any media outlet gave unfavourable coverage.

On the 12th September 2011, the ABC’s Media Watch reported (‘Biting the hand that feeds, Episode 31‘) on an email sent from Jason Scott, Managing Director of News Limited’s The Sunday Times in Western Australia, apologising to “our valued real estate clients”. The paper had published an unfavourable article suggesting it can cost as much as $20,000 to sell through a real estate agent and reported on two vendors who did it alone. Media watch noted it was the Managing Director and not the Editor in Chief – normally responsible for editorial content, that wrote the apologetic email.

The apology was prompted by Mark Hay, an Investment property specialist who sent an email to almost every real estate agent in the state, suggesting to take their advertising elsewhere, “Can I encourage you to boycott the paper in light of this, or better still this is a perfect reason why we as agents should build our own web site to challenge [part owned by News Limited] and the others who keep putting the squeeze on us. Anyone interested?”

Dr Mercille responded with a yes to the question if journalists could have predicted the size of the Irish property bubble and the crash when asked by the inquiry, saying analysts working for the papers “invariably [provided] upbeat analysis” and always said it would be a soft landing.

Dublin Institute of Technology media lecturer and former Irish Times journalist, Harry Browne said consumer behaviour was fuelled by “property porn” produced by the media, both print and television. Prior to the economic collapse the media would deny there was a bubble, “Before 2008, the media tended to largely ignore it and it is only months after it had started deflating that reality had to be faced.”

» Biting the hand that feeds – Episode 31 – Media Watch, 12th September 2011.
» Academic points to media coverage as stoking boom – The Irish Times, 26th March 2015.
» Banking Inquiry: ‘property porn’ in media fed economic bubble – The Irish Times, 25th March 2015

Posted in Australian Housing | 3 Comments »

Risks increase in Australian commercial property

Written by admin on March 29, 2015 – 1:35 pm

Businesses forced to close, downsize and offshore has caused vacancy rates to surge around the country, and rents to fall, yet commercial property prices continue to rise. This divergence has the central bank concerned the “risk of a large repricing” in commercial property is increasing.

The Reserve Bank of Australia wrote in its March 2015 Financial Stability Report, “The divergence between rising prices and falling rents in office and industrial, and to a lesser extent retail, property has widened further since the previous Review, with an associated fall in yields. As a result of these developments, the risk of a large repricing and associated market dislocation in the commercial property sector has increased.”

According to the central bank, the correction of commercial property prices has “been responsible for a number of episodes of stress in the banking sector.”

The central bank reports conditions in Perth and Brisbane are particularly weak with the plunge of commodity prices forcing drastic downsizing among the resource companies. Compounding the problem is a significant amount of new office space will come on line in the next couple of years, causing further pressure on the market.

Adelaide and Canberra are not far behind. In Adelaide, Property Council SA executive director Daniel Gannon says empty CBD office towers should be converted into residential apartments to arrest the spiralling commercial vacancy rate.

The central banks says a correction could be triggered by a number of factors, such as increased supply “that prompts a reassessment of valuations”, or a sharp fall in foreign investor demand caused due to rising global interest rates or adverse conditions in the investors’ home country.

» Financial Stability Review – The Reserve Bank of Australia, 25th March 2015.

» ‘How we’ll turn CBD offices into residential spaces’ – Adelaide Now, 26th March 2015.

Posted in Australian economy | 1 Comment »

APRA to keep banking crackdown secret

Written by admin on March 26, 2015 – 8:36 pm

According to the ABC, Kevin Nixon, Former Managing Director of Regulatory Affairs at the Institute of International Finance (IIF) says foreigners are puzzled about the entire Australian housing market. Now a partner (risk) with Deloitte in Sydney, Nixon is a respected voice globally on regulation and governance of the financial system.

In a Deloitte round-table on the Australian mortgage industry, he remarked about his experience at a meeting of central bankers, “One of the central bankers present asked: ‘What’s going on in Australia?’ to which the research economist replied: ‘We’ve given up thinking about Australia. There is no economic rationale for it”

But while research economists and central bankers around the world can simply give up trying to understand the psyche of the irrational Australian property investor, the challenge mounts for local regulators trying to make “behavioural adjustments” to keep the market from that fateful correction and limit irreparable damage to our banking system.

On Friday in a House of Representatives Standing Committee on Economics, the Chairman of the Australian Prudential Regulation Authority, Mr Wayne Byres said the regulator was unlikely to ever disclose what capital controls it will impose on individual banks who do not exercise prudence.

Last year, the watchdog wrote to banks indicating it would not like to see loan growth to risk taking property investors exceed 10 per cent. Earlier this month, it was revealed the limit was breached by three of our major banks. (‘Investor loan growth limit breached by three major banks‘)

Macquarie Bank lead the pack with investor loan growth up an astronomical 73.1 per cent over the year.

Investor loan growth for the NAB grew at 13 per cent, followed by Westpac 10.4 per cent, ANZ 10.3 per cent and the Commonwealth Bank at 9.2 per cent.

The Australian Prudential Regulation Authority has the authority under the banking act to apply different prudential capital ratios to authorised deposit taking institutions (ADIs). It is widely believed the regulator will increase the ratios of banks it believes is imposing greater risk to the Australian banking system, requiring the bank to hold more loss-absorbing capital and as a side effect, reduce profitability. However, these ratios will remain confidential.

Mr Byres told the house economics committee:

Prudential regulators are traditionally the people who try to operate behind the scenes—below the surface, below the radar. Financial institutions survive and thrive because they have confidence and the community has confidence in them, and you are happy to put your money into the bank, you are happy to take out your insurance policy and you are happy to invest your superannuation money because you have confidence that, when the time comes, you will get your deposit back, your policy will be paid and your super money will be there.

Unfortunately no institution is perfect, and sometimes issues arise. Prudential regulators tend to try to operate behind the scenes to get issues fixed and to avoid them becoming a source of concern to the community. If we can do that well and head off problems before they become serious problems, that is actually reinforcing of financial stability, because it is preserving the confidence that exists in the system.

But it could be too late for the regulator still scared from the collapse of Australia’s second largest insurer, HIH.

Barclay’s warned last week, Australian households are the most indebted in the world.

Today, head of fixed income for BT Investment Management Vimal Gor echoed the same concerns saying homeowners in Sydney and Melbourne have so much debt that any drop in house prices would be a disaster. (‘Drop in house prices would be a disaster: analyst‘)

The Reserve Bank of Australia was unable to drop interest rates last month due to the housing bubble entering hyperdrive in both Sydney and Melbourne. With APRA’s crackdown remaining top secret and with the Reserve Bank as chair of the Council of Financial Regulators, the next cut in the official cash rate could signal APRA has confidently put these much needed controls in place. Until then, it would be imprudent for the central bank to cut.

