So I’m walking to Kosciusko–now that the ABS Established House Price Index has cracked its September 2008 peak of 131 to reach an all-time high of 134.4 (as of September one year later). This renewed bubble reversed the trend of falling nominal house prices that had dropped the index to a low of 123.8 in March 2009.
This level of price volatility–down 5.5% in 6 months, only to rise 8.5% in the subsequent six months–almost matches the stock market’s manic-depressive performance.
Though you’d see no mention of it if it you only read Chris Joye (“Keen concedes defeat“), the main factor behind the revival of the bubble is what is formally known as the First Home Owners Boost (FHOB), but what is more accurately described as the First Home Vendors Boost. As at the end of September–the date of the latest ABS house price data–171,000 applicants had received this $7,000 bribe. Since many are couples, more than 1 percent of Australia’s population has leapt into the property market pool at the behest of a government stimulus.
So how has a mere $1.2 billion injection of government money driven the average house price up by 8% in six months? By the “magic” of leverage: the typical First Home Buyer (FHB) took that $7,000 to the bank and leveraged it up to another $40-50,000, which then was handed over to the First Home Vendor (FHV) as cold, hard cash.
The FHV then took that extra $40-50,000 and leveraged it to an additional $200,000-$250,000, which meant that that new place which had been just out of reach prior to the FHOB was now well within range. Competing with other lucky recipients of government and bank largesse, he drove up the price of that middle to upper tier house by an additional $100,000 or more.
The aggregate impact of this government enticement into private debt was that Australian households reversed the deleveraging process that had begun in late 2008, and as a result the mortgage debt to GDP ratio, which had been falling, began to rise once more. The FHOB has led to Australians taking on an additional $50 billion of mortgage debt. That “demand” factor, far more than any other, is why I’ve lost the second half of Rory’s bet with me.
Normally I regard the “ceteris paribus” assumption of conventional economic theory as a copout–in a market economy everything is connected to everything else, and you can’t assume that, for example, a firm’s output can change without affecting the market price. But I think I’m entitled to ask the “ceteris paribus” question here: what would have happened to house prices had the government not spiked the market with the FHVB? I somehow doubt that Rory would be crowing today had that irresponsible policy move not been made.
In fact, there’s a good argument that we wouldn’t be having a property bubble here at all, were it not for the First Home Buyers policy. I’m not one for making arguments solely on statistical correlations–I’m only too aware of the “correlation isn’t causation” argument–but I think I can also spot a smoking gun when I see one.
Prior to the FHB, though real house prices were rising, so was real household disposable income. Then add two dollups of the FHB–one its introduction as a “temporary” measure to get us over the shock of the GST in 2000, the other its doubling to boost the economy during the brief 2001 recession–and off go real house prices relative to real household disposable income.
Last year, as the market starts to head back towards parity between house prices and incomes again, Rudd throws in another temporary doubling (of this temporary measure that is now almost a decade old), and off goes the house price bubble once more.
In the main, I’ve been a critic of banking practices as the underlying cause of the Global Financial Crisis. But I also believe that the crisis would have occurred long ago (in 1987) and been far less severe if governments and Central Banks hadn’t attempted to rescue the system from its own follies. The First Home Owners is a classic government folly, and its doubling last year is the main reason I’ll be walking to Kosciusko some time in April 2010.
Lots of demand for houses
http://www.smh.com.au/business/dollars-strength-cant-deter-foreign-property-investors-20091105-hzx3.html
“John Bongiorno, director of Marshall White & Co, in Melbourne said international buyers had typically made up 5 to 10 per cent of sales, a figures that had recently risen to about 15 per cent. And the dollar’s rise had not yet dampened demand.
Mr Bongiorno said his overseas clientele was ‘‘predominately mainland Chinese”, some of which adopted a fly-in, fly-out approach to house hunting.”
I think we still need an explanation of why the housing bubble and recovery are happening not only in Australia, where demand is stringly stimulated, but in the US and UK as well.
Is it simply that US and UK prices fell enough to warrant a genuine recovery, but Australia’s prices where artificially held up by stimulatory policy? Are we joining the world wide recovery from a higher base? And does it matter?
