Rescuing the Economy or the Bubble?

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Many ele­ments of the recently announced pack­age are jus­ti­fied. When the econ­omy is about to go into a debt-induced reces­sion, gov­ern­ment spend­ing both boosts demand, and pro­vides the pri­vate sec­tor with cash flow needed to meet its debt repay­ment commitments.

Equally vital was the guar­an­tee of all bank deposits. A run on the banks would be dis­as­trous, and this guar­an­tee ensures that this will not happen.

But yet another increase to the First Home Buy­ers Grant???

Is this because, um, house prices are, like, maybe too low?

Oh please, some real­ity here: the root cause of this cri­sis is exces­sive debt that drove house and share prices to unsus­tain­able lev­els. Times appeared rosy as the house (and stock­mar­ket) bub­ble con­tin­ued, but this was only because bor­rowed money was adding to demand.

No-one wor­ried about this when it was easy to flog a house for a higher price. But unfor­tu­nately, this game had to come to an end, because debt ser­vic­ing became pro­hib­i­tive as house prices rapidly out­stripped incomes. The bub­ble burst first in the USA, and the car­nage it has wreaked there should warn us all that asset price bub­bles are dangerous.

And how does the Aus­tralian gov­ern­ment respond? By pro­vid­ing yet another stim­u­lus on the demand side.

A col­laps­ing hous­ing bub­ble may be a scary prospect, but the more it is inflated, the scarier the final bust. And Australia’s, on any mea­sure, is big­ger than America’s.

A sim­ple com­par­i­son of the ABS Estab­lished House Price Index (ABS 641601 and 641603) to the CPI shows just how large the Aus­tralian house price bub­ble is (see Fig­ure One).

Fig­ure One

Figure One: House Prices vs the CPI

House Prices vs the CPI

Since 1987–hardly a time when Aus­tralian house prices were low by his­tor­i­cal standards–house prices have increased two and a half times as fast as con­sumer prices (see Fig­ure Two). Median incomes have fared lit­tle bet­ter than the CPI, so that houses are 60 per­cent less afford­able now than in 1987.

Fig­ure Two

Ratio  of House Prices to the CPI

Ratio of House Prices to the CPI

That’s also true even when we take into account lower inter­est rates. Yes, rates are about half what they were in 1987 (see Fig­ure Three); but debt is six times larger as a per­cent­age of house­hold dis­pos­able income than it was then (see Fig­ure Four)–so that merely pay­ing the inter­est on out­stand­ing mort­gage debt con­sumes 13 cents in the house­hold dol­lar, ver­sus a mere 3.5 cents back in 1987.

Fig­ure Three

Mortgage rates and payments

Mort­gage rates and payments

Fig­ure Four

Mortgage debt to disposable income

Mort­gage debt to dis­pos­able income

Increas­ing the amount of money that first home buy­ers can slap down on a home may help those who can’t afford to get into the mar­ket do so–great. It will also increase com­pe­ti­tion for houses, and poten­tially sus­tain the Great Aus­tralian Hous­ing Price Bubble. 

Not great. As the USA shows us, the pain of a burst­ing house price bub­ble can be pretty immense–especially since it’s fuelled by exces­sive lev­els of debt.

But that pain will only get worse if the bub­ble is dri­ven any higher. The higher up you are when you fall off a moun­tain, the more it hurts when you hit the ground. The Aus­tralian house price moun­tain, on any mea­sure, is sub­stan­tially higher than the USA’s was when it began its long, painful descent (see Fig­ure Five).

Boost­ing the First Home Buy­ers Grant is a mis­take, just as it was when Howard did it. It will merely delay the day of reckoning.

Fig­ure Five

Australian vs US Housing Bubble

Aus­tralian vs US Hous­ing Bubble

About Steve Keen

I am a professional economist and a long time critic of conventional economic thought. As well as attacking mainstream thought in Debunking Economics, I am also developing an alternative dynamic approach to economic modelling. The key issue I am tackling here is the prospect for a debt-deflation on the back of the enormous debts accumulated in Australia, and our very low rate of inflation.
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129 Responses to Rescuing the Economy or the Bubble?

  1. Zap737 says:

    Hi Steve,

    Do you think the amount offered for the first home buy­ers scheme in the “res­cue” plan ($14000/$21000) and the num­ber of grants (I believe them to be lim­ited to 150 000 in total) will have a huge effect in boost­ing house prices?

