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. GSM says:

    At this point, FHOG or no, house prices in Aus­tralia will be deter­mined by the unem­ploy­ment situation.

    Rudd knows this clearly. That is his moti­va­tion for the big busi­ness pow wow and the stim­u­lus package/FHOG expansion.(I would also bet that Rudd chose Chan­nel 7 for his “chat” last Sun­day to pur­posely lower the 60 min­utes story where SK appeared and enlight­ened us all on HIS take on the unem­ploy­ment future– 10–15%????!!)

    Yes, Aus­tralia is very vul­ner­a­ble to a sig­nif­i­cant decline in house prices. But the man­i­fes­ta­tion of can be mit­i­gated by rea­son­able lev­els of employ­ment. The major pol­icy shift as I see it is that the Govt now is focussed more on main­tain­ing house prices than in house afford­abil­ity. This has come about prob­a­bly because of the dev­as­ta­tion wit­nessed in bank­ing insti­tu­tions worldwide.

    House prices are clearly com­ing off– more moti­va­tion for Rudd to change course. My expec­ta­tions are that the “wait and see/there is no rush” men­tal­ity will pre­vail (due to lower future IR’s, the recent mar­ket tur­moil, slow­ing con­sumer spend­ing etc),which will in effect send house prices lower thus keep­ing fence sit­ters firmly in place.In this envi­ron­ment all you really need to know is the tra­jec­tory of prices.

    I’m sure we will see nightly suc­cess sto­ries of renters turned own­ers but they will be in the minor­ity. Get ready for a mas­sive media onslaught on the virtues of buy­ing a home.

    Unem­ploy­ment will inex­orably rise in Aus­tralia. To what lev­els? Who knows. Cor­re­spond­ingly, house prices will fall. For now, that’s enough to know.

  2. Foundation says:

    Keith said: “Foun­da­tion,
    There is a 15th series which began in 2005. Your info appears to be dated. The weight­ings for the 15th series cer­tainly includes house pur­chase at 7.8% of the all groups cpi. It is also present in the 14th series.“
    I’m aware of that. The approach to hous­ing costs has remained unchanged since the 13th series (though weight­ings have been med­dled with). House prices are NOT included. Con­struc­tion costs and stamp duties etcetera ARE included. But the price of land, the bit that was bid up to astro­nom­i­cal lev­els by the recent unsus­tain­able bub­ble, is SPECIFICALLY EXCLUDED! Much as I stated earlier.

    The adjust­ments to CPI made in 1998 resulted in the aver­age annual CPI read­ing being around 0.9%pa less than it would have been had mort­gage inter­est costs (the sin­gle largest con­sump­tion expen­di­ture most fam­i­lies ever face) not been delib­er­ately excluded.

    Regards, F.

    PS — I’m see­ing a few com­ments here still sug­gest­ing prices can’t fall by 20%+. That’s amus­ing as I could buy today in areas of Mel­bourne I’m track­ing, an equiv­a­lent house today for more than a 20% dis­count on sim­i­lar homes 18 months ago. ;-)

  3. Bullturnedbear says:

    Hi John,

    I didn’t say that peo­ple don’t buy houses to live in. I just defined what “really” sets the price of those houses. Sup­ply does not set the price. Demand does.

    Peo­ple pay a set price based on their desire for risk (even with­out know­ing the risk) and their abil­ity to pay.

    That level of risk is now more obvi­ous and peo­ple have increased their fear of risk. As a result prices will fall accord­ingly. Also people’s abil­ity to pay has fallen as finance is harder to get, putting fur­ther down­ward pres­sure on prices.

  4. furball says:

    Steve

    This really is dread­ful analysis.

    There is noth­ing in here to say that cur­rent debt lev­els are unsustainable.

    You have ignored a cen­tral pos­si­bil­ity, while house prices in 1987 may have matched his­tor­i­cal norms, this his­tor­i­cal norm may have reflected an exces­sive con­ser­v­a­tive use of debt in the fund­ing of home purchases.

    I grant that asset prices have grown through increas­ing use of debt. I accept the rel­a­tiv­ity that you have demon­strated. But you have not estab­lished that Aus­tralian and Amer­i­can debt lev­els at index = 100 were in any way equiv­a­lent degrees of finan­cial pressure.

    You have not deter­mined that 13% of HDI to Inter­est is inap­pro­pri­ate. Please direct me to the spread­sheet or stud­ies that sug­gest this is unac­cept­ably high.

