Housing bubble could cause wealth destruction on a ‘super’ scale.

Written by admin on August 19, 2012 – 11:14 am

Australia’s fixation with keeping its housing bubble afloat could cause wealth destruction on a grand scale.

It’s now five years since the GFC. The debrief from this household debt lead crisis in the United States includes a 38.8 per cent fall in median family net worth across all age groups in just three short years from 2007 to 2010.

Australia’s competitive spirit is leading a desire to smash this record.

Chris Vedelago, property reporter for The Sunday Age has today reported:

Desperate property owners on the brink of losing their homes are raiding their superannuation in record numbers, accessing more than $100 million in emergency funds in the past 12 months to keep the banks at bay.

According to the report, 6,500 struggling home owners raided their super funds last year to keep the Australian dream alive, the third consecutive year of increases. Despite interest rates falling, the aggregate value of last financial year’s raid is 99.38 million, up 25 per cent on the previous year and “well above” raids conducted during the GFC.

Obviously, for those who make the emergency raid, there must be some expectation things will get better in the future. They just can’t keep raiding it.

Pauline Vamos, CEO of Association of Superannuation Fund of Australia said “Your super is not there to pay debt, it’s there for retirement.”

If Australia’s housing bubble were to correct, just like many around the world, then these homeowners could be left high and dry, not only without a home, but with little future retirement savings.

Boomers doing it tough

With retirement rapidly approaching, Baby Boomers are increasingly more pessimistic. According to a RaboDirect survey out this week, 62 per cent of Boomers expect the economy to worsen in the next year.

But their own finances is what is really keeping them awake at night, with 30 per cent of Boomers now expecting to enter retirement with a mortgage. 40 per cent in the mortgage ‘hangover’ group, plan to sell and downsize. 30 per cent hope to dip into their superannuation to pay off the roof over their heads, something RaboDirect consider risky, especially after the performance of super funds in the past five years.

» Home owners raid super to pay mortgage – The Age, 19th August 2012.
» Households in financial stress risk losing super security – The Canberra Times, 19th August 2012.
» Boomers haunted by fear of debts – The Courier Mail, 17th August 2012.


Posted in Australian economy, Australian Housing | 26 Comments »

26 Comments to “Housing bubble could cause wealth destruction on a ‘super’ scale.”

  1. Tom Says:

    Has anyone noticed the older generation X and younger boomers are getting sick of their super funds? Most of the ones I know, want to get DIY super and invest in the safety of residential property. They has lost of alot on equities and will probably lose even more on the property fallout.

  2. arthur ponzirelli Says:

    Banks have people specifically tasked to deal with this issue i.e. assist struggling homeowners to complete all the requirements to legally access their super. If this is the case you wonder how large the problem really is and how accurate the $100m might be. Much of this would have been tied up in equities and is chicken feed compared to the amount moved into SMSFs then subsequently to property. As Tom says there’s a big push for this. I’m still amazed at the composition of your average OFI in Melbourne – plenty of age 60+ buyers who should be kicking back rather worrying about becoming overnight millionaires.

    That large flow of super money moving into property is obviously helping limit damage to a slow melt, to the detriment of the share market. At the end of the day the property industry continues to get its claws into the super honey pot.

  3. Michael Francis Says:

    The super funds being raided are generally Balanced and Growth funds managed by fund managers who are themselves managed by the banks.
    I bet they are not selling the bank shares within the fund, which explains why Bank shares are just a fraction away from their all time highs and everything else is half what it used to be.

  4. FHB Dreamer Says:

    I don’t understand this. The boomers are probably the most well off amongst the entire population. They have had 25 years of growth, should have accumulated large superannuation funds and an investment property. They are the one’s that have fuelled the boom, so why are they now not well off? If they have not been able to do well for themselves then it is their fault. Let’s look at the younger people that have no homes and little job security. My sister works a 50hr weeks for $30k a year. Now that’s doing it tough. It is clear that the boomers have failed to plan for their retirement.