    If the RBA cuts rates to say 2%, won’t it make it easy for bor­row­ers to afford larger loans and there­fore inflate the hous­ing bub­ble more?

    Do you think banks will tighten loan require­ments — for exam­ple requir­ing a 20% deposit — or will they still lend to 105% (as has been the past practice)?

  2. jc1 says:

    Hi Steve

    I seem to remem­ber read­ing in a com­ment on an ear­lier post that you said that you recently decided not to sell your prop­erty as you were not happy with the price you were offered.

    If I under­stand you rightly you are pre­dict­ing sig­nif­i­cant drops in prop­erty prices in Aus­tralia — between 20 and 40%. Wouldn’t it have been bet­ter to get out now and park the cash so you can pick up a bet­ter place with the same amount of money in the future? Oth­er­wise isn’t your prop­erty going to fall in value — to an even lower price than the one you were not happy with?

    Or am I miss­ing some­thing in your argument?

  3. Ed says:

    I’m not sure it will will make any dif­fer­ence. Maybe the last few diehards will jump in to make the pur­chase but prob­a­bly not enough.

    My view, not based on hard data, is that the amount of money leav­ing the sys­tem is more than the money enter­ing. The scale of the prob­lem will over­whelm the attempts to pump prime the econ­omy. The hous­ing bub­ble is only part of the prob­lem. The real prob­lem is (was) equity with­drawal against the inflat­ing asset. In a sense we have a ponzi scheme (hous­ing) mor­ph­ing into a giant credit card. The con­tri­bu­tion that this lit­tle arrange­ment has made to con­sump­tion and eco­nomic growth over the last decade must be huge. I think that most ana­lysts over­look this and assume that the down­turn will be like all oth­ers. How will $10 bil­lion and an increase in the first homeowner’s grant com­pen­sate for the great equity con­sump­tion binge? We’ll need a lot more than $10 bil­lion to cover that tab!

    Also, the neg­a­tive wealth effect will cut con­sump­tion sub­stan­tially, lead­ing to higher unem­ploy­ment, and under­em­ploy­ment for the casu­als. You can pump prime all you like but you still need a job to buy a house. I think that the under­em­ploy­ment fac­tor is being over­looked. Our IR sys­tem is far more flex­i­ble today. We have an army of casual part-time employ­ees whose work hours can be cut tomor­row. This won’t show up in unem­ploy­ment num­bers. How­ever, the effect on con­sump­tion will be imme­di­ate. It may be that we have a deep reces­sion with rel­a­tively low “offi­cial” unem­ploy­ment and a whole army of miffed bank econ­o­mists telling us that hous­ing is ready for the next upswing.

    Lastly, despite all the mid­dle class wel­fare, it’s harder to get the dole than it used to be. I think this change over the years of eco­nomic ratio­nal­ism will prove to be a sleeper. Econ­o­mists tell us that the auto­matic sta­bilis­ers will crank up in a down­turn help­ing to min­imise the depth of any reces­sion. If this really is a big reces­sion then mak­ing it hard to get the dole will only make it worse.

  4. DJB says:

    The impact of the addi­tional $7000 may well be only marginal:

    * given that it only rep­re­sents a small per­cent­age of cur­rent house prices:

    * given that most first home buy­ers are likely to be located in areas where prices have already begun to soften significantly;

    * if increas­ing unem­ploy­ment will leads to lower demand;

    * if per­cep­tions of increased demand lead to increased sup­ply (ie more cur­rent own­ers being will­ing to sell).

  5. blueinca says:

    I really don’t know what some of you mean by soften! Real Estate agents use this as well. It is a trou­bling myth that house prices have fallen. Gen­er­ally they haven’t– Real Estate indus­try says prices have soft­ened– but the truth is — house prices just sim­ply haven’t kept sky-rocketing upwards (thank good­ness, for that!). Gen­er­ally most areas are report­ing 0.5% increases etc over the last quar­ter– so they are still going up! Peo­ple need to realise there is NO law that says house prices HAVE TO go up– the fact is they are ridicu­lously high, & in fact have been for the last decade. Here’s my speel on one the rea­sons for house prices & there­fore debt in this coun­try is so high, pulled from another topic:

    so Kevin Rudd is now Mr.Inflation. Couldn’t he have just let well alone– put the money into guar­an­tee­ing deposits etc is a good thing BUT why does he think increas­ing the first home own­ers grant is going to make prop­erty cheaper– it is going to do the oppo­site. Giv­ing a sec­tor of the mar­ket even more money to go to their bank with, means they have more bor­row­ing capactity mean­ing that they can bid higher at auc­tions there­fore push­ing the price up.