» RBA says too early to judge APRA’s home loan restrictions – The ABC, 25th March 2015.
» Banking regulator APRA says individual banks targeted in crackdown on investor loans – The ABC, 21st March 2015.
» APRA keeps macroprudential strictures on bank lending secret – The Sydney Morning Herald, 20th March 2015.
» RBA sounds alarm about bursting of housing bubble inflated by cheap credit – The Sydney Morning Herald, 25th March 2015.
» Hot property: lenders push back on rate cuts – The Australian, 26th March 2015.
» Investor loan growth limit breached by three major banks – The ABC, 10th March 2015.
» Numbers add up for constraints on bank loans for residential property investors – Australian Financial Review, 15th March 2015.

Posted in Australian economy, Australian Housing | 29 Comments »

Australian households too indebted and ill-prepared for upcoming crisis.

Written by admin on March 16, 2015 – 8:59 pm

New research from Barclays warns Australian households have record debt levels, some of the highest in the world, greatly exposing them to heightened risk in the event of another financial crisis.

The report shows household debt in Australia is at 130 per cent of GDP, significantly more than the global average of 78 per cent. The global average has declined from a record high of 81 per cent in 2010, showing the majority of the world is deleveraging while Australia continues to binge. Household debt in Australia held steady at 116 per cent of GDP from 2008 until 2013 when Australia’s property market went into hyper drive, pushing debt unsustainably higher.

The extreme household debt levels groups Australia in with many Eurozone countries, with Denmark at 129 per cent, Switzerland 120 per cent and the Netherlands 115 per cent.

Melbourne Land Boom

News Limited, who described the alarming debt levels today as a “ticking time bomb,” said “The level of household debt is higher now than at any other time in Australia’s history, with records going back to the 1850s.”

“The level of bank lending as a share of GDP is now more than double the share of the previous peak, which was during the 1890s land boom.”

In 1880, there was a speculative land boom in Melbourne fuelled by wealth that had been created during earlier gold rushes (mining). There was strong population growth, with the population of greater Melbourne rising by more than 70 per cent over 10 years from 1881. The land speculation engulfed most members of society and was helped by a surge in lending. The Federal Bank was founded in 1882 by James Munro and the funds used to speculate on suburban real estate.

A certificate of shares in the Federal Bank of Australia, Ltd. Issued in Victoria in 1887. Source : Museum Victoria

The crash began in 1891 with land prices plunging to around half of their perceived value at the peak of the boom. For example, average property prices peaked at around £950 in Brighton in 1888 and then fell to around £400 in 1893 and £300 in 1898. Property in Collins Street that was selling for £2000 a foot at the top of the bubble, had an asking price of £600 and still was unable to attract buyers.

While the trigger is not 100 per cent clear, it’s believed the crash started when banks started restricting their lending for land at the end of 1887. (No wonder APRA is too scared to do anything). Another observation was the large amounts of land brought onto the market resulted in poor rental yields. Coupled with high levels of leverage, more and more speculators experienced cash flow issues. (I guess they didn’t have negative gearing then!)

Mortgage defaults and bank runs started a period in history known as the Australian Banking Crisis. The peak of the crisis was signalled by the Federal Bank failing on the 30th January 1893. Five months later, 11 commercial banks had gone under and suspended trading.

It was the biggest housing bubble in Australia’s history, until now.

Australia’s household debt may be unsustainable – McKinsey Global Institute

Barclays is not the only one ringing alarm bells on Australia’s expanding household debt problem. In a report released in February 2015 by the McKinsey Global Institute, titled “Debt and (not much) Deleveraging“, it found seven countries had “household debt levels that may be unsustainable:” – the Netherlands, South Korea, Canada, Sweden, Australia, Malaysia, and Thailand.

“Unsustainable levels of household debt in the United States and a handful of other advanced economies were at the core of the 2008 financial crisis. Between 2000 and 2007, the ratio of household debt relative to income rose by one-third or more in the United States, the United Kingdom, Spain, Ireland, and Portugal. This was accompanied by, and contributed to, rising housing prices. When housing prices started to decline and the financial crisis occurred, the struggle to keep up with this debt led to a sharp contraction in consumption and a deep recession.”

McKinsey reported since the 2008 financial crisis, “a great deal of research has been conducted to establish the link between household debt, financial crises, and the severity of recessions.” (We reported on IMF findings in 2012 – Housing busts preceded by high leverage more severe and protracted: IMF“)

“The rise and fall of household debt affect the magnitude of a recession. In the years prior to the crisis, when credit was flowing and asset prices were rising, economic growth appeared robust, but it was artificially inflated by debt-fueled consumption. Then, after the crisis hit and credit dried up, the decline in consumption was especially sharp as households could no longer borrow and had to make payments on previous debts, often for homes in which their equity has been wiped out.”

“Just as rising house prices and larger mortgages can create an upward spiral, falling prices trigger a dangerous downward spiral. Compared with other households, highly leveraged ones are more sensitive to income shocks as a result of job losses, costly health problems, or increases in debt servicing costs. When highly indebted households run into trouble, they cut back on consumption, which contributes to the severity of the recession.”

The report concluded “reduced consumption after a financial crisis causes especially severe and prolonged recessions.”

» Australian households awash with debt: Barclays – The Sydney Morning Herald, 16th March 2015.

» Mortgaging our children’s future: Aussie ticking time bomb sparks fears should new GFC hit – News Limited, 16th March 2015.

Posted in Australian economy, Australian Housing | 30 Comments »

Hockey reveals plans for bigger housing bubble – to help affordability!

Written by admin on March 7, 2015 – 8:46 pm

Treasurer Joe Hockey has suggested first home buyers should be able to dip into their superannuation to purchase a first home. It comes after Senator Nick Xenophon was ridiculed in August 2014 (‘Why Australia has one of the world’s largest housing bubbles’) proposing the same idea to a Senate Economics References Committee hearing in Adelaide. Multiple experts came forward suggesting Xenophon’s idea would only increase house prices and further exasperate the problem.

In the weeks following, Finance Minister Mathias Cormann ruled the ludicrous idea out. (‘Mathias Cormann warns super not the key to housing’)

In response to Hockey’s imprudent plan, announced yesterday, shadow Treasurer Chris Bowen said “His [Hockey’s] plan would have the likely effect of not only undermining retirement incomes but also driving housing prices up further and making it harder for first home buyers.”

This view is shared by John Daley from the Grattan Institute, “It won’t improve the problem around supply. If supply remains constant and you effectively increase the amount that people can pay then prices will go up. This is economics 101.”

