Before the Pool Room, a quick comment on Australia’s recent 0.4% growth in GDP in the first quarter of 2009–largely due to a surprise growth in net exports–and the sequel the next day of a surprise trade deficit.
Briefly, the “textbook” definition of GDP is:
GDP = C+I+G+X-M
“GDP equals Consumption plus Investment plus Government spending plus eXports minus iMports”
M fell by 9 billion, X (more on this below) fell by 3 billion, so there was a +6 billion turnaround in the “net exports contribution to GDP” (as it’s known).
Now for a healthily growing economy, all 5 factors (C,I, G, X, and M) would be increasing–including M, since lots of the C+I+G are spent purchasing them. But suddenly spending on imports has dropped $9 billion in a quarter–that’s of the order of 2% of GDP. That implies that spending has dropped, not risen. This is not what I call a sustainable “growth” pattern.
Secondly, the increase in the volume of exports that was spruiked when the GDP figures came out was not all that it seemed. Gerard Minack of Morgan Stanley claimed that there had been a change in ABS methodology which led to the volume of commodity exports bring substantially overstated. That claim has now been rejected by the ABS, but as discussion of this on Peter Martin’s site indicates, there are still very large problems with estimating the volume of exports given the extreme volatility in commodity prices and exchange rates.
Part of the ABS’s reply to Gerard’s article in The Age implies that this unreliability of export volume calculations will continue for some time:
The volume measures of exports of bulk commodities … are calculated by multiplying the quantities of such exports, as reported by exporters in tonnes or some other unit of quantity, by the average price of such commodities, as reported by exporters in the reference year. For the March quarter 2009 volume estimates, 2006-07 is the reference year for prices. The reference year prices are updated annually, in the September quarter accounts. For example, the September quarter 2009 accounts will use average prices reported in 2007-08.
So the estimates for the September quarter GDP will be based on prices as reported in 2007-08… Given the volatility of prices in the last four years–a huge increase in our export prices followed by the recent sharp decline that will doubtless continue for some time–calculations of the real value of exports will be extremely inaccurate for some time to come.
Given all that, I expect that the exported tonnage of commodity exports probably fell significantly across the board in the most recent quarter, and the recorded increase was an anomaly.
This explains the “huh” factor of the very next day’s announcement that we had gone from a substantial trade surplus to a deficit. How does that tally with the “increase” in exports in the GDP figures? The trade deficit is the dollar value of exports minus the dollar value of imports–there is no “price deflating” going on.
So putting this all together (looking just at C+I+G+X components), the probable outcome for real output in the last quarter was a fall of the order of 1-2%, or an annual rate of decline of 5-8%.
Note also that there are severe problems with US data, though not caused by its export prices but the practise followed by the BLS of modifying unemployment numbers using its “Birth and Death” model for changes in the small business sector in the USA that are too small to be captured by surveys. This adjustment accounts for 220,000 of the jobs created in the USA in the month of May–when aggregate jobs actually fell by 345,000. So without the adjustment–a statistical procedure to account for a weakness in the survey method used to estimate unemployment–recorded unemployment would have increased by 565,000. This would have turned a “surprisingly good” decline in jobs number there into a “depressingly familiar one”. See Mish’s site for an excellent discussion of this.
PS Gerard has apologised for his error–as I noted to a discussant here when the ABS’s letter was brought to my attention, it’s very rare for him to make such a mistake, and he has since duly apologised in his Down Under Daily.Here’s what he had to say:
Now over to Evan’s selection for The Pool Room this week…
THE POOL ROOM – Week Ending Friday 5th June, 2009
AUSTRALIAN-RELATED LINKS:
Australia Dodges Recession Bullet, ABC, 3 Jun
Irrespective of whether Australia is in recession or otherwise, it’s a good time to remember that official GDP growth ignores debt growth. So, yes, maybe Australia “grew” by 0.4% in Q1 so long as you ignore the unprecedented government spending, including cash handouts before Christmas. If you or I go mad with a credit card, buy a flash car courtesy of EZY-Finance Ltd and take out a home equity loan (remember those?) the only thing that grows is our debt burden. It appears to be different for countries who borrow and – wallah! – their GDP has grown and it’s time for the PM to stand on his imaginary aircraft carrier and call a press conference. Gerard Minack also notes that the ABS spruiked the figures.