    Only one per­son can be suc­cess­ful in the end, so all that extra money is doing is push the price up. IT IS THE LAST THING home buy­ers want. Unscrupu­lous real-estate agents and greedy ven­dors will now fac­tor that into their ‘wanted price’.

    If you want to push prices down– out­law the dis­gust­ing, obnox­ious prac­tice of ven­dor bids. Where the price doesn’t reach what the ven­dor & agent want, so they make a vendor’s bid (why would a ven­dor– when he/she is sell­ing– its incon­gru­ous) and com­pletely dis­tort the price and there­fore the value of the prop­erty. Auc­tion­eer then pleads with peo­ple to bid so they get 1st right to nego­ti­ate when passed in, but of course that is at the inflated/artificially cre­atd post-vendor’s bid amount. It is a dis­gust­ing prac­tice, and the increas­ing of the first-home own­ers grant just shows how short-sighted this Labor gov­ern­ment are. Watch the prices rise as the gov­ern­ment encour­ages more debt!!!

  6. Steve Keen says:

    Hi JC1,

    Yes I would be bet­ter off, but I like this place a great deal, and com­pared to other econ­o­mists, I think my job is pretty secure! So given that I will, in all like­li­hood, do very well in terms of income out of this crisis–in stark con­trast to most of society–I’m will­ing to devote some of that income to pay­ing my mort­gage off more rapidly, and avoid the has­sles of mov­ing, etc.

    On the other hand, if some­one is inspired by the FHBG pump to fork out $25K or more than I was offered, I’ll put up with the inanity of our rental mar­kets for a while and sell. We shall see…

    A major moti­va­tion for putting it on the mar­ket was fol­low­ing my own advice, but as noted above, my per­sonal sit­u­a­tion means that the con­se­quences of the com­ing slump are likely to be the oppo­site of the norm for me.

  7. Steve Keen says:

    Ed, You’re spot on. The macro impact of merely sta­bil­is­ing debt is %260 billion–far far more than the $10 boost from the gov­ern­ment scheme.

  8. Tina says:

    Hi Steve,

    I ‘googled’ your name as I was very inter­ested in your opin­ion regard­ing the first home grant increase for estab­lished prop­er­ties. I am on the sell­ers side, sell­ing two 2-bedroom units in Sydney(range $330K460K). Two days after the grant was announced, one unit was sold for $10K more than was the pre­vi­ous high­est offer. The other unit is going to be auc­tioned and from what I can see, it also should get around $10K-$15K more than I pre­vi­ously expected. You are abso­lutly right — the grant is play­ing into the sell­ers hands, not the first home buy­ers. I think that even­tu­ally this grant will be Kevin Rudd’s “undo­ing” as the even more ele­vated prop­erty bub­ble and then burst will be asso­ci­ated with his grant.

    Kind Regards.

  9. Gary says:

    Hi Steve,
    Its great to see some­one who is prop­erly informed about the cri­sis. I have been fol­low­ing this intensely for 3 years now and it amazes me how traders (eco­nomic speak­ers) still spruik off how things will be ok, when a lit­tle googling about deriv­a­tives would per­haps change their spiel. But like push­ers of credit they’ll say any­thing to get your money to gam­ble on the next good thing.

    I heard that you were sell­ing your house, get­ting off the ship before it sinks, so roughly how long do you think before Aust’ goes really bad? Can you esti­mate based on any avail­able data?

    My per­sonal belief is that the upcom­ing Aussie crash has to hap­pen to nor­malise things, its ridicu­lous oth­er­wise, so any actions by gov­ern­ment to avoid it, usu­ally by spend­ing money are just going to make it far far worse, one way or another.

