When Herds Col­lide on the Yel­low Brick Road

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2010 is shap­ing up as the year that the bulls and bears of the world’s last unpopped asset mar­ket bubble—Australia’s prop­erty market—will col­lide head on. The gap between those pre­dict­ing yet another bub­ble, and those pre­dict­ing its ulti­mate demise, has closed.

The bulls as always, empha­sise the “fundamentals”—population-fuelled demand out­strip­ping lag­gardly supply—and that “Aus­tralia is dif­fer­ent”.

The bears, as always, empha­sise lever­age— that the true fun­da­men­tal behind asset prices is people’s will­ing­ness to go into debt to buy them, in the belief that they can flog them for a lever­aged profit to the next Greater Fool. And on the “We’re dif­fer­ent because we have kan­ga­roos” the­ory, the bears con­tend that Aussies are just as sus­cep­ti­ble to a well dis­guised Ponzi Scheme as any­body else on the planet.

I doubt that most peo­ple realise just how dif­fer­ent Aus­tralia has to be to the rest of the world to sus­tain the bulls’ expec­ta­tions of yet another explo­sion in house prices in 2010. Not only do we need to defy a world­wide trend of falling house prices, we need to sus­tain that on top of a house price bub­ble that has already exceeded the best the rest of the debt-dri­ven world has achieved in the last 20 years.

Aus­tralian house prices rose by a fac­tor of five since the 1987 Stock Mar­ket Crash, far more than even US house prices. Even adjusted for infla­tion, Aus­tralian house prices increased by over 250 per­cent from 1987 lev­els. The best the US’s hous­ing bub­ble could man­age, before it burst in 2006, was a mea­gre 180 per­cent rise.

One irony in the bull case is that it relies on the mar­ket not work­ing properly—though the bulls push the “sup­ply and demand” line, they also rely on sup­ply fail­ing to do what it allegedly does in nor­mal mar­kets, and respond­ing to increased demand in a man­ner that tem­pers the demand-dri­ven price spike.

They also are happy to receive state hand­outs when it keeps the bub­ble afloat. 2009 was clearly the year of the gov­ern­ment-spon­sored house price bub­ble, with the First Home Ven­dors Grant dri­ving up sub-$500,000 prices by as much as $40,000. Those happy ven­dors then lever­aged their bonus $40,000 from pan­icked First Home Buy­ers into an addi­tional $200,000 or so on their next purchase—which inflated houses up to the $1 mil­lion mark.

On Jan­u­ary 1 2010, that gov­ern­ment boost com­pletely dis­ap­pears, while the “right wing” of our schiz­o­phrenic gov­ern­ment eco­nomic man­age­ment sys­tem, the RBA, has declared that it might attempt to prick the bub­ble caused by the boost its fis­cal “left wing” gave to house prices this year.

So with one arti­fi­cial prop to the mar­ket removed, and the mon­e­tary wing of gov­ern­ment threat­en­ing to prick what the fis­cal wing re-inflated, we’re down to the final bat­tle­ground: will Aus­tralians will­ingly increase their expo­sure to debt to finance yet another accel­er­a­tion of house prices, and will banks and lenders accom­mo­date them?

Lenders don’t have much room to add to lever­age in the Land of Oz. We’ve long left the Kansas of the 1960s, when banks required a 30% deposit—so that some­one with a $50,000 deposit could bid no more than $167,000 for their dream home. But hav­ing skipped down the Yel­low Brick Road of ris­ing lever­age, the Global Finan­cial Cri­sis has stopped the Wiz­ards in their tracks. With­out it, we may well have cracked through the 5% deposit—which turns a $50,000 deposit into a $1 mil­lion pur­chase price.

Now there are rum­blings that, gasp, a 10% deposit might be required in future—and sud­denly that $50,000 deposit will only finance a $500,000 dream home.

That could be a night­mare for ven­dors this year—and of course for the Wiz­ards of Debt as well. I’ll almost cer­tainly find myself (and some friends) trekking from Par­lia­ment House to Mount Kosciuszko in late Feb­ru­ary 2010, since the final gasp of the FHB is almost cer­tain to drive the ABS’s estab­lished house price index above its pre-Boost peak of 131. But I expect that as I come down from the moun­tain, Aus­tralian house prices will also be los­ing alti­tude.