Trade Slump Undermines GDP Optimism, ABC, 4 Jun
The bullets are starting to hit the mark: “Official figures show a sharp slump in exports has dragged the $2.3 billion trade surplus in March to a deficit of $91 million in April… imports fell 2 per cent to $21.77 billion in April, with capital goods, such as trucks and machinery, down 1 per cent while consumer goods decreased 1 per cent.” Export prices don’t look like improving as today “Gloucester Coal has agreed to sell coking coal to its Japanese customers in the coming Japanese financial year at prices more than 60 per cent lower than the previous period.”
Ore to China Not Driven By Demand, The Australian, 4 Jun
Maybe China won’t be our great red hope after all. “The record iron ore exports to China that helped Australia dodge a recession have been driven by speculation and anticipation of demand by steelmakers that has not yet eventuated.” Ring any alarm bells (hint: oil prices last July)? And in another article “China’s government said unemployment is worsening, a quick rebound in trade is becoming less likely, and the nation is yet to feel the full effects of a global slump”. Michael J Panzer chips in with some more holes in the China recovery story. Contributed by Macca.
House Prices NOT Tipped To Rise, Michael Pascoe, SMH, 3 Jun
A bona-fide brickbat at last, an article that should produce as much laughter as Geithner in front of an audience of Chinese students. Pascoe lauds the economic modelling might of the RBA, APRA and Macquarie Bank because their computers are bigger! Yes, that’s the same mob whose intellectual fire-power left them worried about an over-heating economy about 45 minutes before the onslaught of the “worst financial crisis since the Great Depression”.
Families Prosper From Tariff Cuts, Mark Davis, SMH, 1 Jun
“The study by the Centre for International Economics also predicts that if governments around the world succumb to protectionist pressures and increase tariffs on imports to preserve local jobs they will only make the global recession worse.” So the de-industrialisation of Australia is set to continue. Why produce physical goods when you can rely on global wholesale finance to fund the debt bubble, “hot money” inflows to keep the currency and stock markets strong and the selling off of primary industry to foot (some of) the bill? Both the Libs and Labor support this view.
Credit Law Revamp Could Cost Jobs, Glenn Milne, Sunday Telegraph, 31 May
“The key change is that the onus for proving credit worthiness will shift from the customer to the lender. So if you sign up to a credit deal which you clearly cannot afford it will be the bank, or retailer that has to repay the loan.” An important and under-reported story spun as a threat to jobs by Harvey Norman, PwC and the sub-editors. Apparently the large institutional interests want to protect small businesses and tradesman from a new law – now there’s a red flag if ever I’ve seen one. In bygone days it was considered self-evident that creditors needed to share responsibility with debtors for debt issuance. Not anymore.
Australia’s Foreign Debt – Data & Trends, Tony Kryger, Australian Parliamentary Library, 7 May
Contributed by blog member BullTurnedBear. Extremely useful research paper examining Australian debt. Key figures: total gross foreign debt in 2008 was $1.07 trillion ($600b net) having risen from only $8b in 1976; over the same period foreign debt has skyrocketed from 9% to 95% of GDP; 74% is owned by financial institutions; the largest creditors are the UK (23%) and the US (22%; 39% is denominated in AUD, 31.5% in USD, and 13% in euro; 48% has a term less than 1 year, including 37% which is due within 90 days.
Big Is Better For Super, SMH, 4 Jun
More delusional tub-thumping by the Ponzi crowd. “[Deloittes] said the better performance from bigger funds could be attributable to better education of members, which allows them to manage their holdings more wisely. “ You couldn’t make it up. One fact is beyond question: “Big Is Better” for commissions.
GLOBAL ECONOMY / BANKING / FINANCE:
Consumer Spending Falls As Americans Boost Savings, Bloomberg, 1 Jun
Deflation watch. Despite those green shoots this show is running right on script. The US savings rate was negative at the height of the housing bubble. Now it’s shot up to 5.7% – at the expense of marginal consumption and short-term GDP. Now some May spending data has emerged and, yes, same-store consumer spending fell 4.6%.
From the Sub-prime To the Terragenous, Land Values Research Group, Gavin R. Putland, 1 Jun
Excellent research paper providing strong evidence that a downturn in the domestic property market is a leading indicator of recessions. Contains useful housing bubble and recession data for 32 countries.
Mortgage Meltdown, More Pain To Come, Mike Shedlock, 31 May
If these graphs don’t frighten you, nothing will. Check out the sub-prime resets, Alt-A resets (“there are $2.4 trillion of Alt-A resets and they are mostly ahead of us”); and option ARMs. Note that “Wall St mortgages are 15% of all mortgages, but are 51% of all highly delinquent mortgages.”