  5. Tom Says:

    You have to wonder where all the money went, don’t you. The boomers would have brought housing, when houses were affordable. If they didn’t use equity release products, then where did all the money go?

    Looks like GST will have to go up to pay for this disaster.

  6. PETER_W Says:

    Where did the money go?

    Very little of it went into genuine long term business productivity value creation.

    Most of it was squandered on feel good NOW vanity lifestyle imports… Granite benchtops would have to be the business equivalent of marble foyers with fountains.

    As you sow, so may you reap!

  7. Ripa Says:

    Paypal OK? or COD

    http://www.ebay.com.au/itm/North-Melbourne-VIC-3051-Apartment-Project-sale-12-units-land-512-m2-/271038891733?pt=AU_Business_Industrial_Businesses_for_Sale&hash=item3f1b2d46d5

  8. AverageBloke Says:

    4wd’s and Caravans

  9. Spruiker Buster Says:

    FHB – They did spend there money on investment property but were structured in a way that prices would continue to rise infinitly.
    Many have increased there loans over the years to pay for maintenence and expenses.
    Some have got out at the top and spen there money on life style and travel (the good life).
    So basicly the money has gone from – falling house prices
    – maintenence and expenses
    – life style and travel

  10. Romsey Says:

    @Ripa

    That is hilarious, to bad he doesn’t have a “best offer” button, I might offer a couple of bucks……
    I also like the bit where he states the price has been reduced 50% since last year.

    12 units on only 512 m2…… sounds a bit ambitious, suppose it’s ok if you like living in a shoebox.

  11. Miss Money Penny Says:

    I agree with the above. If baby boomers who retiring at the end of a long boom are struggling it is because they were being greedy and have been caught out when the boom stopped.

    I think sympathies should lie with the first home buyers who were conned by the banks (through high lending amounts) , govt (through first home owners grants) and media/re agents (buy now or miss out). They will be struggling for the next 30 years to pay off their negative equity, over priced houses unless they go bankrupt before then….

  12. LBS Says:

    “I think sympathies should lie with the first home buyers who were conned by the banks (through high lending amounts) , govt (through first home owners grants) and media/re agents (buy now or miss out). They will be struggling for the next 30 years to pay off their negative equity, over priced houses unless they go bankrupt before then….”

    I agree with you Miss Money Penny but they did have a choice to not get that far into debt. I do believe the govt, banks and media/ REA are the biggest issue out of the whole situation. The ultimate end of it is everyone is going to suffer.

  13. HousingTroll Says:

    When we all say “Gubbermint”, do we really expect that either politcal persuasion would have done anything differently considering the size of the political carrot/stick that is Negative Gearing and aspirational property investing. Simply the Wealth Effect engendered through lax policy was a Polly’s wet dream.

    Instead I want to know what the Agency heads were doing. RBA, ASIC, APRA and the ATO in particular. I don’t believe for a second that they can claim there is no problem (today) or likely that they didn’t see it coming (after the fact). Given the dire outcomes in every other western economy from property/debt bubbles to claim that you’ve been blindsided by one at home is testament to ineptitude.

    Simply it comes down to self-interest, lack of integrity or fortitude to stand up to Govt and say loud and clear there is a problem brewing.

    We’ve now had FIVE YEARS to change course. FIVE YEARS to hear from these luminaries about addressing the issues. Any one of these agencies could have stepped up to the plate with suite of solutions designed to reign it in.

    Instead they’ve actively denied there is a problem. You can’t only blame the government when the agency heads won’t speak up.

    As to raiding the super funds the banks have clearly not exercised due dilligence in lending with a view that the Super funds are there for the taking.

    Those with lo-doc/no-doc DOCTORED DOC loans should be forcing production of the forgeries before they ever let Megabank get a cent of Super.

  14. Gavaroo Says:

    …… So how long will this take to unwind? Are we talking years or months?

  15. BotRot Says:

    @Housing Troll,

    Well said.