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  • I should add that I found you via Max Keiser. He is one who sees like myself a con­spir­acy (aka New World Order).

  • mbe­har

    Dear Steve,

    In an arti­cle today in The Aus­tralian, prop­erty devel­oper Harry Triguboff claims that a 2% rise in inter­est rates would result in a 40% increase in mort­gage pay­ments.


    Con­sid­er­ing that banks are tight­en­ing lend­ing stan­dards, what is the expected decrease in home value for every 10% increase in mort­gage pay­ments?

    How much and how fast do you expect inter­est rates to rise to reach nor­mal lev­els and what is the “nor­mal” inter­est rate? What is the expected impact on vari­able rate mort­gage pay­ment amounts for every 1% increase in inter­est rates?

  • mbe­har


    Here is the quote from Harry Triguboff, “No other coun­try is even con­sid­er­ing rais­ing their rates (which are much lower than ours). Should the rates be raised from 3 per cent to 5 per cent, as sug­gested, this will result in bor­row­ers’ mort­gage pay­ments being 40 per cent higher than what they are pay­ing today, and for no addi­tional ben­e­fit.”

  • Lau­rence

    After Paul Keat­ing decided to king-hit the mort­gage mar­ket, inter­est rate climbed to some­where between 20 to 25% and we started hear­ing sto­ries of some smart investors who had their sold off their res­i­den­tial prop­er­ties or shares and then locked the cash up in 3-yr 18–19% fixed rate deposits.

    Now some­one in the US has sug­gested a 27 year inter­est rate cycle and is start­ing to climb.

  • Lau­rence

    Sorry about the typo, #104 should be “smart investors who sold off their res­i­den­tial prop­er­ties”. Any­way, 20–25% range was for per­sonal loans, stan­dard vari­able home loan inter­est rate peaked at about 17%. Here is some inter­est rate data from the RBA

    Released, New cash rate tar­get (Per cent)
    7-Nov-07, 6.75
    8-Aug-07, 6.5
    8-Nov-06, 6.25
    2-Aug-06, 6
    3-May-06, 5.75
    2-Mar-05, 5.5
    3-Dec-03, 5.25
    5-Nov-03, 5
    5-Jun-02, 4.75
    8-May-02, 4.5
    5-Dec-01, 4.25
    3-Oct-01, 4.5
    5-Sep-01, 4.75
    4-Apr-01, 5
    7-Mar-01, 5.5
    7-Feb-01, 5.75
    2-Aug-00, 6.25
    3-May-00, 6
    5-Apr-00, 5.75
    2-Feb-00, 5.5
    3-Nov-99, 5
    2-Dec-98, 4.75
    30-Jul-97, 5
    23-May-97, 5.5
    11-Dec-96, 6
    6-Nov-96, 6.5
    31-Jul-96, 7
    14-Dec-94, 7.5
    24-Oct-94, 6.5
    17-Aug-94, 5.5
    30-Jul-93, 4.75
    23-Mar-93, 5.25
    8-Jul-92, 5.75
    6-May-92, 6.5
    8-Jan-92, 7.5
    6-Nov-91, 8.5
    3-Sep-91, 9.5
    16-May-91, 10.5
    4-Apr-91, 11.5
    18-Dec-90, 12
    15-Oct-90, 13
    2-Aug-90, 14
    4-Apr-90, 15.00 to 15.50
    15 Feb 1990, 16.50 to 17.00
    23 Jan 1990, 17.00 to 17.50

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  • bil­l64

    Steve was doomed to make the trek to the sum­mit of Mount Kosciuszko, because he missed few ele­ments which caused the Aus­tralian hous­ing bub­ble. The first and most impor­tant ele­ment is the gov­ern­ments’ restric­tive­ness in releas­ing land for new dwellings in order to pump up or main­tain the bub­ble. The sec­ond ele­ment is the gov­ern­ments’ restric­tive­ness in plan­ning that stops build­ing more dwellings on a same size land. The third ele­ment is the so called neg­a­tive gear­ing tax pol­icy.