More Prime Foreclosures, More Re-defaults, Mike Shedlock, 31 May
More of the same. “The problem is not on that “front-end” ratio [mortgage repayments], but on the back end, which is all of the borrowers other debt (credit cards, car loans, student loans, etc.)… other debt is so high that most of today’s troubled borrowers cannot afford any loan payment at all, even at a very modest debt-to-income ratio.”
Pending Home Sales: Watch the Birdie, Denninger, 2 Jun
In his inimitable style, Denninger calculates the impact of rising retail mortgage rates on the US housing market. Now contrast this to an article in the SMH this week: “April Pending Home Re-sales Surge 6.7% In US”. Zero Hedge thinks that the future of the National Association of Realtors must be really, really, really bad. And on 4 Jun Bloomberg reports that US mortgage rates jump to highest since December, to 5.29 from 4.91 percent a week earlier.
The Housing Rebound As Traded By An Insider, Zero Hedge, 3 Jun
“… [homebuilder Toll Brothers’s] chairman decided to provide some optimism during his Q1 2009 earnings call and then proceeded to dump stock not once, not twice, but seven times in a span of one month.” It’s Enron all over again.
US Auto Sales: Worse and Worser, The Big Picture, 3 Jun
Look at the data in the link above and then look at this headline courtesy of the SMH: “US Car Sales Stabilise”. It contains such gems as: “Total US car sales were down 33.7 per cent at 925,824 vehicles compared with May 2008… but carmakers took comfort in the fact that the seasonally adjusted annualised rate of 9.91 million was the industry’s best performance this year.” Similar delusions led to the demise of the US car industry.
The Big Mess [GM], Daily Show, 3 Jun
Another brilliant must-see segment from Jon Stewart at Comedy Central. Much more informative than Bloomberg. If you missed it the first time, also watch Stewart take out Jim Cramer – part one, two, three (hit “replay” if the video doesn’t work the first time).
Obama Saving GM Needed Dealmaker Team to Break It In Bankruptcy, Bloomberg, 1 Jun
Possibly the worst case of MSM propaganda in the history of the GFC. Obama calls in his Wall St donors to restructure GM, as they were so awesomely successful in their day jobs. “We were told from the start to impose the same commercial rigor on this restructuring as we would have done in the private sector.” “The tools Obama was asking the task force leaders to use were honed over their years of dealmaking.” “For these kinds of restructurings, it makes perfect sense to bring in the people who know how to execute.” Don’t read before eating. More from GM.
Spanish Slump Stokes Debt Dilemma as Jobless Rises, Bloomberg, 3 Jun
Deflation watch with paella. “As Spain sinks deeper into recession and the jobless rate heads for 20 percent, the highest in Europe, employers are telling workers to accept wage cuts if they want to stay competitive. That’s making it harder for households to tackle a debt load built up during the country’s economic boom and equivalent to 18,000 euros per person.”
U.K. House Prices Unexpectedly Jumped by 2.6% in May, Bloomberg 4 Jun
Statistics 101: when it suits your argument, adjust for seasonal trends; when it doesn’t (like now), ignore seasonal trends like the usual jump in house sales coming into the summer months. Alternative headline: “In the three months through May, prices fell 16.3 percent from a year earlier.”
Oil Jumps on Bullish Goldman Forecast, Dow Jones, 5 June
Banking 101: get bailed out by your ex-CEO sitting in Washington; help yourself to $12.8 trillion; collude with your mates and use the bailout money to hire tankers to store oil while the price is cheap and to reduce supply; then have your research department talk up the price; sell later; enjoy bonus. It also helps to buy influence.
Fall In Private Borrowing, Brad Setser (CFR), 2 Jun
US consumers are trading consumption for saving (up from negative in 2004 to over 5% now). The US government has stepped in to keep the Ponzi scheme from collapsing. This supports Doug Noland’s view that the US government is trying to replace the housing bubble with the Government Finance Bubble.
Profile of a Collapsing Bubble, sourced from Jesse’s Americain Cafe, 4 Jun
Looks like we’re at “Return to normal”. Good time to pile back into the ASX. The Australian contained a sensible discussion on stock markets this week (no, not from Charlie Aitken).
Naked Short Selling Redefining Systematic Risk, Deep Capture, 6 May
Another fantastic video (under 20 mins) from deepcapture.com. In places like India they pay off politicians with paper bags full of cash (literally). In the west they do it this way (the article is from 1994 and will only make sense after watching the video and understanding the role of REFCO.)