    Fur­ther, you have not pre­sented any infor­ma­tion regard­ing the geo­graphic dis­tri­b­u­tion of salary, such that West­ern Syd­ney homes may be over-valued and highly sub­sti­tutable while inner north, east­ern and inner west­ern homes have no ready sub­sti­tutes, as far as those earn­ing high wages are con­cerned. Not to men­tion the valid cal­cu­la­tion that seems to stack up — 10 min­utes extra travel time val­ued at two wages at $60/hr x 1.5 — 2.0 wages does describe a good deal of the vari­ance between sub­urbs head­ing out.

    You might be onto some­thing regard­ing the rel­a­tive per­for­mance of the hous­ing mar­ket in real terms against its past performance.

    You may have iden­ti­fied that houses are not going to return a ridicu­lous top line growth aver­ag­ing 7% per annum (imply­ing 35% on equity if mort­gage equity starts at 20%).

    You may have iden­ti­fied a key sus­cep­ti­bil­ity of the econ­omy, should an exter­nal shock cause large increases in unem­ploy­ment (to 7%, say).

    How­ever, you have not iden­ti­fied an impend­ing crash. Just an asset class that has out­per­formed other asset classes through the use of debt by house­hold­ers, in a way that could not be repeated for another 20 years.

    If you really believe you are right, please put together the logic in a robust fashion.

    We’re not there yet.

    Best Regards
    Furball.

  5. John, I strongly doubt price falls from here will mainly involve the high end. They will be across the entire spec­trum. Yes, prices have been falling in the outer sub­urbs — 25 kms from CBD (at least in Brissie where I know mainly from friends) — for about a year.

    But it is quite clear that there are many more houses for sale now in the 5 to 15 kms regions con­tain­ing a lot of older median priced houses.

    Some will be forced sales, oth­ers will be retir­ing or close to retir­ing sell­ers. Sure the lat­ter will not be des­per­ate for a sale, but they would like to sell in the next few years. And they have seen cycles before, may see through the baloney and know that prices are not going to go up for many years, and will press on with a sale know­ing that even if they sell for 10–15% less than a year ago, they still have done very nicely thank you out of the bubble.

    Your point about houses worth as homes is spot on. I con­sider the house that I rent to be my home, too. (And I do not own any res­i­den­tial prop­erty what­so­ever.) So your home does not nec­es­sar­ily need to be a house for which you are repay­ing the bank. (This fac­tor would be improved if large scale investors — ie super­an­nu­a­tion funds — began to pro­vide the bulk of rental housing.)

    And as I’ve shown on my web­site, the stan­dard of liv­ing gap between rent­ing and buy­ing at these prices is enor­mous. It only makes sense to take such an enor­mous drop in stan­dard of liv­ing — and the stress of high debt lev­els — if you truly believe that the gap is only going to grow. That is why FHBs and investors bought into the bubble.

    But that myth has been well and truly extin­guished. Pric­ing will now cor­rect back to reflect a true value for the emo­tional gain of own­ing your own home. Like many bub­bles burst­ing, pric­ing may well over cor­rect. And I would sug­gest, with pre­vail­ing con­di­tions, that cor­rec­tion might occur rea­son­able rapidly.

    Which leads to GSM’s com­ment. I don’t believe it’s all about unem­ploy­ment. The US mar­ket peaked over two years ago, and has expe­ri­enced sig­nif­i­cant falls as we all know — but unem­ploy­ment has really only begun to increase sign­f­i­cantly there over the last 6 months.

    So con­di­tions can def­i­nitely exist to cause house prices to fall in the absence of falling employ­ment, and I would sug­gest that we too have those con­di­tions in spades.

    On the other hand, that we are likely to be expe­ri­enc­ing higher unem­ploy­ment at the same time that our hous­ing mar­kets have begun to go south would sug­gest that mar­kets may fall more rapidly than in the US.

  6. Tony says:

    Steve,

    Whats inter­est­ing about the credit bub­ble is what causes it and is there a bet­ter way.

    There are two ways the cap­i­tal accu­mu­la­tion of an econ­omy can be dis­trib­uted amongst the population:

    1. It can be lent by those who have it to those who don’t for a fee, ie credit

    2. It can be dis­trib­uted from those who have it to those who don’t through taxation

    Now the econ­omy works through both mech­a­nisms, but over time there has been more reliance on the credit mechanism.