    The rea­son for the above poli­cies is sim­ple and obvi­ous. About 72% Aus­tralians are home own­ers and about 60% of their wealth is the home. One said the 72% Aus­tralians rather lose their jobs than lose the value of their homes. On the other hand, hous­ing bub­ble gives home own­ers a delu­sion of wealth increase and eco­nomic pros­per­ity. John Howard once said that polit­i­cal par­ties always favor improv­ing hous­ing afford­abil­ity while in oppo­si­tion, but when in gov­ern­ment, always try to stop house prices falling.” The Ven­dors’ Grant is just another typ­i­cal exam­ple.

    The above poli­cies are short-sighted and leave all of us have lit­tle to spend other than on pay­ing off mort­gage or pay­ing high rent.

    Every­one includ­ing Rory Robert­son knows the Aus­tralian hous­ing prices are ridicu­lous par­tic­u­larly in terms of the vast land and rel­a­tively small pop­u­la­tion we have com­par­ing to the rest of the world. But unless the poli­cies are changed, the hous­ing bub­ble will go on.

  • You know bil­l64,

    You’re cer­tainly right about most of this, but I think you’re wrong about Rory Robert­son. From the vehe­mence he applies to me–both pri­vately and in public–I’m pretty con­vinced that he doesn’t know that our house prices are ridicu­lous. Ditto–though in much friend­lier tones–for Chris Joye. Some of the spruik­ers know they’re spruik­ers, but oth­ers are “true believ­ers”.

  • bil­l64

    Dear Steve

    Of course there are always some extrem­ists in this world. But as to the “true believ­ers” you talked about, I think it is just a job and instinct for them to speak blindly for the inter­est of them­selves and the organ­i­sa­tions they belong to. As far as I am aware of, the “true believ­ers” either work for the banks or mort­gage bro­kers or real estate agents or news­pa­pers etc. They not only live on but also get rich from the bub­ble and the ongo­ing bub­ble. Image what would hap­pen to them if the hous­ing prices fall 20%, let alone 40%? 

    You are the lonely knight fight­ing for the truth. The “true believ­ers” are fight­ing for their liveli­hood and per­sonal wealth. 

    They do not have true belief. They are only self-serv­ing inter­est groups.

  • Lau­rence

    This hous­ing bub­ble dis­cus­sion is get­ting inter­est­ing as more and more vari­ables and being focused on. Let me talk about the Govt’s immi­gra­tion pol­icy as another impor­tant vari­able and the way to over­come it.
    If you observe the behav­iour of flies fly­ing around the pad­dock, you’ll find that they pre­fer to land on the same piece of dung rather than being the only fly occu­py­ing a large piece. Ants attack­ing ant-rid also behave in the same man­ner in that they would squeeze in along the crowded edge of a par­tic­u­lar drop rather than hav­ing a go at a nearby drop that is rel­a­tively unoc­cu­pied.
    The dynam­ics of mutual attrac­tion has caused the for­ma­tion of pop­u­la­tion cen­tres in Aus­tralian cities and the rein­forc­ing func­tion is no doubt in the hands of the politi­cians.
    Apart from reg­u­lar news sto­ries about exploita­tion of immi­grants and over­seas stu­dents by “ruth­less” land­lords, we learn that many other dif­fer­ent kinds of rev­enues are being gen­er­ated from immi­gra­tion. Put all the eco­nomic vari­ables relat­ing to “immi­gra­tion” into our eco­nomic model and I would not be sur­prised of the weight they pull in terms of eco­nomic growth.
    The dynam­ics of inter­ac­tion between dif­fer­ent pop­u­la­tion cen­tres and the inter­ac­tion between urban cen­tres and rural areas cause dif­fer­en­tials in the prices of land. If you go look­ing in the rural areas, you’ll be able to buy 10’s or even 100’s of acres/ hectares for the price of a city apart­ment.
    One of my friends sold his north shore prop­erty at the peak of the late 80’s hous­ing boom and bought him­self a rural prop­erty, includ­ing a herd of 5000 cat­tle and farm­ing machiner­ies etc some­where near Gul­gong,. I observed the behav­iour of the flies on the dung dur­ing a tour around his immense prop­erty. They were no dif­fer­ent from the flies I saw 20 years ear­lier on when I was work­ing in the bush. They like crowds.
    With money in the pocket, some of the offers by the drought-stricken farm­ers along way to Mount Kosciuszko may prove to be too tempt­ing, if you don’t mind being alone.