Jobless Benefit Rolls Fall, Initial Claims Dip, Yahoo Finance, 4 Jun
More green shoots psychology. Forget the GM bankruptcy and the impact on one of America’s last remaining productive industries because “the tally of first-time claims for jobless benefits declined to a seasonally adjusted 621,000 from the previous week’s revised figure of 625,000.” The SMH even inserted claims of productivity improvements into their headline. Watch out for next month when the May jobless figure is “adjusted” upwards, just like every other month – here’s an example.
The Chicago School Is Eclipsed, The Week, Brad Delong, 29 May
Excellent article. “Richard Posner, leader of the Chicago School of Economics, uses his new book, “A Failure of Capitalism,” to try to rescue the Chicago School’s foundational assumption that the economy behaves as if all economic agents and actors are rational, far-sighted calculators. In some sense, Posner must try. For without this underlying assumption, the clock strikes midnight, the stately brougham of Chicago economic theory turns into a pumpkin, and the analytical horses that have pulled it so far over the past half- century turn back into little white mice.” “The litany of financial lunacy is longer than even the Eastern Orthodox litany of the saints.”
Roubini On the Failure To Predict Financial Failure, RGE Monitor, 1 Jun
An article and a 51 minute video delivered in a “wonky and academic and high brow” style. Roubini claims that the GFC was predictable, unlike some central bankers. Contributed by Bruce.
Holes In the China Recovery Story, Huffington Post, Michael J. Panzer, 3 Jun
Is the China recovery story all it’s cracked up to be? No. In another article “China’s government said unemployment is worsening, a quick rebound in trade is becoming less likely, and the nation is yet to feel the full effects of a global slump”.
China To Increase Subsidy For Auto, Home Appliance Replacements, China View, 19 May
“China will increase subsidies for consumers who sell their cars and home appliances in order to purchase new ones, in an effort to spur domestic consumption.” When China pumps up domestic consumption the money is used to buy Chinese goods. Lucky for China. When Australia pumps up domestic consumption the money is used to buy Chinese goods. Lucky for China.
Bernanke Sees End of Recession Soon, Yahoo Finance, 3 Jun
“In testimony to Congress, Bernanke sounded more confident that the U.S. recession would end this year than he had just one month ago, and he said the risk of a dangerous downward spiral in prices had receded.” It’s a shame there are no Chinese students in Congress. Does the end of the recession imply that there will be less than one in nine Americans on food stamps?
Fiscal Options For the UK, Willem Buiter, FT, 2 Jun
Long, academic article featuring the impact of long-running deficits on the solvency of the UK. Buiter fears that using inflation to remain solvent is a possibility. Contributed by Greg.
Ukraine Economy Down 21 Percent In Q1, Boston.com, 4 Jun
“The legislature’s Audit Chamber said such a severe economic downturn calls for amending this year’s budget, which is based on a government forecast of 0.4 percent growth.” So they were close enough I guess. The International Monetary Fund forecasts an 8 percent contraction for the entire year. Contributed by ak.
The States vs Federal Schism, Zero Hedge, 4 Jun
“By now if you don’t know the trajectory that the federal government has set on with monetizing virtually anything and everything, you must be living somewhere deep in the green shoot forest with only enough WiFi/cable coverage to get CNBC.” ”The report confirms all fears about just how gruesome the fiscal catastrophe is at the state level.”
GEOPOLITICAL:
Geithner Tells China Its Dollar Assets Are Safe, Reuters, 1 Jun
Zeitgeist watch. Geithner’s ridiculous comment drew loud laughter from the student audience. It’s the 20 year anniversary of the Tiananmen Square massacre too… looks like the students have selected a State-sanctioned target this time, rather than the State itself. Shame no one threw a shoe at him. Speaking of opposing the State, Bloomberg originally reported this story but later pulled it. Click here to watch a very frank discussion on China, US treasuries and the USD (note the hosts trying to close down controversial debate).
Latvian Debt Crisis Shakes Eastern Europe, Telegraph (UK), 3 Jun
“Latvia has become the first EU country to face a sovereign debt crisis after failing to sell a single bill at a treasury auction worth $100m (£61m), prompting fears of a fresh storm in Eastern Europe as capital flight tests currency pegs.” Looks like a repeat of the 1997 crisis in SE Asia. Soon it will be time for the big money to come in and pick up the pieces at pennies on the dollar – standard operating procedure after they’ve stacked the country with debt and shorted the currency. More from Zero Hedge (check out the graph!).
Lessons From Ecuador’s Bond Default, Felix Salman, 29 May
A small nation beats the kleptocracy for once.