    At the same time, and on the opposite end of the same side of the coin (sorry for the twisted cliche), it has to be obvious by now that the “Gubbermint” represents a narrow corridor of power and privilege. The Megabanks, the Super Fund outfits, Insurance, Lenders,… *they’re* the Gubbermints constituents. If its’ not obvious today, in light of what is going on and what is about to come, I don’t know, do people deserve it? I say no, but doesn’t mean people shouldn’t live vigilantly, on guard, and by their wits. Also doesn’t mean that its’ open fish eating season for the sharks too.

    Look at the past 12 years. How euphoric many people were, how rich they felt, or how rich they were going to become, all because they were given a chance to hang themselves. And they seemed to love it, and being cocky about it too.

    I was surprised in 2008 when the GFC hit the general mood of the people here (Australia) was still in euphoria. Not even taking one step back and thinking, let’s take a good look at this. I am speaking of the general population, people I know. Of course you couldn’t expect the corporate media (another constituent of the Government) to allow a “dissenting” voice, and when they did allow this voice, it was called Steve Keen, and was slammed down by yobboes from the property industry.

    The game was rigged from the begining. People fell for it. Few kept their feet on the ground, too few. Nearly everybody in this country would know the saying, “if it’s too good to be true, its’ because it is”, no-one lived by that. Let alone asked themslelf, “how will I pay that back?”.

  16. FHB Dreamer Says:

    @Housing Troll – exactly, well said!

    The RBA just plod along adjusting interest rates with no real basis,
    Wayne Swan assuring overseas Investors that the Australian Economy is “different”,
    the ATO data based on flawed records from the real estate industry,
    the banks overvaluing assets,
    the insurers reaping the mortgage insurance benefit,
    the government getting all that tax,
    Julia & Tony with all their baby boomer voters which they cannot lose

    = Too many ‘important’ people with too much to lose, that’s why none of them are saying anything.

    It will all be to the detriment of the younger generation and all their money and tax will go towards supporting an ever increasing ageing population in Australia, so the FHB base is diminishing on a daily basis. Why do you think they brought in the carbon tax!

  17. Jj Says:

    +++++++++Wayne Swan assuring overseas Investors that the Australian Economy is “different”+++++++++

    We’re not different, we’re just late. We’re late for everything. Fashion, movies, technology, a working public transport system… why should our economic catastrophe be any different. It can’t be that far off. Then again, if the problems are going to come as late as a working rail network… we could be waiting for a while… lol.

  18. LBS Says:

    Great comments housingtroll and botrot….. very true.

  19. BotRot Says:

    @Jj,

    I think the reason for the lateness here, has all to do with continuing and increasing credit and debt issuance, and credit-debt consumption. It hit us here too in 2008. There has been significant job losses, businesses closing, reduced work hours, less tax receipts, and debt increasing since then.

    Things like Bank profits and Mining Boom revenue, that make Australian’s believe that things are different here, are mostly private.

  20. PETER_W Says:

    It all unwinds when net credit growth TO BUY is zero.

    Credit growth to renovate or capitalise interest or consolidate debts does not have any direct effect on market price transactions.

    The simple explaination is… The equity in housing is only ever the net change in debt between the buyer and the seller plus the deposit from the buyer.

    Credit = deposits

  21. HousingTroll Says:

    BotRot
    In support of your view of the narrow corridor of privelege and crony capitalism I found this passage in a speech given by Michael Hudson at the Veblen, Capitalism and Possibilities for a Rational Economic Order Conference, Istanbul, Turkey, June 6th, 2012

    http://michael-hudson.com/2012/07/veblens-institutionalist-elaboration-of-rent-theory/

    “After a wave of financial speculation and corporate fraud led the dot.com stock market bubble to burst in 2000, banks nurtured an even larger and more burdensome real estate bubble. Indebting the economy has enabled the financial sector to absorb most of the revenues squeezed out by the insurance and real estate sectors, along with the major monopolies (minerals, fuels and power, radio and television, telephones and transport) and privatized infrastructure sold off from the public domain to become rent-extracting opportunities. On top of the landlords – and now over industry – stand the bankers, lording it over them and using debt leverage to take control of governments as well. Yet neither socialist critiques nor those of mainstream economic futurists have focused on the financial takeover of society and its symbiosis with real estate and monopolies to which Veblen pointed. By the 1960s, theorists of the postindustrial “service economy” were focusing on information technology, not on the financial sector.