Oops, didnt see post 95 by ‘Up And Away’ which posted the whole article
On leveraging up the grant, I recall a relatively recent (maybe June or July) newspaper (afr?) article which reported that major banks were tightening up by no longer allowing the grant to be counted. The banks called the new deposit basis something like a personal or real or true deposit – some pr name to feebly disguise their own stupidity.
The Chinese property market is in a bubble. They are now all fuelled up and buying here. I would not count on the Chinese ability to successfully gamble on housing prices as an indicator for our experience.This is classic buying mania at the top.
http://www.dailymail.co.uk/news/worldnews/article-1223747/Ghost-mall-The-worlds-largest-loneliest-shopping-centre.html
“It was trumpeted as the world’s largest retail mall, with shoppers able to browse through 1,500 stores, take a stroll along a mock Venetian canal or even have lunch in front of an 85ft replica of the Arc de Triomphe.
But the New South China Mall, which opened in 2005, stands empty with 99 per cent of its shops having remained unleased and attractions including a 553-metre indoor and outdoor roller coaster standing idle”
http://gulfnews.com/business/markets/analysts-fear-impending-asset-bubble-burst-in-china-1.519201
Analysts fear impending asset bubble burst in China
“There is now a “speculative frenzy” in Chinese assets. Already, expensive Chinese real estate has continued to rise at a rapid rate.”
http://ftalphaville.ft.com/blog/2009/10/16/78181/chinas-liquid-real-estate-bubble/
“The real estate market in China, particularly the residential side, is a burgeoning bubble that is growing bigger and more breakable by the day. Land and housing prices were already rising steadily when Beijing’s stimulus package hit the sector in early 2009. Now prices are surging, with developers, bureaucrats and investors cashing in while urban Chinese – once encouraged to invest in home ownership by the central government – become less and less able to buy.”
Late Feb is plenty of time D2D,
I’m currently leaning towards a mid-April trek, though planning and weather issues may lead to a later time (after winter obviously). When I get back from Europe I’ll head down to the Snowy and check the route over carefully, get some meteorological advice, and make a firm decision. In the meantime, I have a volunteer who will keep track of those willing to join me for a day or two (by any non-auto means of transport), and once I’ve had confirmation from him I’ll post his details here.
You don’t need savings to have loans–in that way he’s making the standard neoclassical mistake. But the program (which I missed–too busy down here in Canberra right now) could still be interesting.
A few disparate things to add about the state of the housing market.
I think there is a second overlooked aspect to the boost. It is fairly well acknowledged that there is likely to be a significant lessening in demand from this sector as the boost ends (although some spruikers are still trying to make out that FHBs will still be active in the market).
But I think there is a very good chance that this lessening in demand will be accompanied by an increase in supply. Whenever I observed a talkback-style discussion over the boost, there was always a question of how long the buyer had to live in the property (few referred to it as their home, surprise, surprise – do they still serve that function
)
I think a very significant proportion of the younger buyers will have their properties on the market as soon as they meet the requirements of the grant and also the half CGT concession. Others will move back in with their parents while renting out the property, thus easing the rental market. This will be a very significant feature of the market over the next 12 months in my view.
There is no doubt in my mind that the majority of propaganda is now based around bringing relatively naive investors into the market to take up the slack from the drop off in FHBs. Certainly every comment by a REI member is along those lines.
However there seems to be abundant supply in this category. Louis Christopher speaking on “The Barefoot Investor” on CNBC about a new product, listing properties that have been listed for sale on the internet for 60 days or longer, said that the Gold Coast and Sunshine Coasts had the greatest number of properties in these reports.
This was just a couple of weeks ago and he said that the Surfers Paradise postcode had 900 old listings alone!
Finally, a personal anecdote. An old footie mate of mine has developed the first multi-level unit development in my small home town in North Queenland. Really nice building, and because it is likely to be unique for a long time, has the benefit that once all of the units are sold, owners should be able to get a sale fairly painlessly. This is important because in my home town properties would frequently be on the market for several years (prior to the arrival of the housing bubble with southern investors buying site-unseen off the internet, often within hours of it’s listing.)
But the bubble seems to have popped up that way. The building is now complete and people have been living in there for over a year. Less than half of the units are sold. One southern investor bought a whole level – off the plan I believe – but failed to close on the deal. A recent auction of 20% of the units (about one-third of the unsold ones) enticed only a few local bidders – not a southern investor in sight. Last count they sold 60% of units that were up for auction. Actually, my parents bought one of them to live in – I understand at a good discount to yet another contract that fell through earlier in the year.