Chief economist of Bank of America Merrill Lynch, Saul Eslake said “Anything that allows people to spend more on housing than they otherwise would in a supply constrained market will result in more expensive housing and nothing else.”

“It’s exactly the same principle as first home owner grants and stamp duty concessions”

If Mr Hockey is genuinely serious about addressing housing affordability, he should be concentrating on removing current market distortions such as negative gearing and limited recourse borrowing by SMSFs, rather than trying to create new distortions.

Please spare a thought for the council of financial regulators – The Reserve Bank of Australia (RBA), The Australian Prudential Regulation Authority (APRA), The Australian Securities and Investments Commission (ASIC) and The Treasury who are trying to control the overheated market at a time when Hockey wants to throw petrol on it. Ludicrous.

» Joe Hockey raises prospect of first home buyers using super to enter property market – The Age, 6th March 2015.
» Joe Hockey flags opening up super funds for houses, job training – The Sydney Morning Herald, 7th March 2015.
» Mathias Cormann warns super ‘not the key to housing’ – The Australian, 30th September 2014.
» Nick Xenophon internationally ridiculed for plan to buy first homes with superannuation – Who crashed the economy, 9th August 2014.

Posted in Australian economy, Australian Housing | 49 Comments »

Housing bubble prevents vital rate cut

Written by admin on March 3, 2015 – 7:25 pm

“Australia is vastly uncompetitive, I don’t think they want to openly say it, which is why they put a lot of fudge and nonsense in the minutes today” commented Michael Every, head of Asia-Pacific markets research at Rabobank after last month’s cut to the official cash rate.

Michael Every is, of course, referring to the stubborn Aussie dollar making Australia uncompetitive in the international market place and resulting in the loss of jobs from manufacturing to back office.

Stephen Walters, an Australian economist with JP Morgan summed up the severity of problem earlier last month with just two graphs:

According to the data, the average Australian wage is 70 per cent above the global mean, the minimum wage is 100 per cent the global average, electricity is 50 per more and gas is 150 per cent more than the global average.

Only today, Dr Bob Baur, chief global economist at Principal Global Investors said the Australian economy is struggling because “wages are too high”, Australians get too much annual leave and are too hard to fire. “In the US, we get two weeks’ vacation, so three or four weeks at one time (as in Australia) is not something that’s natural, at least in the US — it is in Europe, but then, Europe is not growing terribly fast either.”

According to the OECD, Australian wages grew the second fastest of any developed economy over the past 13 years, but times are now changing. Last Wednesday, the Australian Bureau of Statistics reported wages are now growing at the slowest pace on record.

The other reason why our labour rates are considered high globally is due to our strong dollar. The mining boom has seen a bad bout of dutch disease creep in as the dollar surged above parity with the USD. Today, a currency war and an internationally high official cash rate have seen a flight of money heading into Australia. Sending the dollar lower is considered one way of increasing Australia’s competitiveness and this is likely to be easier than getting all Australians to take a 38 per cent pay cut (New employees at Coca-Cola Amatil to earn 38 percent less).

The statement from the Reserve Bank of Australia on today’s monetary policy decision indicated:

The Australian dollar has declined noticeably against a rising US dollar, though less so against a basket of currencies. It remains above most estimates of its fundamental value, particularly given the significant declines in key commodity prices. A lower exchange rate is likely to be needed to achieve balanced growth in the economy.

The Australian economy is now in worst shape that this time last month. Unemployment hit 13 year highs last month, according to figures from the ABS. Capital expenditure is falling faster than expected and a slowing China, forced its central bank to cut rates on Saturday.

But the Reserve Bank was unable to act today due to increased risks posed by the housing bubble. After cutting the official cash rate last week, irrational property spruikers have been drumming up insatiable appetite for housing, especially in the overheated Sydney market. One commentator, ex RBA, said the market was racing away like an “out-of-control freight train.” Needless to say, this has serious consequences for Australia’s banking system.

The RBA reiterated its joint effort with other regulators to control the dangerous bubble in its monetary policy decision statement:

The Bank is working with other regulators to assess and contain risks that may arise from the housing market.

But until this framework is in place, the RBA might have to sit and wait tight.

Further easing of policy may be appropriate over the period ahead, in order to foster sustainable growth in demand and inflation consistent with the target. The Board will further assess the case for such action at forthcoming meetings.

» Statement by Glenn Stevens, Governor: Monetary Policy Decision – The Reserve Bank of Australia, 3rd March 2015.
» ‘No economic benefit’ in further surge in house prices, economists warn RBA – The Age, 2nd March 2014.
» The boom is about to go bust – The Sydney Morning Herald, 2nd March 2015.
» Australia central bank acting like it ‘just woke up’ – CNBC, 5th February 2015.

Posted in Australian economy, Australian Housing | 25 Comments »

Australia set to tackle Foreign Investment Surge in Residential Real Estate

Written by admin on February 25, 2015 – 9:36 pm

Following the release of the Report on Foreign Investment in Residential Real Estate from the House of Representatives Standing Committee on Economics in November 2014, the Australian Government has today released a consultation paper on proposed reforms.

According to Foreign Investment Review Board (FIRB) statistics, The House of Representatives Standing Committee on Economics’ report indicated that “approved” foreign investment in Australian residential property has been surging in recent years. It cited in the first 9 months of last year, prior to the release of the report, foreign investment surged 44 per cent compared to all of 2012-2013 with “much of this investment [..] concentrated in the Melbourne and Sydney markets.” Fairfax tabloids in Sydney and Melbourne have been littered with articles of Chinese buyers outbidding locals with prices exceeding reserves in the hundreds of thousands.

Leading property experts say the Sydney property bubble has been in “hyperdrive” with prices surging almost 30 per cent in just two years, creating a challenge for the Reserve Bank of Australia who is keen to slash the official cash rate to stem rapidly rising unemployment. With house prices at ten times income, Sydney is the third most expensive city in the world for housing following Hong Kong and Vancouver, according to the most recent Demographia survey. Melbourne is not far behind as the fifth most expensive city in the world for shelter.

It is unclear what contribution Foreign investment is making to surging home prices. The Australian Bureau of Statistics (ABS) told the House of Representatives Standing Committee on Economics inquiry, data on foreign investment is “patchy”. It regularly scanned trade magazines and newspapers to try to ascertain the level of foreign investment:

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

Treasurer Joe Hockey said today, “At the moment we simply do not have enough data and that’s because no-one has taken foreign investment regimes seriously in the past.”

Currently flouted legislation do require all foreign persons to gain approval prior to purchasing residential real estate in Australia. To encourage the supply of new homes, non-residents can only apply to purchase newly constructed dwellings or vacant land for development. Given that temporary residents residing in Australia need a place to live, temporary residents may purchase one established dwelling to live in, but must sell the property when they leave Australia.