    My under­stand­ing of the deriv­a­tives is that basi­cally when com­pa­nies go bust, thats when all hell breaks loose. Given that credit is, has, will dry up, how can the deriv­a­tive debts ever be paid, there isnt that amount of money around?
    If the major own­ers of the deriv­a­tives are off­shore, eg China, wont they sim­ply demand pay­ment in terms of real assets ie “the USA” and when pay­ment doesnt occur try to take it.?

  10. Ken says:

    Debt is actu­ally get­ting close to sta­bil­is­ing, see http://www.rba.gov.au/ChartPack/financial_indicators.pdf I would expect that when the fig­ures are updated next that house­hold debt will actu­ally be grow­ing at less than the infla­tion rate, so in real terms declin­ing. I assume this is what the RBA told the gov­ern­ment last week.

    When house prices are drop­ping 15–20% per year in many coun­tries get­ting offered a dis­count of between about 2–5% (based on first home own­ers spend­ing 140,000–350,000) doesn’t really seem all that good. It should take about a week or two for real­ity to assert itself.

  11. Gary says:

    Thanks, but I still dont see a res­o­lu­tion to how $600–700 tril­lion in deriv­a­tives are ever going to be set­tled, unless every­one, ie the world, is declared bank­rupt. How can the deriv­a­tives ever be paid?

  12. Craig says:

    Steve

    While I agree with your logic on the First Home Buy­ers Grant I am inter­ested to learn what you think are the pol­icy alter­na­tives the Gov­ern­ment has at this point.

  13. amphibious says:

    I still can­not under­stand why our gov­ern­ment, like ALL oth­ers, is deter­mined to ensure that credit con­tin­ues. Has not expe­ri­ence, from the time of Venice’s exper­i­ments in inter­na­tional lend­ing and that strange idea (sup­pos­edly brought back by Marco Polo from China) of paper money been fairly con­clu­sive? Fiat (aka unbacked credit) money means a boom inevitably fol­lowed by a bust.
    As a 15yr old in the 60s my first les­son in eco­nom­ics brought me into con­flict with the text (and teacher) because of the mag­is­te­r­ial asser­tion that farm­ers are depen­dent on the indus­trial soci­ety. Seemed to then,and now, that it’s a bit dif­fi­cult chaw­ing down on wid­gets & poly­styrene. The fact that a mod­ern (sic!) farmer would have to eat pes­ti­cide & super­phos­phate just shows how ludi­crous the cur­rent sys­tem.
    I actu­ally heard, ABC’ COun­try Hour, that some farm­ing fam­ily were suf­fer­ing mal­nu­tri­tion because they couldn’t afford .. food prices.
    Puhleeez!

  14. Peter W says:

    Banks & Credit are as use­ful to an econ­omy as Power Util­i­ties and Electrons.

    To grow GDP we need both.

    I sub­mit… Bank­ing & credit needs the same reg­u­la­tion as Power and electrons.

    The econ­omy suf­fers when there is a short­age or a sur­plus of both these COMMODITIES.

    A reg­u­lated 11% ROE would seem rea­son­able (5% more than AAA bonds).

    If a bank wants to pay mas­sive wages in a reg­u­lated sys­tem it will suf­fer at the share­holder return level.