Getting Real About Gold, The Australian, 3 Jun
“America’s third largest life insurer, Northwestern Mutual Life Insurance, has been in existence for 152 years. It has never in all those years bought gold – until now.” Good news for the gold bugs who, among other things, believe that central banks are manipulating gold downwards to encourage continued faith in fiat currencies.
Merkel Lashes Out at Central Banks, BusinessWeek,
Trouble within the ranks of the elite. “What other central banks have been doing must stop now. I am very sceptical about the extent of the Fed’s actions and the way the Bank of England has carved its own little line in Europe.” Off-the-radar parts of the blogosphere have long talked about the divisions between the Anglo Saxon countries on the one hand and the central Eurozone, China and Russia on the other. Contributed by Christopher.
BTB,
IMHO your option 2 is about to happen – again – and this is my reason for coming around to your view on the $US.
Your option 1 will probably be in the mix too, but further out one wonders about the direction of the $US, especially when the incipient treasuries bubble bursts (i.e. when sovereign-default-fear from huge deficits overwhelms port-in-a-storm buying and a sharply rising long bond yield chokes off any hope of US recovery/repayment).
Bill.
Sorry Otto that I did not follow up. Life takes me away a bit. I went looking for your post a night or two ago and didn’t see it.
First thing is you have to go back to 2006.The Leverage numbers wrt the banks is much different now than it was then. (I thought I made clear in my post it was a 2006 or thereabouts estimate)
I was working on published numbers at the timeand my work is rough by necessity
Most importantly my 10% number I couched in some doubt as my memory does not retain that sort of inconsequential stuff in detail (inconsequential in terms of my life. I just remember it was not a large figure. I must not have been too far out as in 2007 I chanced to have dinner with a major hedge fund manager in HK. They were betting on the Australian banks going down. Their work was “somewhat” more sophisticated and detailed than mine, but nevertheless came to the same conclusions in the same manner.
I am sorry I can’t give you detailed numbers now, but it was a while ago.
If you look at everything that has been done in the past two years it has all been done to prop up the banks and allow them to get recapitalised (which they did and your number indicates that).
The FHBG was NEVER designed to help young people get houses. The best way to do that was to let the price of the houses fall to more realistic levels in terms of wages! As it was, as we all know, the increased grant just went into the price of houses together with some multiple!
Meanwhile, the Banks were having trouble refinacing our external debts, so the Govt gave them a guarantee.
Car dealerships looked like going down on a major scale, so we had a bail-out to try to stop a fall in Commercial real estate. Then we had Rudd bank to stop commercial real estate falling because that too would have wrecked the banks.
Now we have this damned 50% investment allowance thing, which for most business requires a $10,000 expenditure on a new item. Guess what that means for most businesses…a new car! Now not a Holden or a Ford or a locally made Toyota…any car!
Again propping up, not the manufacturer, but the retail car industry to stop commercial real estate falling in value.
Meanwhile we are selling off mines and factories to overseas buyers because there is no money here to finance them. Our economy has been hijacked to keep the banks alive during the past two years. Without all these measures they would have been broke! As they should be!
A prolific spruiker on news.com.au has been taking advantage of the boost-induced house price stabilisation to attack my credibility and that of Steve’s.
I tried on many occasions to get a comment up that started out: “I would find being grouped with Prof Keen to be very flattering, if by somebody who actually knew something about housing…” – but I seem to be frozen out of many of the commercial blog sites these days.
This provided the impetus for me to get off my butt and assess how actual house price movements (ABS data) compared to my forecasts of a year ago. Pleasingly, my forecast has been remarkably accurate. Moreover, I updated my forecasts out to 2016 in light of the significant changes to the housing policy backdrop. The brief paper is here
http://www.geocities.com/homes4aussies/090610h4a.pdf
Whilst I concentrate on Brisbane, my views are applicable to the wider Australian housing market.
While I’m at it – and since the subject of untrustworthy data is topical today – I just wanted to inform those interested in the Australian housing market of something I’ve noticed.
Many will recall that I had developed a simple method to accurately forecast house sales in Brisbane (by subscribing to data from suburbs consisting of almost 10% of the free standing houses in the Brissie LGA).
Not long after providing raw data, including suburbs, to a journalist and another blogger (who may be confused about which scandinavian country trolls are a part of folklore), the data that I was using to forecast house sales for Brissie became corrupted.
What began to happen, at least in the suburbs that I was studying, is that sales began to be double listed. Those of you who have a subscription to an onseller of these data which originate from Queensland Department of Natural Resources and Water might want to check whether the same thing is apparent in the suburbs to which you subscribe – do searches by the month going back through last year – for me the double ups begin in September 2008 (when the market hit it’s activity lows), and there were very few apparent before this (actually I’ve found none! – be sure to disregard any strata titles easily detected by their small land size).