    And fuel­ing credit cre­ation is a frac­tional reserve bank­ing sys­tem that steadily prints money. That money then mul­ti­plies many times through the bank­ing sys­tem cre­at­ing an ever increas­ing expan­sion of credit along with increased prices and eco­nomic activity.

    And the bulk of the pop­u­la­tion know it makes sense to bor­row because their wages aren’t keep­ing pace with price increases caused by money print­ing and credit cre­ation, so its bet­ter to bor­row now because your house will inflate faster than your abil­ity to save.

    If we look at the USA, total debt has now exceeded 50 tril­lion. This amount has been steadily increas­ing since world war 2, with a large accel­er­a­tion since finan­cial deregulation.

    And the cre­ation of this debt along with stag­nat­ing wages and regres­sive taxes, has meant that wealth is flow­ing from the bot­tom to the top, instead of the other way around. And now its all col­laps­ing, because a large part of the pop­u­la­tion can no longer take on any more debt.

    The answer is sim­ple; reduce credit, stop print­ing money, reduce the role of the bank mul­ti­plier effect and improve pro­gres­sive tax to replace the need for credit. The eco­nom­ics of doing this is easy, the pol­i­tics how­ever isn’t.

  7. Fur­ball, you make a rea­son­able point about what is the “opti­mal HDI” and I would be inter­ested to see whether Steve can add any empir­i­cal data to the discussion.

    I would say this. We already know that human beings’ risk tol­er­ance goes through cycles, or at least alters depend­ing on experiences.

    The extreme risk aver­sion shown by those that lived through the Great Depres­sion, of course, is one very well known such case. It is gen­er­ally accepted that the chil­dren of Great Depres­sion par­ents were less risk averse. And per­haps ensu­ing gen­er­a­tions have become less and less risk averse. Add to that fac­tor the propen­sity for human beings to unlearn lessons of history.

    We know that increased risk equals increased prob­a­bil­ity of greater reward, but with con­comi­tant increased volatility.

    I would sug­gest that you are cor­rect — that the process of unlearn­ing the lessons of the Great Depres­sion was com­plete — and the return to the laissez-faire con­di­tions was the root cause of the credit and hous­ing bub­bles. As such, peo­ple were pre­pared to take on higher and higher gear­ing lev­els. But many did not realise that the increased volatil­ity shown in the rapid ramp­ing up of prices also had a down­side — rapid price falls.

    I doubt very much that any­body could deter­mine with any cer­tainty what level soci­eties would choose if there could be a sta­ble trade off between risk return and volatil­ity. I think we know enough that we humans would tweak it up a bit sooner or later if things were sta­ble for a while!

    Even though it may be dif­fi­cult, prob­a­bly impos­si­ble, to put an exact fig­ure to — it does not change the fact that the phe­nom­e­non is real. What’s more, many of the excep­tional investors of our time have used their under­stand­ing of this to profit greatly.

    Per­son­ally, I don’t think it is all that dif­fi­cult a con­cept to under­stand — Buffet’s sum­ma­tion may be the best — “be greedy when oth­ers are fear­ful, and fear­ful when oth­ers are greedy”. The most dif­fi­cult part is hav­ing the clar­ify of thought to see through the moun­tains of baloney that vested inter­ests spew forth (eg never see­ing mar­ket peaks in ris­ing mar­kets and con­tin­u­ally call­ing bot­toms in falling ones).

    One ques­tion to pon­der — imag­ine a young (but equally wise) War­ren Buf­fet liv­ing in Aus­tralia with a young fam­ily and he has $50,000 in sav­ings. Does he allo­cate his cap­i­tal to buy­ing an Aus­tralian house (as a home or oth­er­wise) right now at cur­rent prices?

  8. chris says:

    I don’t have any real data but I believe that the major­ity of the fam­i­lies in Aus­tralia have mort­gages and the minor­ity are rent­ing or have already repaid their homes in full.

    — Assum­ing that the unem­ployn­ment will not increase a lot I believe that the major­ity of the peo­ple will try to keep their mor­gages and will not sell their houses (at least because they need a place to live and want to avoid the has­sle of moving)

    Then if the house prices are going to fall dra­mat­i­cally as some peo­ple here sug­gest, wouldn’t this enrage the major­ity of the pop­u­la­tion of Aus­tralia? I’m sure that’s not some­thing the gov­ern­ment really wants, so they will do *every­thing* to avoid that, such as this “res­cue plan” to keep the prices of the houses high for a longer period of time.

    This is why I think Kevin did what he did. What other options did he have anyway?