  15. Gary B says:

    Hi Steve, I mis­takedly posted the below tax rant in the Great Panic Debate sec­tion — Great Mis­take –sorry for dupli­ca­tion.
    Steve,
    the basic cause of the hous­ing bub­ble not addressed by you and your fan club is TAX.
    Tax is the root of all finan­cial and polit­i­cal evil.
    The Great Depres­sion was made infinet­ley worse by the high lev­els of tax­a­tion com­pound­ing other eco­nomic mis­man­age­ment such as credit restric­tion etc. Hoover raised tax from 25% to 60% to cope with expand­ing gov­ern­ment deficits, only to cause fur­ther eco­nomic con­trac­tion result­ing in a fur­ther drop in tax rev­enue. Roo­sevelt con­tin­ued this pol­icy, and it was a major fac­tor in the 1937 reces­sion. Dur­ing WW2, mar­ginal tax rate reached 90%. Obama is going to bring in top mar­ginal tax rates of 60%+ — those who don’t learn from history—.(www.financialsense.com)
    The high rates of mar­ginal tax rates that kick in at rel­a­tively low income rates ensure that Aus­tralia will have a tax avoid­ance obses­sion, and that “neg­a­tive gear­ing’ will be pur­sued by all and sundry. I per­son­ally know of nurses who have sev­eral ‘neg­a­tively geared’ prop­er­ties that are under water, but because of the “tax deductablity of inter­est and main­te­nance”, have delayed the inevitable day of reck­on­ing, “because prop­erty always comes good”- ho hum. In the mean­time, their sav­ings, gar­nered often from excess over­time go down the finan­cial drain — no won­der Aussie banks are so ’stable’and profitable.(thanks Kevie) Removal of the cap­i­tal gain excemp­tion for any short term invest­ment would dis­cour­age all forms of tax dri­ven spec­u­la­tive invest­ments, and low­er­ing mar­ginal tax rates com­bined with abo­li­tion of all tax deduc­tions (which only dis­tort ratio­nal eco­nomic deci­sions — ie.’no free lunches’)would elim­i­nate the per­ceived need for tax dri­ven invest­ments. Lower tax rates result in higher eco­nomic activ­ity and lower tax avoid­ance which results in higher tax receipts. Leg­is­late for a per­ma­nent bud­get sur­plus, so politi­cians can’t steal from future gen­er­a­tions, and prob­lem solved.
    In a coun­try where 40% of fam­i­lies pay no net tax (recent report in The Aus­tralian) and 20%+ are on pen­sions, and free Medicare and unfunded gov­ern­ment pen­sions remain a future grow­ing lia­bil­ity, a more ratio­nal tax sys­tem, which is fair rea­son­able, trans­par­ent, ade­quate and low cost to admin­is­ter and results in more pro­duc­tive invest­ments than “McMan­sions” is long over­due.
    PS any­one who doesn’t believe that cli­mate change is a seri­ous risk to human exis­tance, that at least needs seri­ous insur­ance cover, is a com­plete—— AND, Fail­ure to deal with the Peak Oil(Energy)challenge will result in the Great Great Great Depres­sion.
    Cheers, Gary

  16. Darren says:

    Gary, regard­ing the $600–700 Tril­lion in out­stand­ing deriv­a­tives you men­tion, I beleive this is a ‘notional’ num­ber. The real expo­sure, assum­ing each coun­ter­party doesn’t go bust is much lower, because this is a cumu­la­tive num­ber of on-sells.

    The real net­ted num­ber would be much lower, I think I read around $10T, but don’t quote me! Of course.. this is why the govts are work­ing so hard to keep these banks liq­uid and sta­ble so this amount doesn’t expand, and the con­tracts last until maturity.

  17. r2t2 says:

    I am not an econ­o­mist and so per­haps I am miss­ing some­thing but some­one please tell me why the gov­ern­ment is say­ing, “we are expe­ri­enc­ing a seri­ous eco­nomic cri­sis and unem­ploy­ment WILL rise” and in the same week say­ing, “ok young would-be-home-owners, go ahead and get your­selves in debt — buy a home at an exhor­bi­tant price.” How are FHB going to pay their mort­gage when they are unem­ployed and exactly how will that sce­nario assist the long term wel­fare of the econ­omy and ipso facto the nation?

  18. Aac says:

    r2t2 — The gov wants high house because if they were to fall by say 20% and for­clo­sures were to increase then our banks will prob­a­bly look like their US coun­ter­parts; ie. CBA has 361b of mort­gages on their books. In other words the gov is abus­ing young fam­i­lies under the guise of help­ing. In addi­tion our PM is des­per­ate to go to the next elec­tion, which is only about two years away now, with­out a tech­ni­cal reces­sion. Our gov and many oth­ers like the UK are on tread mill that they cant get off. Incom­petance is too fine a word for our pollies.