Now, as I said here and on my own website, I spoke with a person from DNRW in late 2008 to check that the very sharp drop off in sales was correct. He was tightlipped, but in a good, light-hearted conversation said that usually his staff are very busy because they check each sale to ensure it was accurately recorded and to ensure there were no double ups. He then said that things were exceptionally quiet (ie. because of very low levels of sales).
Now there are two ways that these data could be corrupted as they have been. Perhaps after leaving the DNRW extra sales were added to double up records (perhaps in specific suburbs only?), or the data now coming from DNRW are not being as thoroughly checked.
The latter is certainly a possibility with the contentious issue of revenue falls due to massive drops in house sales going into the state election (which led to Queensland’s credit rating downgrade!). This would also render the ABS data on Brisbane house transfers incorrect because the DNRW is the source of those data.
Funny how the need to cut budgets usually results in cut backs in an areas which have become political problems.
For me it just emphasises how we Aussies are so poorly served by those providing market sensitive data, including Governments. Seriously, how is a kid to make a sound decision on one of the biggest decisions of their life if they can’t trust the information on which they are basing that decision? If only they knew not to trust it!
Outback Oracle, Agreed that all policy has surrounded propping up the banks. I’d add the cash splash to your list – if the government could have targetted only those with high debt levels – most importantly, if it was politically palatable – they would have! They were always going to get a low bang for their buck through the tills, so it could never have been the prime motive!!
As a flow on, anybody given consideration to the fact that Westpac and CBA both needed the ACCC to allow their recent competition-reducing takeovers, and these two banks have been, by far, the greatest supporters of the housing market (garnering 85% of the entire home loan market in 1Q2009)?
homes4aussies,
Good work on the stats and documentation.
I found this interesting article in the Wall Street Journal. Apparently there is an economist, Thomas Lawler, who has developed a US property price index, and is calling Shiller’s work into disrepute. However, if you look at the interactive graph, the trends are almost identical.
http://online.wsj.com/article/SB124051414611649135.html
Thanks for that Philip.
I was aware that the S&P/Case Shiller 20 city composite index had been criticised for not being particularly representative of the entire US since it incorporates only around one-third of state capitals, and those cities which experienced the greatest bubbles in the most recent episode are “over-represented”.
Thus it is considered to overstate the bubble and the bust of the US.
I quickly plotted that index versus our ABS 8 City Weighted Index, which obviously encompasses ALL of our capitals, over the 4 quarters since their respective peaks.
http://www.geocities.com/homes4aussies/1yr_pp.jpg
The spruikers that attempt to suggest that the falls that we’ve witnessed so far are negligible clearly do not know what they are talking about!
Sorry, couldn’t upload that file name….
http://geocities.com/homes4aussies/1yrpp.jpg
BTB and Outback Oracle
You asked how I arrived at my number. Firstly as I said before there is a lot of guess work in the calculation, so it is a bit ‘rubbery’, nevertheless here goes. In view of your comment Outback about earlier numbers being more relevant, I used the CBA annual report (AR) for June 2007 (before the effects of the GFC). I also chose the CBA because (as I understand it) they have a higher proportion of residential mortgages than the other banks.
I also used information from the APRA Insight One publication, published in 2008, but referring to data for 2006 (APRA).
The AR shows Residential loans as $190,337 million (note 13) and SHF as $24,444 million (balance sheet). Note 13 also shows years to maturity in 3 ranges (1 year, 2-5 years and 6 years+); 80% of the amount has 6 or more years to maturity. Here comes my main guess: mortgages often go for 30 years or more, so the average time to maturity for these loans could be any number between 6 and 30, but highly unlikely at either extreme; for the 80% of the loans at the longer end I chose 9 years, which is probably at the short end. But pick any number of years around that mark and the conclusion is not that different.
With the earlier years thrown in, overall the average (weighted)length becomes 8.4 years (say 8 years). Eight years ago the average house prices were 50% cheaper than in 2007. So a bank that issued a loan at 80% of collateral value 8 years ago would in 2007 have a loan only 40% of latest collateral value; in other words the price of a house would have to fall by 60% before there is a shortfall on the loan.
The APRA publication states that on average 30% of bank loans have mortgage insurance, meaning the insurer will pay the bank for any shortfall (as long as the insurer does not go broke), so assuming CBA fits this average and 30% of its loans are insured it would not lose any money on this part of the loans.