  9. michael b says:

    We have recently done some work on ‘afford­able hous­ing’ — a very wide and gen­er­ally ill defined term.
    I didnt like the mar­kets sole com­para­tor of income vs house prices.
    I pref­ered a com­para­tor of wealth vs house prices.
    While I agree with Steves fun­da­men­tals on a house bub­ble and the silly exten­sion to the FMOG — which I see was intended to ensure hous­ing con­struc­tion employ­ment doesnt fall — I want to see more analy­sis on the issue of increas­ing weath effects on prop­erty val­ues.
    2 house­holds each $1000/month, one in their 60’s with lots of assets, and one in their late 20’s with no assets. Same house­hold income, very dif­fer­ent wealth.
    what is the weath cor­ro­la­tion with prop­erty prices?

  10. Peter W says:

    In Mel­bourne each week­end there are roughly 900 hous­ing sales at a cost of $400 mil­lion (aver­age $444,000). The total num­ber of Mel­bourne houses is roughly 3 mil­lion, so each week­end we are observ­ing roughly 0.03% of all the houses in Mel­bourne change hands.

    The price of exchange of these 900 houses ‘sets’ every­ones opin­ion of house­hold wealth.

    If, one year from now, 500 peo­ple ‘set’ the price of exchange at $178 mil­lion (aver­age $355,000 i.e. 20% lower), are the other 3 mil­lion Mel­bourne home­own­ers 20% poorer because 0.016% of all the houses changed hands at a 20% lower price?

    Think about it!

  11. Lawrie says:

    Why are our house prices inflated — how much of the prob­lem is silly bankers lend­ing too much and how much is silly buy­ers buy­ing too much(i.e. big houses)and pay­ing too much?

    I put the greater part of the prob­lem down to buy­ers. I don’t see buyer behav­iour chang­ing much until the house price col­lapse of 2009 is seared into the mem­ory of the nation — until Mums and Dads are telling their kids how they lost the fam­ily home because they didn’t leave them­selves a mar­gin for safety.

    Yep, the fist home buy­ers grant sure is is silly policy

  12. Keith says:

    F,
    Exactly how do you know what is included in House Pur­chase ?
    Cheers

  13. Peter W says:

    Invert the pre­vi­ous hypo­thet­i­cal if it makes you ‘feel’ better.

    Is the pop­u­la­tion of Mel­bourne 20% richer, if in one year from now, 500 peo­ple trans­act 500 houses at $266 mil­lion (aver­age $533,000)

    It appears an astro­nom­i­cal amount of the per­cep­tion of wealth can be cre­ated or destroyed as a result of the trans­ac­tions of 500 — 1000 people.

    Strange eh!

    This extremely strange phe­nom­e­non has destroyed dozens of finan­cial insti­tu­tions and roughly $30 TRILLION of the worlds stock­mar­ket value dur­ing the past 12 months.

  14. Pingback: Contrarian Investors’ Journal » Blog Archive » If property prices follow long-term inflation, will prices not fall in the long-term?

  15. Peter W says:

    There is a very sim­ple dif­fer­ence between invest­ing and speculating.

    Spec­u­la­tors gam­ble that prices will rise so they can profit from sel­l­ling at a higher price.

    Investors (strangely) want prices to fall because at lower prices they recieve a higher rental yield.

    The Spec­u­la­tors focus is “on sell­ing” the bal­ance sheet.

    The Investors focus is “Return on asset = Yield” the P&L

  16. yankeejimc says:

    Steve: I am anx­ious to see your reply to fur­ball, who asked what data implies cur­rent debt lev­els are unsus­tain­able. As a Yank, I won­der if the answer for the US is the amount of demand fueled by INCREASING debt lev­els ala Ponzi. That surely is unsus­tain­able. Oz does not seem to be quite so badly off in that respect.

    yan­kee­jim

  17. Steve Keen says:

    Dear All,

    As you all prob­a­bly appre­ci­ate, I’m far too busy now to respond to most posts here, but I enjoy the dis­cus­sion forum the site has evolved into–with reg­u­larly over 3500 read­ers a day as I write.

    The sim­ple answer to Furball’s ques­tion about why cur­rent lev­els are unsus­tain­able is his­tory. Check the long term graphs for Aus­tralia and USA debt in ear­lier posts. The long answer is the finan­cial insta­bil­ity hypoth­e­sis and my mod­els of it, the sim­plest of which you will find on the The­ory page here.