Today’s consultation paper recommends the introduction of fees for foreign buyers of Australia’s residential real estate. A token application fee of $5,000 would apply for properties under $1 million dollars. Properties over $1 million would attract a fee of $10,000, with $10,000 increments for every 1 million dollars thereafter. The report notes the FIRB and Treasury (who provides secretariat support to the FIRB) is currently funded through consolidated revenue and suggests the Australian Taxpayer should not bear the costs of foreign audit, compliance and enforcement operations – sensible budget savings.

The report on Foreign Investment in Residential Real Estate released last year also recommended a user pay model but with a modest fee of only $1,500 to fund “enhanced audit, compliance and enforcement capacity within FIRB.” On the other extreme, Today’s report notes countries such as Singapore and Hong Kong levy an additional buyer’s “stamp duty” of 15 per cent of the purchase price. (Maybe we could do the same with proceeds to help fund the Committed Liquidity Facility?)

Just as laughable as the ABS scanning magazines to ascertain foreign investment is the FIRB’s track record on enforcement. It’s a point not lost on Prime Minister Tony Abbott who said in a National Press Club speech last fortnight, there had not been a single prosecution in six years.

The consultation paper highlights, “while the Foreign Investment Review Board and Treasury were well placed to continue undertaking the upfront screening of residential real estate applications, its internal processes and lack of specialist investigative and enforcement staff have weakened the enforcement of the foreign investment rules.”

A recommendation is to create a new “specialist, dedicated compliance and enforcement” unit within the Australian Taxation Office to enforce foreign investment legislation for residential real estate. It suggests the tax office is better suited as it has staff with compliance and enforcement skills, sophisticated data-matching and “experience in pursuing court action”, i.e. a proven track record of getting results!

While this may be a consultation paper, it is understood from an interview two weeks ago that Prime Minister Tony Abbott has taken immediate action, directing Treasury to start issuing divestment orders for immediate sales of illegal purchases.

The next target for the Abbott government is expected to be limited recourse borrowing arrangements by superannuation funds.

» Strengthening Australia’s Foreign Investment Framework – The Treasury, Australian Government – 25th February 2015.
» Report on Foreign Investment in Residential Real Estate – House of Representatives Standing Committee on Economics, November 2014.
» PM Tony Abbott orders Treasury squad to force immediate sales on foreign property investors – The Daily Telegraph, 13th February 2015.
» Australian housing overheating and could eventually face a correction: Moody’s – Who crashed the economy?, 29th June 2014.
» Report into foreign investment in residential real estate could come too late – Who crashed the economy?, 19th March 2014.
» Real Estate Investment by Foreign Residents : Top Secret – Who crashed the economy?, 4th January 2012.

Posted in Australian economy, Australian Housing, Foreign Investment Review Board | 32 Comments »

South Australian Government Launches Discussion Paper on Broad-Based Land Tax

Written by admin on February 11, 2015 – 9:58 pm

The South Australian Government has today launched a discussion paper on the state’s taxation system, calling for interested parties to make submissions.

While the discussion paper makes no recommendations, one tax reform idea put forward is to abolish stamp duty on property transactions (conveyance duty) and replace it with a broad-based property tax of around $1,200 per annum for a median valued home of $410,000.

Conveyance duty (stamp duty on the transfer of real property) is currently levied during property transactions. For a $410,000 dwelling, the purchaser would pay $11,330 plus 5.00% on the excess making a total of $16,830. The Reserve Bank of Australia indicates the median length of tenure is 10 years, hence stamp duty equates roughly to $1,700 a year ignoring compounding, inflation and borrowing costs. For shorter term tenures, a broad-based land tax is favourable, but it could negatively impact longer term owners.

The South Australian Government indicates its objectives for tax reform is to provide enough revenue to deliver high quality services, to encourage entrepreneurship, investment and job creation, to collect revenue as efficiently as possible and to be as stable and predictable as possible.

Conveyance duty is considered a relatively inefficient tax in that effects the decision to buy and sell property, be it trade up or down size. It makes up a significant portion of the transaction costs on a property. Land tax, on the other hand, is considered an efficient tax base as the tax cannot be avoided and will broadly apply to all land including the principal place of residence.

From the South Australian State Government’s view point, conveyance duty makes up a significant 22 per cent of total tax revenue “but it is also highly volatile (annual growth has ranged from negative 20 per cent to positive 42 per cent)” dependant upon the currently irrational property market. As it is a tax on property transactions as well as values, a slow market can significantly impact revenues. This is best illustrated in 2008-09 during the Global Financial Crisis (GFC) as the state’s property market tried to correct before the Federal government intervened with the first home owners’ boost that Treasury reports was designed to bring forward demand and prevent the collapse of the housing market. The report notes conveyance duty collapsed 20% at the time and I’m sure the government is keen to avoid it this time around.

Outside of getting the reforms implemented in time, the real problem at hand is transition mechanisms and time-frames. As recent purchasers have forked out a small fortune on stamp duty, it would be unfair to overnight abolish stamp duty and bring in a broad-based land tax. Proposals under current consideration is to make the broad-based land tax effective from the purchase date of a new property transaction – potentially delaying a wide introduction or to provide credits for recent buyers. The latter makes the most sense if the government is striving for a stable and predictable tax revenue stream.

» Tax Review in South Australia – Government of South Australia, 11th February 2015.

Posted in Australian economy, Australian Housing | 53 Comments »

Reserve Bank forced to cut on eve of Global Economic Crisis (GEC)

Written by admin on February 4, 2015 – 9:29 pm

Before heading out the doors for Christmas, the Reserve Bank of Australia (RBA) board indicated “on present indications, the most prudent course is likely to be a period of stability in interest rates.” The last time the RBA had taken the knife to interest rates was on the 7th August 2013, some 16 months earlier. Australia’s central bank was anticipating on keeping the last remaining and precious 10 official cash rate cuts left in the war chest for the next crisis, at the envy of so many other central banks presiding over failed debt fuelled crises with cash rates sitting at zero.

But in a surprise and sudden move, the Reserve Bank decided yesterday it had no choice but to act against a backdrop of a rapidly deteriorating economy, and in the process, risk putting the icing on the world’s largest housing bubble.

Outside of a brief mention on a strengthening US economy, yesterday’s statement by RBA Governor Glenn Stevens on the monetary policy decision was packed full of doom and gloom.

It indicated the Eurozone economies and Japan were “both weaker than expected” and “China’s growth was in line with policymakers’ objectives” – which is a positive way of saying China’s growth rate came in at 7.4 per cent in 2014, the lowest figure in 24 years and the first time the country missed its growth target in 17 years.