I’m proud of my mate for doing this development – he had the guts to do it, and it’s something he can be proud of for a long time as I’m sure it will prove to be prominent feature of the town for many years.
But I do think that the difficulties in selling these units, together with the very high numbers of old listings in the typical investor hotspots, is strong evidence that the investor is not coming back to take up the slack. Moreover, it is going to take quite a while of increased demand just to clear the backlog of listings.
And to be honest, if I was a property investor, I reckon I’d be on a plane to Las Vegas and picking up one of those apartments with an “in your face” view of the strip for less than $400K, less than half of what they sold for 2 years ago (as seen on the 4Corners show about James Packer)
Aac (102) and Upandaway (95)
More to this issue than meets the eye, in my view. See an expansion on this in my comments here -
http://www.bubblepedia.net.au/tiki-view_forum_thread.php?comments_parentId=2844&topics_offset=4&topics_sort_mode=lastPost_desc&forumId=7
“fly in, fly out approach to house hunting”…. sounds about right!
Hi Caneron Murray,
Housing recovery in the US?? Then how would you reconcile this?
“How Bloomberg Fabricates U.S. Housing Numbers”
“The really important departure from reality is how Bloomberg (and the rest of the U.S. propaganda-machine) have simply ignored the millions of already-foreclosed properties which U.S. banks are hiding from the market.
As I demonstrated in “Fantasy Housing Numbers a Prelude for NEXT U.S. Housing Crash”, U.S. banks are on track to record close to 5 million foreclosures and repossessions – just in the current year. However, they are only on pace to sell about 1.5 “distressed properties” (which also include “short sales”). This simple arithmetic means that U.S. banks are adding at least 3.5 million empty homes to the millions of foreclosed properties they were already holding off the market prior to this year.
Obviously, if there were 19 million empty homes at the end of 2008, and at least 3.5 million more empty homes this year (just counting only those being held by U.S. banks), then the real total of U.S. empty homes today would be at least 22 million. Clearly, Bloomberg’s claim of 18.8 million empty homes in the U.S. in the 3rd quarter of this year has absolutely no connection to the “real world”.
Presumably a major news organization like Bloomberg is able to keep track of its own prior published articles, which strongly suggests the deliberate attempt to deceive. Interestingly, Bloomberg’s previous report on U.S. empty homes provides some data which strongly supports my assertion that U.S. banks have been accumulating vast quantities of foreclosed properties.”
“Now, with the U.S. housing market collapsing, these credit default swaps are being triggered. Selling these foreclosed properties locks-in the banks’ losses – causing these massive obligations to come due. As I illustrated in “Bankster Sues Bankster – AGAIN”, in one example of a credit default swap, Citigroup (C) is suing Morgan Stanley (MS) to collect on this contract.
Even after the “collateral” which “backed” this insurance was liquidated, Morgan Stanley is still facing a pay-out of more than 300:1 based on the premiums it received for this insurance. While not every CDS will require 300:1 pay-outs, there is no reason that some of these payments could not exceed 300:1 – given the gross negligence of regulators in not requiring adequate collateral for this $50+ trillion “insurance market”.
If you take the billions in losses which U.S. banks are racking-up on foreclosed U.S. properties, and then start making 300:1 pay-outs on those losses, it doesn’t take long for the entire U.S. financial system to appear hopelessly insolvent – even with the new, fraudulent accounting rules enacted in the U.S. in April.
For the benefit of new readers, I will repeat my warning: it is perilous to accept any U.S. government-reported statistics at “face value”. The absurd reading on 3rd-quarter GDP is a prime example.”
http://seekingalpha.com/article/170419-how-bloomberg-fabricates-u-s-housing-numbers?ref=patrick.net
The masters of propaganda – from the aforementioned article
“One Melbourne real estate agent, who asked not to be identified, privately worried about what the Chinese demand would do for the chances of local buyers.”
Please forgive me, only a new blogger I disagree the media or government is going to discredit Steve try to shut him down.
When the bear market mood was high Steve was given plenty of air time by the media,Steve even told some zealous bloggers to tone down their comments.
