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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117 Responses to When Herds Collide on the Yellow Brick Road

  1. Alan Gresley says:

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

  2. mbehar says:

    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?

  3. mbehar says:


    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.”

  4. Laurence says:

    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.

  5. Laurence says:

    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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  7. bill64 says:

    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.

  8. Steve Keen says:

    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”.

  9. bill64 says:

    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.

  10. Laurence says:

    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.

  11. Laurence says:

    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;


  12. aykch says:

    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.

  13. Steve Keen says:

    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.

  14. bill64 says:

    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.

  15. Laurence says:

    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.

  16. OldSkeptic says:

    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.

  17. OldSkeptic says:

    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.

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