China’s decline after an insatiable appetite for commodities is causing havoc for world commodities prices, a pain almost unbearable for Australia who bet its entire future on China and the triumphant “100 year” resource boom. The Reserve Bank noted “commodity prices have continued to decline, in some cases sharply.” Our largest export, iron ore is down 46 per cent in 12 months. In a post in January (Falling back to earth – Our terms of trade collapse) we showed what affect this is having on our terms of trade and what this will mean for wage growth and jobs – or more precisely lack off – going forward.

One potential positive is the significant decline in world oil prices, with the RBA noting it will “temporarily” lower CPI inflation before the falling dollar erodes any benefit.

Domestically, the RBA suggests growth is “continuing at a below-trend pace” with an emphasis on domestic demand growth being “overall quite weak” causing unemployment to rise over the year.

One possible driver for the surprise decision to cut could be the stubbornly high Aussie dollar. The central bank notes even with the recent 18 per cent plunge in the past 6 months, the Australian dollar still remains above its “fundamental value, particularly given the significant declines in key commodity prices.”

And Australia’s much hyped housing bubble featured predominately with the bank noting credit growth has picked up, with “stronger growth in lending to investors in housing assets” (Sydney investor led housing bubble irrefutable) and noting the surge in dwelling prices in Sydney. Dr Andrew Wilson from the Domain Group recently reported Sydney house prices are in “hyperdrive” after prices surged an unsustainable and very dangerous 29 percent in just two years, out-striping CPI and wage inflation several-fold.

Yesterday’s rate cut is only likely to fuel what the RBA’s “central bank”, the Bank for International Settlements (BIS) last year reported was the world’s second most expensive housing market in the world (Australians struggle with world’s second largest housing bubble), behind oil exporter Norway.

The RBA tries its hardest to allay concern saying it “is working with other regulators to assess and contain economic risks that may arise from the housing market.” We reported last year, (Property bubble a Macroprudential challenge for regulators) that the Council of Financial Regulators, who is chaired by the Reserve Bank of Australia, is working on Macroprudential controls in a bid to contain the bubbling housing market. In December, hot on the release of the Murray report, the watch dogs started to bark – but have yet to bite (Woof – The watchdogs have a bark!)

As we reported then, it is widely expected the regulators will decide to impose capital charges on higher risk investor loans, especially interest only loans. This would require the bank to hold more loss absorbing capital and would likely pass this cost on to the property investor though higher interest charges without effecting owner occupiers, the diminishing first home owner or business. However, recent indications is such framework will be delayed until later this year only exacerbating the current concerns.

The latest statistics from the Reserve Bank, prior to this rate cut, show households are once again starting to leverage up after the period of stability in interest rates when they should be trying to de-leverage and de-risk. Total household debt as a percentage of household disposable income is just 0.4 per cent from the peak during the 2008 GFC. The majority of household debt is locked in residential housing which is at a record high of 139 per cent of household disposable income.

This unprecedented and significant run up in debt over the past 25 years is why the Australian economy is in the doldrums now – and why so many economies collapsed in 2008. Despite having a larger housing bubble than the US in 2007, Australia masked and delayed the devastating effects though an unprecedented mining bubble flooding the country and households with excess money – through middle class welfare, high wage growth and monumental investment returns. Worst still, Australian’s became complacent as the ‘miracle economy’ was tossed around. The recent collapse of the mining bubble, now leaves Australia’s household debt greatly exposed and potentially the next domino to fall as jobs are lost and loans become unserviceable. Only today, Bloomberg reported to the world, “This is what an economic hangover looks like. More offices lie empty in Perth, Australia, than at any time since 1996, while the number of homeowners seeking to offload properties has surged 45 percent from a year ago.”

This is not the time for the average Australian to be complacent on interest rates at levels not seen since the 1950s. To illustrate the significance of the household debt bubble, figures from our National Accounts (ABS) show households still allocate more of their household disposable income to interest on dwellings today, than in 1989 when interest rates peaked at 17 per cent. Low rates have been offset by astronomical household debt levels.

It also goes a long way to explain why domestic demand growth is “overall quite weak” according to the RBA. With so much capital misallocated to housing/shelter and the high cost of living, there is little disposable income left to underpin consumer spending and create jobs to fill the void from the mining boom.

While the Reserve Bank would like you to be out spending, the best thing Australians can do now is to start paying down that white elephant – household debt – and as fast as they can. According to interviews of the indebted, conducted by one of the television news services tonight, that is exactly what people intend to do.

And to finish with some light comical relief, shortly after the announcement of the rate cut, Treasurer Joe Hockey said the rate cut, caused by a rapidly slowing economy, was “good news” – While the decision was solely a matter for the RBA, his government contributed to the cut by keeping inflation low, even going as far to confidently state there will be further cuts to come. While, I suspect he didn’t bother reading the governor’s gloomy statement following the decision, and I know for sure Hockey doesn’t control world oil prices, you wonder if there is an ounce of truth about his contribution. Is the current political circus etching away at consumer & business confidence? I have no doubt it has some role to play.

» Statement by Glenn Stevens, Governor: Monetary Policy Decision – Reserve Bank of Australia, 3rd February 2015.

» Mining Bust in Perth Shows Damage That Led Australia to Cut Cash Rate – Bloomberg, 3rd February 2015.

Posted in Australian economy | 29 Comments »

Falling back to earth – Our terms of trade collapse

Written by admin on January 5, 2015 – 9:21 pm

Australia is now in the grip of the largest terms of trade collapse since records started in 1959, unleashing havoc on Federal budgets that will ultimately flow through to wages and household balance sheets.

The terms of trade is an index calculated by the Australian Bureau of Statistics (ABS) showing the relative ratio between export to import prices. A fall in the terms of trade indicate Australia needs to export more to maintain the same level of imports – making Australia economically worse off.

The price for Australia’s number one export, iron ore continues to fall with prices down 46 percent in the 12 months to November. Since the peak in February 2011, prices have collapsed just over 60 percent. The fall in the iron ore price is due to a slowing in China’s fixed asset investment due to over building.

Australia’s other major exports such as coal and wheat has also experienced significant falls.

Our commodities boom has seen Australians enjoy the second fastest wage growth of any developed economy over the past 13 years, according to the OECD. Data from the International Labour Organisation show Australian wages grew the most of any G20 nation between 2007 and 2013.

But times are changing.

The latest ABS wage price index (WPI) shows total hourly rates of pay excluding bonuses remains subdue, rising just 2.57 percent in the past year. This is the lowest growth since the series started in 1997.