APRA also states that the average loan to value ratio on which the loans are initially based is 67%, with the largest group (just over a quarter of all loans) in the 75 to 80% LVR range, with the second largest (just under one-fifth of all loans) the under 50% LVR group.
Using the above data I made this calculation:
$190,337 minus $57,000 (30% loans with mortgage insurance) = $133,337.
Initial property values at 67% LVR = $199,000
Average property values 2007, 8 years later (double) = $398,000.
Loan to asset values in 2007 (133337/398000) = 34%.
Even if we used an original LVR of 80% the LVR on latest housing prices is still only 40%. If we go one step further and also shorten the average age of loans to only 6 years (obviously far too short), the LVR on latest prices is 45%.
This only focussed on residential mortgages and I realise that business loans may also be under threat, derivatives could incur losses and I am not clear what other traps there may be in off-balance sheet items?
BTB, you may be right about the quality of SHF and maybe all the numbers in the banks’ accounts aren’t worth the paper they are written on; but that is another story. Maybe I have overlooked something important in these calculations, I’m not a banking expert, if so please let me know.
Hey guys been following this site since May last year and was really impressed by how good the information has been and in most cases far more accurate than the mainstream media. I do have a concern though in my first ever post. It seems that posted to this site are very happy when the information provided by the ABS, media and other govt sites supports their view that the world is heading into the deflation/depression etc, however dismiss the same sites as inaccurate when they do not support this view. I am not sure if I have missed something but Australia looks to be keeping it’s head above water. I just got back from 4 weeks in America and I can tell you I spent 2 weeks in the midwest and there are stores closed all over the place, many small towns are almost ghost towns and the desperation from the local people is almost visible. I don’t see anything remotely like that here. There was a jobs convention around the corner from my hotel in Anahiem and there was traffic chaos. I was also in vegas and they pointed out on the tour homes that listed for $2 mill in 06 now on the market for under $1mill. I don’t get that sense of economic uncertainty in Australia they have in the USA.
Hi Stormboy,
Thanks, and yes, on behalf of most of the site here I expect you are right: the Australian data isn’t yet as severe as that in the USA, Europe and Japan, and that does perplex us. There’s also the standard human response to discount information that doesn’t account with your world view, and I’m the first to admit I’m human on that front, even if I try to be more sceptical than the standard economist.
However there are also data reliability issues that we have been aware of ever since the 2008 budget when the ABS’s funding was recklessly cut, and the ABS responded firstly by reducing its sample size by 24%, and then later by sacking (and since being forced to reinstate) about 150 staff. So I had some expectations of unreliable data.
The data is also massively contradictory. I don’t know whether Evan spotted it for the PoolRoom, but Tim Colebatch (I think) in The Age on Tuesday reported on the huge discrepancy between the Production, Expenditure and Income versions of the recent quarterly GDP figure: the first showed GDP falling by about 1.5% in the quarter; the last two showed an increase of about 0.5%. That is an enormous difference, far bigger than the usual statistical discrepancy.
The unemployment data is also surprisingly benign–at the moment.
My main response is still to accept my analysis of the economy’s dynamics, and ask what I haven’t sufficiently factored in to explain why the deterioration in unemployment hasn’t been as sharp as I expected. A major issue here could be the sheer scale of the government response to date–the $42 billion plus the rest amounting to about a 4% boost to the economy in the short term (though some of course dissipated in debt repayment and lots lost offshore in imports). My usual calculations of the debt contribution to demand have omitted the increase in government debt; I will factor those into the July Debtwatch and see what change that makes (the measure is also approximate only of course–hypothesising that all extra debt represents a matching increase in monetary demand when part if compound interest and part also is non-bank debt that doesn’t increase demand).
If we get out of this crisis with only a mild downturn, and the recovery is not based on a return to increasing debt to GDP ratios, then I will be forced to take a much more critical look at my fundamental analysis. But I still expect that the comparatively mild figures we are seeing for Australia reflect the different nature of our linkages to the global economy than for the rest of the OECD (and hence a time lag between our situation and the USA of about a year), and the size of the government stimulus to date counteracting the initial downturn–again with the advantage of taking palliative action a year before the USA, in effective timing terms.
Long Term USD Index weekly chart;
http://3.bp.blogspot.com/_H2DePAZe2gA/Si8awO1Zh3I/AAAAAAAAJPo/S-HEMFLxiXA/s1600-h/DXLT.PNG
Steve and Stormboy,
“If we get out of this crisis with only a mild downturn, and the recovery is not based on a return to increasing debt to GDP ratios, then I will be forced to take a much more critical look at my fundamental analysis.”