  19. Keith says:

    Steve,
    Very inter­est­ing charts. While hous­ing is no doubt at unsus­tain­able lev­els, your com­par­i­son of hous­ing with the CPI tends to cast doubt on the CPI. It seems to be out of step with pretty much any other price mea­sure to do with the major con­trib­u­tors to the econ­omy (eg. hous­ing, com­modi­ties, man­u­fac­tur­ing, local gov­ern­ment taxes). Seems to me the ABS has some explain­ing to do. No doubt the peo­ple con­cerned with pro­duc­ing the CPI take their job seri­ously and have good rea­sons for their method­ol­ogy, but it looks increas­ingly like an exam­ple of peo­ple doing a par­tic­u­larly exact­ing task per­fectly, but fail­ing to achieve the objective.

    r2t2,
    Your com­ment is very apt, and dis­tils the gov­ern­ment posi­tion per­fectly. Kevin’s appear­ance on tv last night was par­tic­u­larly telling when Kevin told a young cou­ple to buy a house (but not their dream house) as soon as pos­si­ble. This kind of advice can only mean two things :
    1. the govt believes hous­ing prices will con­tinue to increase indef­i­nitely, and/or
    2. they don’t under­stand actual eco­nomic activ­ity, and are totally reliant on money flow mea­sures, there­fore caus­ing some­one to spend (and go into debt) will improve the num­bers, there­fore the econ­omy is improved.

    The young cou­ple in ques­tion should obtain a record­ing of the PM’s advice — should make for an inter­est­ing legal case in the future, if they should decide to fol­low the advice and things don’t work out.

  20. Keith says:

    Last night, Kevin was again asked point blank what was con­tained in the Trea­sury advice. Kochie allowed Kevin to change the sub­ject. A very soft ball q&a.
    In any case it’s not the ques­tion I would like answered. I would like to know what ‘advice’ Kevin and Wayne were given dur­ing their recent trips to the US, where they were put in rooms with bankers and had the fright­en­ers put on them, and then given their march­ing orders. National sov­er­eignty — Bah !

  21. Bullturnedbear says:

    Inter­est­ing comments!

    A Gov­ern­ment stim­u­lous pack­age is a sign that there are bad probs in the sys­tem, not a sign that a turn­ing point is near. The new num­bers are just not out yet. This will come as news to all of us, but when the num­bers come out the pun­ters will be very shocked and freeze up even more than they are now.

    The new first home own­ers grant is a sub­sidy for the con­struc­tion indus­try, noth­ing else. Con­struc­tion has been declin­ing since 2003 and the gov­ern­ment is try­ing to pump prime that indus­try. The con­struc­tion indus­try is now in the absolute toi­let and most sub-contractors are look­ing for work that just isn’t there.

    I agree with all you guys that the poor first home buy­ers will get tricked into tak­ing on mas­sive debts even after the gigan­tic asset mania has turned sour. The con­struc­tion lobby is very pow­er­ful and they would have been push­ing for this for ages.

    I don’t believe the increased FHOG will have a mate­r­ial effect either because con­sumers are becom­ing increas­ingly risk averse and the pen­du­lum is swing­ing very hard back to the con­ser­v­a­tive side.

    Remem­ber Polit­i­cal Sci­ence 101. The pri­mary func­tion of a politi­cian is to get re-elected. Most of the deci­sions we will see out of any gov­ern­ment in a down­turn will be what the people/voters are ask­ing for. To fol­low pub­lic opin­ion is the best chance of get­ting re-elected.

    Remem­ber the back­lash after the bud­get regard­ing no increase for pen­sion­ers. Now pen­sion­ers get some more money. Give the child bonus to low and mid­dle income earn­ers, Labor’s main con­stituent. Good politics.

    Either way in this case at least a pos­i­tive is, that those ini­tia­tives will go into the hands of those most likely to spend. The FHOG sub­sidy will encour­age a few devel­op­ers to start new projects and they will likely com­plete those for a loss. As risk aver­sion increases mak­ing money becomes almost impossible.

  22. Anarchy Is Alive says:

    The cash injec­tion is always a good think to stave off mass panic — since we as humans with emo­tions rarely think with ratio­nal­ity and hence our worth as peo­ple is now tied to the dol­lar, you give them more of the dol­lar the more sati­ated they become.

    Much like what a heroin addict would deal with — after com­ing down off a hit, they need another hit to keep them level.

    As for the first home buy­ers grant. What a crock of shit. We went through this years ago and look what sort of mess this cre­ated. The only thing this did was fuel the rapid rise of hous­ing prices along with low inter­est rates at the time. Much like throw­ing petrol (first home buy­ers grant) on a rag­ing fire (low inter­est spec­u­la­tive envi­ron­ment). But thats all good “pol­i­tics” not good “com­mon sense” — good ‘ol Super Rudd comes to the res­cue once again.