    In emphasizing how financial “predation” was hijacking the economy’s technological potential, Veblen’s vision was as materialist and culturally broad as that of Marxists, and as rejecting of the status quo. Technological innovation was reducing costs but breeding monopolies as the Finance, Insurance and Real Estate (FIRE) sectors joined forces to create a financial symbiosis cemented by political insider dealings – and a trivialization of economic theory as it seeks to avoid dealing with society’s failure to achieve its technological potential…. ”

    Well worth a read!

    But I continue to wonder how we deliver the red “reality” pill to the populace when they are content to swallow the blue “blissfully ignorant” pill. What’s it going to take?

  22. Craig Says:

    Professor Steve Keen has proven that an increasing level of public and private debt leads to higher unemployment and lower wages.

  23. Jj Says:

    http://www.smh.com.au/business/olympic-dam-on-hold-as-boom-peaks-20120822-24mvy.html

    Boom! This can’t be good.

  24. BotRot Says:

    @Housing Troll,

    A chunky read indeed. Just finsihed it after starting it last night. I think things make sense now. Not only are the bulk of people stupid, there is a reason for it. Wealth and status, to the point where as long as others perceive you as such, despite not being anywhere near the two. Buying a house seems to be the means for this madness, madness being the end. Nobody during the as 12 years said to themselves, “everybody is doing this, something is bound to give way” (I did). As property prices increased, everyone thought they were collecting rent, or as the article put it, being paid for nothing. Boy! That would make you feel like you’re fast approaching the aristocracy.

    No-one had even the most basic common sense, or see what was going on in front of them. Amazing, seeing that their faces were being slapped real hard each month when the debt bills (mortgage, credit card, personal finance) were due for payment. And the F.I.R.E sectors, the real rent collectors.

    What I find profoundly amazing from this article is we as a, society, economy, culture, people, we’re moving backwards! I’m trying to figure out whether I should be mildly shocked or to giggle.

  25. HousingTroll Says:

    I could hug you right now.

    Is it stupidity, greed, naievity, group-think, an extraordinary popular delusion, the madness of crowds, or just a govt truly representative of the majority’s aspirations?

    When the fundamentals of price-to-income went beyond the 4.0 multiple I would have expected firstly, market correction, secondly market intervention. What happened was the intervention encouraged the market to move beyond its fundamentals.

    A deluded public could feel as though everything was in hand and that they truly lived in The Lucky Country* without appreciating Donald Horne’s back-handed criticisms of being second rate people. With the wealth effect carrying the country along on a stream of optimism what need did they have for understanding any means to genuine wealth creation other than the tangible bricks and mortar kind. As if each house was an edifice shouting F#(K YOU at the intellectual debate needed to establish a sovereign wealth fund to pay for education, research, new industry or to question their misplaced faith in the never ending boom.

    This complacency has been achieved primarily through two means:
    1. Political disengagement
    2. Financial/Economic illiteracy

    Thereby allowing the rentiers to gouge ever increasing amounts from a relatively fixed population the only solution to keep “growth” on its trajectory was to add more suckers and corresponding fiat currency. Flipping houses to each other was the primary means for inflating that digital fiat.

    This drives real wealth destruction as everything is financialized and incentivises the stupid to play real wealth in a casino economy for paper only gains.

    So now that the rentiers have bled everyone dry, is it no wonder that the real economy is suffering?

  26. Craig Says:

    I follow Oz Housing Bubble @OzHousingBubble
    Australia has some of the most unaffordable housing in the world. How many days until Australian’s Housing market bubble bursts? Tick Tock…