I for one have found Steve’s past explanations for a severe deflationary depression quite convincing and I still hold that belief.
Why is Australia still so much better off than countries overseas?
I think at least the follwing factors (probably more):
1) As you indicate, the money poured into the economy has ‘postponed the evil moment’.
2) Whilst the debt is still huge, asset values have not yet fallen sufficiently to expose the problem.
3) Social mood has been up-beat, following the initial signs that property values are not falling so much and we pin great hopes in China saving our exports.
4) The stockmarkets have been bullish re-igniting a belief that the worst is over.
5) Traditionally in Australia there is a delay time before we follow overseas trends.
However, I think it’s a temporary holiday, because:
1) The government cannot keep feeding unlimited moneys into the economy for ever.
2) High debt caused the problem in the first place, it must be resolved by bringing down the debt.
3) As you have shown so convincingly our housing is amongst the most unaffordable in the world and must fall. China has been stockpiling metals and iron ore, not supported by demand, so soon there will be dramatic cutbacks in their orders.
4)During the Great Depression the stock market in the US had several bull runs (one by as much as 52%), yet overall the market fell by a massive 89% during this period. What we see now is just history repeating.
5)As things turn worse again overseas the social mood here will also change and it will need only a small ‘quake’ for the tidal wave to hit us.
Steve,
I already asked that question in the past – what would be required to artificially push the system from the deflationary trajectory back to the growing bubble trajectory?
What is the sensitivity of the system to external stimuli during the switchover phase?
Couldn’t we imagine the bubble for 5 years more? Why didn’t it burst 5 years ago?
I would like to add the following:
The government has prevented the mortgage debt bubble from deflating by FHOG. On top of that there were money handouts used often to increase the margin for future debt repayments and lubricating the system.
If prices of houses are prevented from falling the system is in a kind of pseudo – “equilibrium”. How long this will last nobody knows. There is no extra financing of consumption from the Ponzi speculation however there is no drop in the demand due to the rush to repay the debt. There is no “wealth destruction” due to falling prices of assets – spiraling out of control, driving the demand further down and bankrupting the banking system.
This might be the real meaning of aggregated variables used in the model created by Steve. I am still very far away from having enough intuitive knowledge of the processes in the economy to start modeling them on my own (if I am ever able to). But I have a feeling that a more realistic model which could be used to forecast the dynamic behaviour of the system when external stimuli are applied may need to work at a different level of granularity – not on a macro-scale but on a meso-scale.
Now let’s imagine even more desperate measures to prevent the bubble from collapsing – the ban on repossessions (effectively already in place in Australia), creating artificial demand at the lower end of housing market by replenishing the pool of social housing assets and what sounds ridiculous – a tax on early mortgage repayments. Do you think we cannot imagine that?
We should never underestimate the willingness of politicians to fiddle with the system.
However I agree that these measures can only work to some extent and once the bubble really starts bursting it’s all over – nobody will be able to push it back to the other trajectory.
Stormboy,
In regards to the lag, my vote is with the difference in time between the peak and eventual bursting of the housing bubbles in the US and AU. In the US, the peak occurred in 2006 Q2. In AU, the data seems to indicate the peak occurred around 2008 Q1-Q2.
It was the property price deflation in the US that eventually started the financial problems they are currently suffering from. Now that the AU property bubble is now deflating, I don’t think it will take too long for property price deflation to knock over the AU banking and financial systems. When that occurs, then we will be faced with the devastation that is happening over there.
I’ve read quite a few articles about the desperation that is hurting the people in the US. One of the major problems is that the US has a very skimpy social welfare state while at the same time, its extensive corporate welfare state is enlarging to unseen proportions.
“The U.S. government and the Federal Reserve have spent, lent or committed $12.8 trillion, an amount that approaches the value of everything produced in the country last year, to stem the longest recession since the 1930s.”
http://www.bloomberg.com/apps/news?pid=20601087&sid=armOzfkwtCA4
I’ve found that the economists Dean Baker and Michael Hudson have probably the best ideas when it comes to solving the property crisis. Their articles are definitely worth reading.
http://www.nytimes.com/2009/06/12/opinion/12brooks.html
Oh so they said they cannot live above the means… this is so UnAmerican (TM).
Regarding Australia I still don’t understand why a “lovely 1 bedroom unit in Ashfield” , “Living area and bedroom are very sunny and airy, 1 car space.” should be priced at >$240000. Is it really the permanent equilibrium price?