    A fur­ther point beyond just our domes­tic plight, is with res­cue pack­ages in gen­eral. I am dis­gusted by the desires of gov­ern­ments around the world to res­cue estab­lished finan­cial busi­nesses of which would make the rich much richer, and sup­port their abil­ity to fund their fer­rari in the com­ing months, while those at the mercy of these insti­tu­tions ram­pant greed will have to fall on their sword and REALLY deal with the down­turn. The fat cats get paid and the mice get the crumbs.

    I think I have tapped out all my analo­gies for one post today.

  23. Peter N says:

    Accord­ing to Dr Hous­ing Bub­ble (in USA)that.….“Figuring out hous­ing prices isn’t rocket sci­ence. There is no need for a Master’s degree in finan­cial engi­neer­ing to fig­ure this out folks. Even as the hous­ing mar­ket con­tin­ues its down­ward slump, we are still at over­priced lev­els. Why? Well his­tor­i­cally, hous­ing as an invest­ment only tracks with the nation’s infla­tion rate. That is until a bub­ble appears and peo­ple start get­ting the notion that this time is dif­fer­ent. I’m going to give you a very straight­for­ward math equa­tion on deter­min­ing how much home you can afford. This is the max­i­mum price you can pay with­out putting your­self into finan­cial jeop­ardy and main­tain­ing a cush­ion = 3 times gross house­hold income is the max­i­mum value of a home one can afford? So if your house­hold income is $100,000 you can buy as much as $300,000 worth of home. If you make $1,000,000, you can buy up to $3,000,000. Makes you won­der if we’ll ever see these ratios again.“
    Refer to Dr Hous­ing Bub­ble blog for more info
    http://www.doctorhousingbubble.com/

  24. Bullturnedbear says:

    On the Ques­tion of should Steve sell his house or not?

    Steve it seems as if you are in two minds as to whether or not you should sell your house. Sell sell sell!

    Lis­ten to your heart and your own analy­sis. Not the papers and peo­ple at BBQs.

    House prices are falling hard already and the falls will inten­sify as unem­ploy­ment rises and risk aver­sion con­tin­ues to increase. When forced/panic sell­ing starts the spi­ral down will be intense.

    The Share­mar­ket will prob have one more blow out to the down side, for the moment (this is a guess only). Then the mar­ket will need to have a rest from all the down­ward pres­sure. This con­sol­i­da­tion phase in the World’s share­mar­kets will mark one of the last good times to sell your house or any asset for that mat­ter. Peo­ple may begin to believe that the “cri­sis” is over and con­fi­dence will tem­porar­ily flip back. Sell into this false run of optimism.

    Some time late this year or early next year, who knows when for sure (only an informed guess) the World’s share­mar­kets will begin mov­ing to the down­side again (and find new lows) and risk aver­sion will increase fur­ther. Nobody I talked to 2 months ago believed the share­mar­ket could go much lower and they now believe the mar­ket can’t go much lower from this point. When the mar­ket defies their belief they will be even fur­ther dis­mayed and then throw their chips in again. Con­fi­dence will drain even fur­ther and risk aver­sion will intensify.

    The only assets that sur­vived the Great Depres­sion in Amer­ica was phys­i­cal cash (not bank deposits).

    To be a con­trar­ian takes courage and a large set of ear­muffs. Steve, back your­self and move to cash.

  25. lindyhop says:

    Tra­di­tion­ally it was believed peo­ple should be pay­ing no more than 30% of their net income to ser­vice a mor­gage (oth­er­wise they would be con­sid­ered in mor­gage stress). So a cou­ple or indi­vid­ual with a NET income of $1000 a week should be look­ing at pay­ing no more than $300 a week in mor­gage. At 7.5% inter­est that trans­lates to a mor­gage of $200,000.

    Add a 20% deposit to your $200k mor­gage and that’s $250k total that peo­ple could real­is­ti­cally afford for a first home if their net income was $1000 per week.

    So, yes, Aus­tralian hous­ing prices are unrealistic.

    I used that for­mula when I bought my sec­ond home back in 2001 and worked out I’d paid 10–15% over the real­is­tic price. Since then prices have got so much worse.

    If the gov­ern­ment was going to main­tain the 1st home buy­ers grant they should have kept it only for new builds (which are des­per­ately needed).

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