  • Lau­rence

    Just a few exam­ples of the eco­nomic impacts I feel because of recent immi­gra­tion poli­cies, rel­a­tive to the gen­eral costs of liv­ing:

    Increase in med­ica­tion cost: due to increased demand on sub­sidised pre­scrip­tion med­ica­tion and big­ger div­i­dends to share­hold­ers of big phar­ma­ceu­ti­cal com­pa­nies.
    Decrease in med­ical con­sul­ta­tion cost: due to the intro­duc­tion of Medicare levy and a greatly increased num­ber of med­ical pro­fes­sion­als;
    Increase in med­ical con­sul­ta­tion cost: due to one’s unfor­tu­nate encounter with a witch-doc­tor who hap­pens to be able to oper­ate with­out any “real” med­ical knowl­edge;
    Decrease in hair-cut prices: due to greatly increased num­ber of hair-dressers;
    Decrease in eat-out costs: due to increased num­ber of eat-out places and cooks;
    Decrease in house main­te­nance labour costs: due to increased num­ber of unskilled labour; the decrease in cost is there­fore only tem­po­rary;
    Increase in house main­te­nance mate­r­ial costs: due to the big­ger div­i­dends pro­vided to BHP and RIO share­hold­ers;
    Decrease in red meat cost: due to the increase in sup­ply of white meat and eggs from migrant-oper­ated poul­try farms;
    Decrease in fruit and veg­etable prices: due to the increase in sup­ply of fruit and veg­etable from migrant-oper­ated pro­duce farms.

    and finally
    Increase in hous­ing cost: due to an increase in pop­u­la­tion;


  • aykch

    Dear Steve,

    I am a renter and feel that the house price is ridicu­lous for the Aus­tralian. The Aus­tralian are actu­ally not enjoy­ing lives as before, but only work­ing for the mort­gage. I am wait­ing for the slump of the house price.
    How­ever, peo­ple said that the house price in Aus­tralia is very dif­fer­ent from other coun­tries as it has the neg­a­tive gear­ing which pre­vent the down­turn of the house price.
    What is your com­ment on this? Thanks.

  • I think it’s encour­aged prices up aykch,

    But if a price fall starts then it works in the oppo­site direc­tion. No one will “invest” in hous­ing and expect to lose money on rent and suf­fer a cap­i­tal loss as well. Neg­a­tive gear­ing only works for the indi­vid­ual if there is a cap­i­tal gain. So neg­a­tive gear­ing has kept the bub­ble alive longer than over­seas, but it could well work in reverse once the fall starts–as own­ers sell out to get a gain before it turns into a loss.

  • bil­l64

    Laurence’s obser­va­tions are mis­con­ceived. Some com­men­ta­tors asserted that migra­tion intake was one of the key dri­ving forces behind high hous­ing prices. This asser­tion is one of the fal­lac­ies of the demand-sup­ply the­ory. Because in a free mar­ket econ­omy, where there is a demand where there will be a sup­ply. Doesn’t the entire world des­per­ately need con­sumer demand these days? So why don’t we build more dwellings to meet the demand? Wouldn’t build­ing of new dwellings give the econ­omy some real and good stim­u­lus? Why the gov­ern­ment rather spent big money on some infra­struc­tures or sub­si­dis­ing the com­mer­cial build­ings than directly on hous­ing in the stim­u­lus pack­age? These ques­tions have bewil­dered me since the $900 cash hand-out and the start of the Ven­dors Grant. I have been unable to find the answers. As I pre­vi­ous said, hous­ing prices is not a pure eco­nomic issue in Aus­tralia. Sup­port of hous­ing prices has been the polit­i­cal as well as eco­nomic pol­icy of both the Lib­eral and Labour gov­ern­ments for decades. High demand and low sup­ply is only the symp­tom not the dis­ease.