» Falling wages to upset household debt dynamics – Who Crashed the Economy, 30th May 2014.
» Beijing housing sales falls 35% – Iron Ore falls through $90 – Who Crashed the economy, 17th June 2014.
» Real wages start to fall – Who Crashed the Economy, 19th February 2014.
» GFC2 – Will it be made in China? – Who Crashed the Economy, 30th June 2013.

Posted in Australian economy, China | 49 Comments »

Woof – The watchdogs have a bark!

Written by admin on December 9, 2014 – 6:56 pm

Hot on the release of the Murray report, the Australian banking regulator (APRA) and the Australian investment and security regulator (ASIC) has today exposed teeth as they start growling and barking at our reckless banks.

Both regulators have launched an attack on prevalent risky residential mortgage lending practices, targeting in particular, loans to the overheated investor market.

According to reports, APRA has written to the banks today, telling them growth in loans to property investors should not exceed 10 per cent. APRA warns it stands ready to raise capital requirements early next year if banks do not take a more prudent approach to mortgage lending.

ASIC has today announced surveillance operations into interest only loans. In the September quarter, more risky interest-only loans reached a record high of 42.5 per cent of all loans issued. More property investors than ever before are betting prices will only go up, raising alarm bells among regulators.

» APRA launches crackdown on loans to property investors – The Age, 9th December 2014.
» Financial regulators united in attack on risky loans – The Sydney Morning Herald, 9th December 2014.
» APRA, ASIC increase surveillance of risky home lending – The ABC, 9th December 2014.

Posted in Australian economy, Australian Housing | 39 Comments »

Australian banks not the safest in the world – far from it.

Written by admin on December 8, 2014 – 8:42 pm

Contrary to popular belief, Australian Banks are not the safest in the world and should hold more capital to protect against future shocks.

David Murray, chair of the Financial System Inquiry who released their final report yesterday, said Australian banks should be in the top 25 per cent of global banks, but they are currently around middle ground.

The first two of the forty four recommendations is to increase the resilience of the Australian banking system though increased capital levels and the raising of risk weightings for internal ratings-based (IRB) banks to narrow the different risk weights used between the Big 4 including Macquarie and the standardised banks.

As we reported three weeks ago (Have the Big 4 just flunked APRA’s stress test?’‘) Australia’s Big 4 banks – ANZ, CBA, NAB and WBC have been flouting their privilege in calculating their own risk ratings, putting super profits ahead of stability with the knowledge that naive taxpayers will be on hand to bail out these “too big to fail” banks. This has lead to a deterioration of mortgage risk ratings applied by the Big 4 and Macquarie.

A recent stress test conducted by the Australian banking regulator shows this is a real possibility. The Big 4 have cut their risk ratings and Tier 1 common equity so fine, that in a simulated collapse of the world’s second largest housing bubble – namely Australia’s – and the collapse of commodity prices (already well under way), all four required extra capital. If they were unable to access the extra capital required, all four of our big banks would effectively be insolvent. The non-advanced banks – all the banks except the Big 4 and Macquarie – who have regulated risk weightings, scraped though the stress test, distressed but generally fine.

It is a fact not lost in the Murray report. The report says Australia should not underestimate the risks of financial crises:

For example, the major banks currently have a leverage ratio of around 4–4½ per cent based on the ratio of Tier 1 capital to exposures, including off-balance sheet. An overall asset value shock of this size, which was within the range of shocks experienced overseas during the GFC, would be sufficient to render Australia’s major banks insolvent in the absence of further capital raising. In reality, a bank is non-viable well before insolvency, so even a smaller shock could pose a significant threat. Following its recent stress-test of the industry, APRA concluded, “… there remains more to do to confidently deliver strength in adversity”

The Murray report also highlights the many tax distortions driving Australia’s significant housing asset bubble and ultimately placing the Australian banking system and entire economy at significant risk. This includes the “relatively heavily” taxed income from bank deposits and fixed income securities, negative gearing and the 50 percent capital gains tax discount.

Another one of the many sensible outcomes from the report is the recommendation to reinstate restrictions on Self Managed Super Fund’s (SMSF) access to limited recourse borrowing suggesting it could pose a significant risk to the economy. Property spruikers have been pressuring people to set up SMSFs and to leverage their retirement savings into the property bubble.

But with so many sensible recommendations, the real test is now what, if any, recommendations the government will adopt. Very few of the Ken Henry Tax Review recommendations including above mentioned tax distortions have been implemented after the release of the 2009 report. Various watchdogs over the years have set up task forces, (e.g. ASIC set up up task force on SMSF leveraging into property in 2012 (Alarm bells ring as self managed super funds spruiked as vehicle for leveraged property) with no tangible outcomes. We have had the House Standing Committee on Economics to investigate foreign investment in residential real estate (‘Report into foreign investment in residential real estate could come too late‘). The Council of Financial Regulators is said to be exploring macroprudential controls (‘Property bubble a Macroprudential challenge for regulators’), but we are now not expected to see any outcome this side of Christmas, if at all.

It appears all to hard. Maybe the bubble is too big?

» Financial System Inquiry – The Commonwealth of Australia, 7th December 2014.

Posted in Australian economy, Australian Housing | 7 Comments »

World oil prices continue decline

Written by admin on November 28, 2014 – 7:57 pm

Brent crude plunged 6.7 per cent last night after the OPEC oil cartel decided against intervening in the market to quell steady price declines. The cartel agreed to keep their output ceiling at 30 million barrels a day, sending the futures price to a four year low of $71.12.

Brent crude has now fallen 35 per cent in the past five months – 15.8 per cent of that fall this month. West Texas Intermediate is down 31 per cent since July.

This is a chart, Shane Oliver tweeted today:

Some of the fall is believed to be attributable to the United States gaining oil independence through local shale oil production. But this production is extremely expensive and could be one of the reasons why the cartel decided to do nothing, hoping to price U.S. shale oil out of the market.

Another cause is thought to be falling global demand for oil, especially from regions such as China and Europe. Two months ago, the International Energy Agency (IEA) said a sudden drop in oil demand for the second quarter of 2014 was “nothing short of remarkable.”

It has some wondering if the fall in oil prices is a leading indicator of falling world demand and the onset of the GEC – The Global Economic Crisis? (Note the 78% decline during the heights of the GFC)

The lack of intervention is said to be an indicator that world oil prices will continue to decline for now.

» Oil price collapses after OPEC nations decide against cutting production – The ABC, 28th November 2014.
» Oil rout threatens to spoil Australia’s gas bonanza – The Age, 28th November 2014.
» Drop in global oil demand ‘nothing short of remarkable’ – Who crashed the economy, 14th September 2014.

Posted in Australian economy | 40 Comments »

Have the Big 4 just flunked APRA’s stress test?

Written by admin on November 16, 2014 – 9:28 pm

Australians are compelled to believe banks that produce super profits are some of the safest banks in the world. But is super profits really a sign of safety or an indication of dangerously high leverage and risk taking?