    For a proper answer, I’m going to have to write two book-length treatments–one pop­u­lar and the other tech­ni­cal. I have a long over­due con­tract for the lat­ter with Edward Elgar, and a ten­ta­tive one for the for­mer with another publisher.

    Once I start on either/both of them, my activ­ity on the blog and in the media will have to fall. But they will together pro­vide a detailed answer as to why lev­els are unsustainable.

  18. Foundation says:

    Keith said: “Exactly how do you know what is included in House Purchase?”

    It is detailed in the ABS’ Guide to the Con­sumer Price Index pub­li­ca­tions. For exam­ple: http://www.abs.gov.au/AUSSTATS/abs@.nsf/DetailsPage/6440.02005?OpenDocument

    The ABS will sup­ply the older doc­u­ments that are unavail­able on the inter­net if you specif­i­cally request them. Here’s a sum­mary of the hous­ing weight­ings in the 15th series:

    19.53% HOUSING

    Of which:

    5.22% Rents: Rent paid to pri­vate and gov­ern­ment land­lords, includ­ing hous­ing author­i­ties (e.g. Defence Hous­ing Author­ity)
    1.63% Elec­tric­ity: Elec­tric­ity charges and con­nec­tion fees
    0.70% Gas and other house­hold fuels: Mains and bot­tled gas includ­ing con­nec­tion fees, and other house­hold fuels such as fire­wood, bri­quettes and heat­ing oil
    0.77% Water and sew­er­age: Water sup­ply and sew­er­age charges
    7.87% House pur­chase: New homes (exclud­ing land) and major improve­ments to exist­ing homes, and fixed appli­ances such as ducted heat­ing, hot water sys­tems and ovens
    1.16% Prop­erty rates and charges: State and local coun­cil prop­erty based rates and charges except water and sew­er­age
    2.18% House repairs and main­te­nance: Mate­ri­als and labour costs for repairs and main­te­nance to dwellings

    As you can see, the price of land is explic­itly excluded. The mas­sive increase in home pur­chase costs has not been fac­tored into the CPI cal­cu­la­tion since 1997.

  19. BrightSpark says:

    Steve

    There is one other aspect of Engi­neer­ing which is actaully a law of physics and which seems to be rel­e­vant. That is the sec­ond law of Ther­mo­dy­nam­ics and the prop­erty of Entropy. Entropy increases indi­cate loss of order and this occurs when non reversible processes take place.

    This prob­lem of the bub­ble or the econ­omy is prob­a­bly the result of a chaotic sit­u­a­tion which has arrisen over many years because neo-classical “reforms” which were not reversible have increased the sys­temic entropy.

    An exam­ple of an irre­versible change is the dein­dus­tri­al­i­sa­tion of Aus­tralia and the US. “Free Trade” which was not trade (but pur­chase on credit) resulted in almost instan­ta­neous destruc­tion of wealth cre­at­ing indus­tries which took years to develop. This was clearly a non reversible process which resulted in increase of entropy.

    The total of these increases in entropy has now resulted in the totally chaotic sit­u­a­tion which has devel­oped where peo­ple with lit­tle under­stand­ing of sys­tem sta­bil­ity sim­ply do not know what to do.
    The bub­ble or the economy?

    Many thanks.

    PS I had an LOL sit­u­a­tion when I noticed that the RBA has a “Sys­tem Sta­bil­ity” depart­ment. I have never noticed and sys­tem sta­bilty method­ol­ogy being used by economists!

  20. Bullturnedbear says:

    Hi peter W,

    I couldn’t tell if you were say­ing wealth had fallen, risen or stayed the same in your two examples.

    Price is extremely arbi­trary and that is why over the long term price is sus­cep­ti­ble to much larger swings than peo­ple believe.

    The com­monly held view is that value is rel­a­tively sta­ble or con­stant. Wrong! The peo­ple that lived through the great depres­sion know that when the crowd stops buy­ing the value dies. This is true for all assets.

  21. blueinca (Paul) says:

    I still say that house prices are basi­cally main­tain­ing the (high lev­els)- I live in Mel­bourne– and if the Real Estate agent doesn’t get what the ven­dor wants at auc­tion through his dodgey schem­ing (see my pre­vi­ous rants on ‘Ven­dor Bid­ding’) they pass the prop­erty in– and even­tu­ally the prop­erty sells pri­vately — it takes a longer period of time than is has before– but it still even­tu­ally sells some­where near what they want.