Macca was a good example his very frank to the point style,I look forward to Macca’s gloves off comments when the bear mood returns.
Steve Keen was thankful to the media for his success.
Qoute from Paul Barry
“One should never underestimate the insecurity of Australian politicians.They are convinced that the media has the power to make or break them, and convinced that crucial decisions to do so are made by the proprietors”
The crucial decisions are made by the plebe not the elite.
Channel 7 And Kochie are shrewd they knew to back labour the mood of the country had change because of work choices.
High debt levels struggling to pay the mortgage are mood changes.
You can spend billions on media advertising it will backfire big time.
The plebe will say what a waste of money.
Fix the roads,schools,hospitals,release more affordable crowd land for houses,stop bailing out corrupt businessmen etc, etc
BH On this “leveraging” of the grant it doesn’t matter how you look at it the grant enhances the buyer’s financial resources to the extent that they have, $7000 more for a deposit than they previously had. Forget about the banks’ loan officers who are paid by commission, the buyers would make that decision even if not advised to do so by an ethical (lol) loans officer.
As for the “shortage” of real estate this exists for real estate at prices around 50% of current prices. Real estate is not a homogenious commodity and cannot be simply aggregated so to talk about “supply and demand dynamics” is stupid nonsense.
“Mr Bongiorno said his overseas clientele was ‘‘predominately mainland Chinese”, some of which adopted a fly-in, fly-out approach to house hunting.”
Standard fear and greed tactics from the MSM. If you don’t buy a house NOW, the Chinese will buy them ALL!! Or the flip side…buy a house now and it will DOUBLE in value because foreigners will buy them from you later.
You don’t need to believe in Steve, or even believe in bubbles. The theory of the mean states that all things revert to the average in the long term (that’s why it’s the average). Of course, that doesn’t mean that prices can’t fall below the long term average during a correction.
The thing about real estate is that it occurs on a glacial scale. It simply isn’t possible to follow in real (news cycle) time. Check out the Sydney commercial real estate scene where there has only been one major sale in the last year (bankruptcy related). It’s hardly registered in the media.
One of the extra drivers which shoved house prices up is the extras which came with the FHOG, which took the total up to around $36,500. It is now down to $22,500. Now that the frenzy for the extra $12,000 is over, I expect to see demand slow.
Hi SuitablyIronicMoniker,
I agree, it does occur and a glacial scale so to watch it by the hour is pointless (maybe all houses should have “Price Meters” installed so owners can watch the value continuing to rise and thus rest assured).
What makes me really laugh is that real estate agents are asked to comment on the state of the Australian housing market, this is akin to asking a sales person in Harvey Norman to explain the theroy of operation of a Plasma set(ha – they still think HDMI cables make a difference to picture quality Bwaaaahhhaaaaa).
If you want gossip and scare tactics talk to a sales person (really, would you trust a car sales person – of course not so why a house jockey), if you want information and education go where the vested interest is least (ie Steve et al)
Moz
An article from the Wall St cheat sheet that I came across via ZeroHedge
“Medal of Honor: Professor David Colander Tells Congress Econ Models are Flawed”
http://wallstcheatsheet.com/knowledge/medal-of-honor-professor-david-colander-tells-congress-econ-models-are-flawed/?p=3260/
Indicative quote:
“Over time, we should have considered much more complicated non-linear dynamic models and a whole variety of new models — but economists didn’t do that. They kept dotting I’s and crossing T’s on a very restrictive equilibrium model which assumed away many of the most important elements that cause fluctuations and lead to the interesting effects that we see in the real macro economy.”
Hi Effit,
Robert Gottliebsen’s little chat with up and coming landed gentry holds a few unspoken problems, if we all become a Nation of renters then who by chance will then be the voting majority (ie not the the landed gentry)?
This could bode well for renters with demands for greater protections being acted upon for fear of a political demise (nothing like voters getting on your back on mass).
I cannot take this theory seriously as all policy is geared to owning, having to re-write the rules for a renting majority would leave most pollies in a cold sweat!
Nice try Robert
Moz (the renter)
Moz
There you go as a techo person looking at boundary conditions, something that the neo classicals never see. When these do bite them they call them “unforeseen consequences” or “black swans”.