As we wait for the release of the David Murray Financial System Inquiry final report, strong indications are emerging our big four banks will need to hold more capital after flouting their privilege in calculating their own risk ratings.

Prior to 2004, and in tune with the Basel I accord, banks were allowed to apply a 50 percent risk rating to standard home loans. While every dollar of a business loan, for example, was deemed to be at risk, only 50 percent of a residential mortgage was thought to be at risk. With half the loan risk-free, the bank only had to keep half the Tier 1 capital required.

With the introduction of the Basel II accord published in June 2004, the Basel Committee on Banking Supervision thought it should cut standard home loan risk ratings to 35 percent for loans with a LVR under 80 percent. It also gave ‘Advanced Banks’ the privilege to rate their own assets, after all they were considered to have well developed risk management principals and would never put profit ahead of risk.

In Australia, the ‘Advanced Banks’ are our big four – ANZ, CBA, NAB, WBC and investment bank, Macquarie.

From Pillar 3 disclosures, the Australian Financial Review has calculated current risk-weights for our bank’s home loan portfolios. As required, our smaller non ‘advanced’ banks have risk weightings exceeding the minimum 35 percent. Bendigo is believed to be 39 percent, Suncorp – 40 percent and the Bank of Queensland – 44 percent.

But, according to the Australian Financial Review, Westpac believes only 15 percent of its standard mortgages are at risk (Perfect time for Gail Kelly to retire), ANZ – 18 percent, CBA – 19 percent and NAB – 23 percent. Macquarie is marginally better at 24.4 percent.

The Australian Banking Regulator, APRA, has just conducted its latest stress test on the Australian Banking System. The tests included 13 of our largest banks, accounting for 90 per cent of total industry assets. While previous stress tests included a slowdown in China and fiscal problems in Europe, this year the banking regulator focused on a collapse of Australia’s bubbling housing market.

Two stress scenarios were developed in conjunction with the Reserve Bank of New Zealand:

Scenario A consisted of a housing market double-dip triggered by a sharp slowdown in China. House prices fall by 40 percent and unemployment increases to 13 percent.

Scenario B focused on rising interest rates along with a plunge in commodity prices. Higher unemployment and higher borrowing costs caused a significant drop in Australia’s overvalued housing values.

A footnote in an APRA report noted “regulatory capital for housing held by Standardised banks was (just) sufficient to cover the losses incurred during the stress period.” But this “was not the case” for our Advanced banks.

According to the Australian Financial Review, this finding has been confirmed on Friday by APRA. The Australian Financial Review reports “The text was unclear as to whether the major banks had sufficient or insufficient capital held against their mortgage books to withstand the losses. But an APRA source confirmed to AFR Weekend that it was the latter, and that all residential mortgage capital was wiped out in the stress test.”

» Bank capital at risk from house bust – The Australian Financial Review, 15th November 2014.
» Seeking strength in adversity: Lessons from APRA’s 2014 stress test on Australia’s largest banks – APRA, 7th November 2014.
» Bank debt ratios expose Basel’s faulty risk weightings – The ABC, 8th October 2014.
» Major bank profits on home loans could halve – The Australian Financial Review, 25th July 2014.

Posted in Australian economy, Australian Housing | 38 Comments »

Property bubble a Macroprudential challenge for regulators

Written by admin on October 27, 2014 – 9:05 pm

No doubt regulators, today, wish they were not sleeping at the wheel as the challenge on what to do with the world’s second largest residential property bubble start to mount.

The Council of Financial Regulators – comprising of the Reserve Bank of Australia (Chair), the Australian Prudential Regulation Authority, the Australian Securities and Investments Commission and the Treasury – are working diligently on measures aimed to try to bring the unbalanced investor led Melbourne and Sydney property bubbles under control, before it starts to undermine the banking system.

It is understood, slightly less senior members of each council agency are on a working group determining and risk assessing the most appropriate measures and reporting back to the council. The council is expected to brief Treasurer Joe Hockey of their proposal prior to execution.

Earlier this month, Assistant RBA governor Malcolm Edey optimistically said to expect an announcement before the end of the year, however APRA chairman Wayne Byres wasn’t as convincing as he told a Senate Economics committee on Wednesday, it hasn’t reached a point where we have decided anything, going as far to say “it might be nothing.”

One of the challenges of the Macroprudential policy framework is accurately targeting the risky activity without shifting the problem elsewhere. The council has risky loans provided to naive and overconfident property investor’s firmly in its sight. Currently investor loans make up almost half of all lending. It certainly does not want to introduce policy to hinder dwindling first home buyers.

“We’re keeping a close eye on the build up of credit to investors in the housing market, not to owner-occupiers per se and certainly not to first home buyers. They’re not the issue,” said RBA governor Glenn Stevens.

Another challenge for regulators is targeting the specific problem markets. While Australia has a sizeable housing bubble in all states and territories, the current concern is the unsustainable activity in both the Sydney and Melbourne markets. “What the community wants is sustainable competition and sustainable growth, not something that accelerates through the roof and then drops through the floor,” said Wayne Byres.

The most recent data from the Domain Group (formally Australian Property Monitors) suggest house prices are starting to correct in the rest of the country. In the September quarter, Canberra home prices recorded a 1.7 percent fall, followed by Perth with a 1.5 percent decline, Hobart and Brisbane both recorded drops of 1.3 percent and Adelaide fell 1.0 percent.

It is widely expected the regulators will decide to impose capital charges on higher risk investor loans, especially interest only loans. This would require the bank to hold more loss absorbing capital and would likely pass this on to the borrower though higher interest charges. On Wednesday, Wayne Byres said in his opening statement to the Senate standing committee on economics:

First, within our regulatory framework APRA generally seeks to avoid outright prohibitions on activities where possible: instead, our regulatory philosophy is to focus on institutions’ setting their own appetite for risk. We also use the regulatory capital framework to create incentives for prudent lending and ensure that, while institutions remain free to decide their lending parameters, those undertaking higher risk activities do so with commensurately higher capital requirements.

» Banking regulator outlines likely response to housing investor surge – The ABC, 24th October 2014.
» Bank debt ratios expose Basel’s faulty risk weightings – The ABC, 8th October 2014.
» APRA warns bank lending standards are being stretched – The Sydney Morning Herald, 23rd October 2014.
» APRA ready to act on housing – The Australian, 11th October 2014.

Posted in Australian economy, Australian Housing | 76 Comments »

Sydney investor led housing bubble irrefutable

Written by admin on October 13, 2014 – 8:53 pm

New lending finance data released by the Australian Bureau of Statistics (ABS) today show the Sydney property bubble is now undeniable as it continues its dangerous acceleration – unchecked.

