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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