    Sec­ond, this econ­omy needs more and young pop­u­la­tion. If we are unable to have enough pop­u­la­tion made in Aus­tralia, then we have to import them. No mat­ter you like or not, it has been the real­ity.

    Third, our text books cost 20% more than in the US and a sim­ple muf­fin costs $4.50 in cof­fee shops. Why? Because we sim­ply do not have enough stu­dents and con­sumers.

  • Lau­rence

    You are right. As I have pointed out ear­lier on, hous­ing afford­abil­ity fluc­tu­ates unevenly through­out the coun­try; the aver­age and mean val­ues used in sta­tis­ti­cal data do not nec­es­sar­ily reflect time-based local con­di­tions; such as impact by rental incomes from the board­ing over­seas stu­dents.

    My obser­va­tion was only based on sev­eral sub­urbs with a large over­seas stu­dent pop­u­la­tion. It is com­mon knowl­edge that a sig­nif­i­cant num­ber of land­lords in these areas were pay­ing off their mort­gages by col­lect­ing rents from the board­ing stu­dents. Some of these land­lords became mil­lion­aires within a short period of time by sim­ply squeez­ing the stu­dents into smaller and smaller spaces. From the per­spec­tive of sup­ply and demand, the land­lord who cramped 27 or more Korean stu­dents into a sin­gle dwelling had shown the way how peo­ple can fine-tune a micro supply/demand sys­tem. Some of them, them­selves started as over­seas stu­dents, applied the same tech­nique over and over again by acquir­ing more and more prop­er­ties. As to why those Korean stu­dents rather sleep on top of each other than go rent a sin­gle room in another house, I’ll never try to find out. For the same unknown incli­na­tion, I’ve never tried to find out why the flies in the pad­dock pre­ferred crowd­ing out the same piece of dung and left the other pieces rel­a­tively unoc­cu­pied.

    The get-rich sto­ries spread, the herd fol­lowed, and demand for prop­er­ties went up. More over­seas stu­dents became land­lords of their fel­low over­seas stu­dents. Their “suc­cess sto­ries” immor­talised and became leg­ends, only to be wor­shipped as “genius”, as suc­cess­ful busi­ness­men who dined and wined the politi­cians and “exerted influ­ence” on immi­gra­tion and edu­ca­tion poli­cies. By so doing, they have built a bridge between cer­tain sec­tions of the com­mu­nity with the pol­lies. This “bridge”- a com­mu­ni­ca­tion chan­nel- never existed before. I have gone just a lit­tle fur­ther to clear them as pure blood suck­ers. They prob­a­bly sac­ri­ficed their own chance of aca­d­e­mic suc­cesses and went out of their way to go heav­ily into debt and pro­vided much needed stu­dent accom­mo­da­tions just in the nick of time. It doesn’t mat­ter which way we look at it, the demand for res­i­den­tial hous­ing spiked and I thought the costs went up with it.

    From this and other forums, I have learnt that our finan­cial sys­tem has already shifted from income to debt; now I have formed an opin­ion that our hous­ing afford­abil­ity may have also shifted from more self-reliant to more rent-reliant, in the sense that the rental incomes are sourced over­seas. I am learn­ing some­thing new every­day, and I try very hard to give some­thing back, albeit a lit­tle sub­jec­tive or even mis­con­ceived.

  • OldSkep­tic

    OK, finally got some time together and started going through the Cen­sus stats, plus some ABS nums.

    The argu­ment about pop­u­la­tion growth is non­sense.

    Basi­cally we have been build­ing far faster than pop­u­la­tion growth and this applies to all the major States.

    This can be mea­sures by:
    (1) direct build­ing nums.
    (2) peo­ple per dwelling.

    There has been a mix change between 2001 and 2006, with den­sity going up in semi-detached and flat. But den­sity for detached houses has dropped.