    When agents say — there are bar­gains out there, that prices are falling — DON’T BELIEVE THEMIT IS SPIN, what is really hap­pen­ing is price GROWTH is not hap­pen­ing– prop­er­ties are gen­er­ally mak­ing the same prices they did say 4 to 5 months ago– they haven’t con­tin­ued to rise. But to a real estate agent that means they have another mar­ket­ing option to push prices, ie: “there are bar­gains to be had” But:

    There is hardly any prop­erty for sale in the Mel­bourne mar­ket in the $400k to $600k range (which these days is classed (in real estate agent speak) as afford­able! (What a joke) at the moment.

  22. Peter W says:

    The ‘effi­cient mar­ket’, human behav­ior, most peo­ple mea­sure their wealth against others.

    I don’t believe in the effi­cient mar­ket. I believe that some­times a sig­nif­i­cant diver­gence exists between price and value.

  23. OldSkeptic says:

    Actu­ally this is just another exam­ple of “it is really ok, a quick fix and we can go back to busi­ness as usual (BAU) again. House prices will con­tinue to rise, sped­ing increase, China buy every­thing we dig, the richer get richer, the rest get more debt”, that sort of thing. I really think they expect house prices to rise to infinity.

    Wasn’t there an RBA paper just a short while ago, stat­ing that “hous­ing will always be unaf­ford­able” or some rub­bish like that?

    Non­sense. BAU is dead. We have to invent another econ­omy for Aus­tralia, less con­sumer sped­ing, more cap­i­tal spend­ing and invest­ment ori­ented. A rein­ven­tion like what hap­pened after WW2.

    I always remind peo­ple that at the start of WW2 Oz was broke, couldn’t even make a gun, basi­cally a large farm and a bit of a mine. By the end we were mak­ing the F-22 and F-35 of the era, (the Mus­tang and Mos­quito), plus ships, etc. So rapid change and indus­tri­al­i­sa­tion can hap­pen if there is the will to do it.

    Despite deter­miend efforts it took 50 years to turn back to Oz being a mine and a bit of a farm.

    Off topic: this cri­sis has have finally answered the age old philo­soph­i­cal ques­tion “are humans smarter than yeast”.

  24. Ernie says:

    I would love to see Aus­tralia get back to mak­ing stuff, all this primary/tertiary sec­tor focus has ruined man­u­fac­tur­ing. Even if we only made things for local con­sump­tion to reduce some imports of fin­ished goods, with all their crazy global freight. Can any­one see this global finan­cial cri­sis can help to stim­u­late local man­u­fac­tur­ing as a side effect? Maybe Mr Rudd should have put some of the $10bill into build­ing a gov­ern­ment spon­sored fac­tory to sup­ply free cloth­ing to peo­ple on welfare!

  25. blueinca(Paul), what is typ­i­cal of a falling hous­ing mar­ket is that some ven­dors are des­per­ate to sell and oth­ers are not at all des­per­ate. Clearly, the ones who have more incen­tive to sell (banks sell­ing repos­sessed houses, mort­gagors default­ing and at risk of fore­clo­sure, and investors\speculators urgently need­ing cap­i­tal) will have to accept pric­ing pro­vided by the mar­ket. Oth­ers will remove their prop­erty from the mar­ket. How­ever, once they see the mar­ket con­tin­u­ing to trade down, they will be faced with the deci­sion of whether they would like to sell after­all and get the mar­ket price at that time or risk get­ting a lower price later (per­haps when they really do need to sell). This process will take sev­eral — per­haps many — years.

    I worked with a guy who bought an invest­ment prop­erty in outer Bris­bane in 1991 at the tail end of the last prop­erty boom. He bought it for $120K and when he retired in 2000 he was tired of the has­sles of rent­ing it out and it kept retreat­ing in value. He wanted to con­sol­i­date all of his finances going into retire­ment and spent the best part of a year sell­ing the prop­erty. Even­tu­ally he sold for $80K — a nom­i­nal loss of 33%, a real loss of around 50%, and oppor­tu­nity cost of much more.

    My advice at the time was to hold on to the prop­erty — so I can’t be accused of always being bear­ish!! (And BTW, right now with the ben­e­fit of hind­sight that advice might have looked like a no brainer, but I was very much in the minor­ity at the time.)

    I will also add the mag­ni­tude and length of this boom — a bub­ble — sug­gests that the down­turn will be greater and longer. I would not expect new inflation-adjusted highs in hous­ing for a very long time (if ever — fol­low­ing the argu­ments pre­sented by Steve!)

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