Investors are starting to feel the strain as they fight each other for tenants in an oversupplied marketplace. With August figures showing 60 percent of all new home loans in NSW is for the purchase of an investment property, the highest ever, rents are starting to fall. According to the Domain Group, apartment rents have dropped below $500 a week to $495. Rents for houses remain static at $510 a week.

Rents are also falling in Perth and Canberra, while rents remain static in all other states – failing to keep up with inflation.

» Change in the wind for Sydney’s rental market – The Domain, 10th October 2014.

Posted in Australian Housing | 84 Comments »

Housing ratios – State by State

Written by admin on September 16, 2014 – 10:06 pm

On Sunday, the Bank for International Settlements (BIS) released residential property price statistics for most developed countries around the world – (‘Australians struggle with world’s second largest housing bubble’). The data confirms Australia has the second most overvalued residential property market in the world, second only to Norway. The data, collected at the start of this year, shows on a price to rent metric, Australian residential property prices were 50 percent overvalued. On an income to rent metric, Australian house prices were 40 percent overvalued. House prices have appreciated significantly since the survey was done.

One of our readers, Alex, asked if there were a similar report comparing capital cities of Australia?

Here it is for the June 2014 quarter:


We have indexed the data to 1997, a period of stable house price growth (research shows long term house prices only rise by inflation). Note income is derived from a single wage – the ABS Wage Price Index – total hourly rates of pay excluding bonuses and is not household disposable income.

A price to CPI ratio (real house price) has been included. There is evidence both rents and incomes are inflated. Rents started to rise faster than inflation after the financial crisis, but with the significant influx of investors in the market at present (investors accounted for a record 49.7 per cent of total loans in July), rents are now contracting and will likely further exacerbate over-valuations. The same can be said for wages, with wage growth and household disposable incomes coming under pressure.

The over-valuations assume a healthy, stable market (like in 1997). If the economy were to deteriorate, larger falls could be expected.

Posted in ABS House Price Indices, Australian economy, Australian Housing | 64 Comments »

Treasurer Joe Hockey in bubble denial

Written by admin on September 16, 2014 – 6:12 pm

Treasurer Joe Hockey has once again demonstrated ignorance toward issues effecting everyday Australians, this time denying Australia is amidst the grips of a credit fuelled housing bubble.

His comments come almost a month after he said the fuel excise increase won’t effect the poor. The out of touch Treasurer told ABC radio, “The poorest people either don’t have cars or actually don’t drive very far in many cases.”

Hockey’s argument today is Australia’s housing bubble isn’t debt fuelled, but caused by a lack of supply.

“I’m not so sure it’s credit fuelled,”

“It is just an infinite mantra for international commentators, for analysts based overseas to say ‘well, you know, there’s a bit of a housing bubble emerging in Australia,” commented Hockey after the Bank for International Settlements (BIS) yesterday released a report showing Australia has the second most overvalued property market in the world.

“That is rather a lazy analysis, because fundamentally we don’t have enough supply to meet demand.”

“That doesn’t suggest there’s a bubble; there might be a price increase of some substance, but you’d expect the market to react and produce some more housing.”

Actual data from the Reserve Bank of Australia show Australians have racked up excessive household debt levels, suggesting the bubble is in fact credit fuelled. Australia’s household debt to disposable income is one of the highest in the world.

Despite the official cash rate sitting at levels not seen in over 50 years, Australians are still paying more to service their mortgages today as a percentage of household disposable income, thanks to record debt levels, than in 1989 when interest rates hit 17 percent:

A recent report shows Joe Hockey owns four investment properties.

Hockey said today, “I don’t see at the moment any substantial risk.”

» Joe Hockey denies Australia in a property bubble – The Sydney Morning Herald, 16th September 2014.
» Hockey dismisses any property bubble – The Australian Financial Review, 16th September 2014.

Posted in Australian economy, Australian Housing | 16 Comments »

Australians struggle with world’s second largest housing bubble

Written by admin on September 15, 2014 – 8:01 pm

Australians have enjoyed the second fastest wage growth of any developed economy over the past 13 years according to the OECD. Interest rates are now at record low levels not seen in almost 60 years. You would think the average Australian would be on easy street.

But a survey from National Australia Bank today reveals almost 1 in 5 Australians are living pay day to pay day, struggling to make ends meet. Of those, 70.4 percent are dipping into their savings and 40 percent have been spending on credit cards.


The answer can be found in the Bank for International Settlements (BIS) quarterly review on Residential property price statistics across the globe, released today, that finds Australia has the second most expensive housing market in the world, second only to Norway.

And the National Australia Bank’s answer to all this? Today it has teamed up with Good Shepherd Microfinance to loan people who find themselves in difficult financial circumstances, more money.

» Almost one in five Australians never have any money left over from their regular pay packets, according to a NAB survey. – SBS, 15th September 2014.
» Australia’s house prices second-highest in world: BIS – The Sydney Morning Herald, 15th September 2014.
» BIS figures confirm Australian housing overvalued – The ABC, 15th September 2014.
» Residential property price statistics across the globe – BIS, 14th September 2014.

Posted in Australian economy, Australian Housing | 25 Comments »

Drop in global oil demand ‘nothing short of remarkable’

Written by admin on September 14, 2014 – 9:21 pm

In an ominous sign for the global economy, the International Energy Agency (IEA) has said a sudden drop in oil demand for the second quarter of 2014 is “nothing short of remarkable.”

The second quarter saw demand slow to below 0.5 million barrels per day, the lowest level in two and a half years.

The IEA has “revised down sharply” demand forecasts for 2014 and 2015 to 0.9 million barrels per day and 1.2 million barrels per day respectively citing a weaker outlook in both Europe and China. The agency fears Eurozone economies “are getting perilously close to deflation.”

Last week the price for Brent crude fell though $100 USD a barrel, the first time in 16 months. Since the peak in June, prices are down over 14 percent. West Texas Intermediate is trading around $91 per barrel, the lowest level in 7 months and down 12 percent from the peak.

China’s Factory Output Slumps

According to China’s Nation Bureau of Statistics, growth in China’s factory output fell to 6.9 percent in August yoy, the weakest growth since the 2008 recession. Growth is expected to slow further with Xu Gao, chief economist at Everbright Securities in Beijing saying “The August data may point to a hard landing. The extent of the growth slowdown in the third quarter won’t be small,”

» International Energy Agency says sudden drop in the global demand for oil ‘nothing short of remarkable’ – The ABC, 12th September 2014.

» China’s factory growth slows to near six-year low – The Sydney Morning Herald, 13th September 2014.

Posted in China, Eurozone | 5 Comments »