    Even adding them together shows a drop.

    NOTES: there are some wrin­kles.

    (1) The Cen­sus nums only apply to those in their dwelling at the time of the sen­sus. Approx a mil­lion are in tran­sit or some­where else of some kind at that time.

    (2) The num­ber per dwelling goes 1,2,3,4,5,6+. Work­ing back­wards (to match the total peo­ple to the total peo­ple in their own dwelling on the night) the 6+ aver­ages out about 9.

    (3) The Dwelling Not Stated nums have dropped dra­mat­i­cally since 1996. From 254,855 in 1996 to 8,715 in 2006. Look­ing at the other cat­e­gories I have treated these as in the House/semi/flat cat­e­gory that I call PRIME.

    Mak­ing these assump­tions and adjust­ments we have:

    2001 to 2006: 1% drop in peo­ple per dwelling — Total, 1.3% in Prime.

    2001 to 2006: 6.1% increase in Prime dwellings. 5.7% increase in pop­u­la­tion.

    By Major State:

    Pop­u­la­tion inc Inc in Prime Build­ings
    NSW: 3.4% 4.8%
    VIC 5.8% 7.2%
    QLD: 10.7% 9.4%
    SA: 2.7% 3.2%
    WA: 7.3% 6.8%

    So WA and QLD might have an issue, but the rest looks like a Bub­ble.

    How­ever, when you look at the num­ber of peo­ple per dwelling, even QLD shows no growth and WA actu­ally drops.

    This is due to mix. Peo­ple per semi/flat has increased, but the peo­ple per house is the same (Qld) or declined (-3% in WA). As new house growth dwarfed the increase in semi/flats in both those States then the over­all peo­ple per dwelling did not increase (or dropped). These can be explained by migrat­ing, pos­si­ble short term work­ers and/or retirees.

    There­fore, the idea that pop­u­la­tion pres­sure is dri­ving house prices , espe­cially detached houses in non­sense. Per­haps there is some pres­sure on semi detached/flats in some areas, but noth­ing to jus­tify these price increase in recent times.

    Plus have a look at the ABS house price nums (I can’t post a chart) but basi­cally look­ing at the quar­ter by quar­ter nums for all major cities you saw it roar­ing along in 2002-March 200. Then stopped until Sep 05 and then a mini boom to Dec 07. Note there are major State dif­fer­ences, this is the Aus­tralian aver­age.

    Then it went down the tubes. At the bot­tom (Sep 2008) the quar­terly price drop for estab­lished houses hit 10% per annum. Then it remained neg­a­tive at lower annual rates until the June 2008 quar­ter, where it hit a whop­ping 4.2% for the quar­ter. All that stim­u­lus, grants and inter­est cuts cut­ting in.

    Plus have a look at the build­ing approvals, after a bit of a dip they are roar­ing along now.

    You were unlucky Steve, this is going to end in tears pretty soon now. My gut feel­ing 2010 is going to get ugly.

    Plus (and the steak knives), Oz is head­ing for a seri­ous cur­rent account deficit cri­sis as our exports have col­lapsed. Per­son­ally I think the recent and com­ing inter­est rate rises have noth­ing to do with the RBA being wor­ried about house prices (they never have in the past), more a recog­ni­tion the we have to get our cur­rent account deficit into some sort of bal­ance and main­tain cap­i­tal inflows. 

    Which means dear friends, the RBA is going to kick the guts out of the econ­omy. Instead of the Govt, say, ras­ing GST for optional con­sumer goods. You can’t keep a good neo-lib­eral econ­o­mist down.

    The unem­ploy­ment nums are rub­bish, work­ing hours declined 2.6% from their peak about 18 months ago. So where did all the jobs go?

    We sort of dodged a bul­let last year, mainly because of the inter­est rate drops … which was a huge stim­u­lus, dwarf­ing the Rudd pay­ments. It bought us a year and now it gets rough.

  • OldSkep­tic

    I should add the dwellings and peo­ple per dwelling are all from the 2006 cen­sus, Time Series Pro­files.

    I have the full set of Cen­sus data .. fun play­ing around with it.