There are other boundary conditions for example as rents go up there is less demand as people become homeless of live in shared accomodation. These limits all cause lagging feedback as they are approached and will lead to an eventual “belly up” for real estate as an investment.
To technical people who work in timescales of milliseconds or less we see this happening many times in faulty equipment. One trouble is that the neoclassicals seem oblivious to the effects of the passing of time not even aware of factors which change in a glacial time scale even though these have been well recorded.
cheers B.S.
TruthIsThereIsNoTruth (#72) and Philip (#75)
Prof. Emmanuel Saez (University of California, Berkeley) has analyzed income distribution for a variety of countries using income tax statistics. In his view, this is a more accurate approach than income surveys, that are usually conducted.
The paper below (I included the abstract, too) may be of your interest,
=================================================================
Top Incomes in the Long Run of History
ABSTRACT
This paper summarizes the main findings of a recent literature that has constructed top income shares time series over the long-run for more than 20 countries using income tax statistics. Top incomes represent a small share of the population but a very significant share of total income and total taxes paid. Hence, aggregate economic growth per capita and Gini inequality indexes are very sensitive to excluding or including top incomes. We discuss the estimation methods and issues that arise when constructing top income share series, including income definition and comparability over time and across countries,
tax avoidance and tax evasion. We provide a summary of the key empirical findings. Most countries experience a dramatic drop in top income shares in the first part of the 20th century in general due to shocks to top capital incomes during the wars and depression shocks. Top income shares do not recover in the immediate post war decades. However, over the last 30 years, top income shares have increased substantially in English speaking countries and in India and China but not in continental Europe countries or Japan. This increase is due in part to an unprecedented surge in top wage incomes.
As a result, wage income comprises a larger fraction of top incomes than in the past. Finally, we discuss the theoretical and empirical models that have been proposed to account for the facts and the main questions that remain open.
http://www.econ.berkeley.edu/~saez/
A shorter article refered to the US only (although it also contains some comments about the UK and France) is
Income inequality in the United States, 1913-1998.
=================================================================
Other than Saez’s, I don’t know of any comparable resource on this subject.
It goes without saying, his results have created some controversy (although he mainly discusses his methodology, advancing quite cautious explanations), mostly in the US.
Among his critics, is Alan Reynolds (of The Wall Street Journal fame). Here is a link to a comment by Reynolds
The Top 1%… . of What?
Sunday, December 17, 2006.
http://www.opinionjournal.com/forms/printThis.html?id=110009398
There is also an informal article by Prof. Paul Krugman, but is a bit dated (1992) and refered to the US only. The advantage is that it is much shorter and easier to read than Saez’s (102 and 39 pages ).
In what concerns the US, Krugman’s conclusions seem similar to Saez’s. Krugman, if I remember well, does not advance any explanation at all.
In any case, as an interesting thing, Reynolds also criticised Krugman’s article.
The Rich, the Right, and the Facts: Deconstructing the Income Distribution Debate.
http://www.prospect.org/cs/articles?article=the_rich_the_right_and_the_facts
I hope this is useful!
Cheers,
Marco <- without the 2
Steve, is it possible to consider doing the walk in September 2010. Reasons are accomodation is fast being booked out during Easter-Autumn period as High Country is a popular destination at this time of year. Summer and Winter is suicide due to fire season during summer then snow and ice during Winter, but plenty of accomodation is available during the September break and weather starts to improve. Apparantly there is a period of a week when Victorian Schools return to school prior to there NSW counterparts in September which frees up many places of accomodation. As we wish to do the walk, at my age I can’t sleep in a ditch.
That’s feasible mfo. I’ll put up a post to debate all these issues in a couple of days–maybe once I’m in Finland.
mfo said “Steve, is it possible to consider doing the walk in September 2010.”
Kosciuszko may not be that high by world standards, but it is still in an alpine zone and in September will have plenty of snow cover. It is not suitable for people inexperienced in winter alpine conditions, which can be atrocious at that time of year. May can even be dodgy. March/April is the best time to be up there.
What Halycon said.
I’ve had to abandon a walk near Kosciuszko on _Boxing Day_, due to freezing weather and driving sleet.
September is barely out of skiing season.
Thanks Halcyon,
That was my guess but I wasn’t sure.