I’m giving two talks at Swinburne University of Technology on Thursday February 4th. The information below is reproduced from the flyer for the event developed by regular blog contributor Matt Mitchell, who has arranged the talks:
12.00pm – 2.00pm: DebtWatch : Observations and reflections on the educative role of modern media
- Dr Keen will discuss his experience using his Debtwatchblog on which he posts regular articles for discussion and the role of this media in both educating the public and stimulating debate among economists, students and lay people around economic theory and practice.
- Target Audience: Educators using online resources and those interested in emerging media.
2.30pm – 3.30pm: Have we dodged the iceberg?
- Dr Keen will describe the causes of the Global Financial Crisis, and the role of debt in that crisis, as well as proposing some courses of action to deal with the effects of this crisis.
- Target audience: staff in the Economics and related discipline areas.
Matt would be delighted to have other blog members attend, and the event is open to the general public. So please make it along if you can. The venue for both talks is LA101 at the Lilydale Campus of Swinburne University of Technology.
For further details, please contact:
- Matt Mitchell: 9215 7140, mmitchell@swin.edu.au; or
- Debbi Weaver: 9215 7204, dweaver@swin.edu.au
I hope to see some of you there. Closer to the date I hope to publish a retrospective on the development of the blog. Some feedback from members about the blog experience–which I can use in the talk–would be appreciated.
January 31st, 2010 at 5:52 pm
Look forward to the lecture. Will be there. Any other blogg members going?
Cheers All.
January 31st, 2010 at 9:44 pm
Hi Steve,
Just a web page suggestion (very very minor).
Just noticed the ‘>’ tag sitting in the web page header sitting below ‘Analysing the Global Debt Bubble’ and above the ‘Home’ page tab.
If you right click in IE and view the page source (note pad etc) then search for the script line:
Analysing the Global Debt Bubble>
You will notice the double the >> on the closing p tag (paragraph tag).
One > needs to be cleaned off the end within the index page script and then saved. If you then do a page refresh (F5) it should then be gone.
Once happy with the change you just need to over write the ‘live’ page with the new version to see the change.
Seems like a silly thing to point out but once you notice it it is hard to ignore (like a dead pixel).
PS Please forgive my explanation if the above is something you can easily do without instruction and for the minor nature of it.
Moz
January 31st, 2010 at 9:49 pm
Post Note
Of course word press treated the tag as it should and did not display them:
“Analysing the Global Debt Bubble>”
is what you are looking for minus the quote marks
Moz
January 31st, 2010 at 9:53 pm
Nope still wont show the tags – hummmm.
Analysing the Global Debt Bubble>
Moz
January 31st, 2010 at 9:55 pm
This is getting silly…….
Analysing the Global Debt Bubble>
Moz
January 31st, 2010 at 10:01 pm
Sorry, word press has gotten the better of my attempt to display the line of script (line 147 in the fire fox editor)
Moz
February 1st, 2010 at 3:22 am
Steve, may I ask for your opinion? Economists are gaily returning to their free-market agenda and restating fundamentals with, yet again, not a mention of the word “debt” – see e.g. here: http://gregmankiw.blogspot.com/2010/01/economics.html
How are we to endure the deflationary effects of globalisation when we (especially the squandersome UK) are stuck with so much debt? What do you think should happen, and what do you think will happen?
February 1st, 2010 at 3:34 am
P.S. How about installing some sort of fund-raising thermometer graphic so your contributors can see how they’re doing?
February 1st, 2010 at 11:30 am
Interesting presentation – the new model looks like a valuable contibution Steve. The behaviours look convincing, can’t wait to see it populated with real data, and then subjected to some casino-style money creation.
On a technological note, I am interest in how you get MathCad and Vissim to play nicely with each other. I know you produce the ODEs in Mathcad – while Vissim does the stock and flow modelling. How hard is it to go from one to the other, given the massively more complex ODE structure?
February 1st, 2010 at 4:41 pm
Suprise drop in job ads reported today:
http://www.smh.com.au/business/slump-in-job-ads-clouds-economic-outlook-20100201-n7er.html
Do you think this is just a blip, or is deleveraging still dragging down aggregate demand enough to reduce employment?
February 2nd, 2010 at 12:33 am
@Moz 3 to 6,
I see no extra “greater-than” entity in the source on the index page of this blog. Currently some of the code is tag soup and this just triggers the various recovery modes of each browser. Good that that doctype is traditional instead of strict. With traditional there are 18 errors where we strict there would be 49 errors.
Are you trying to show > > together. The correct code is >> which shows as >>
February 2nd, 2010 at 12:53 am
Should note that to code >>, one must type this without the space after the ampersand.
& #38;#62;& #38;#62;
This is since this blog is coded with XHTML and all ampersands must be encoded correctly.
Steve, what elements are allowed? Can we use >blockquote< or >code<.
Also have you though about other HTML entities like the following. Good for the maths.
∑ √ ∞ ≈ ≠
Coded as.
∑ √ ∞ ≈ ≠
Maybe a support page that show such notation and coding.
Another thing that I have noticed is that each comment ID does not work as a link. The below URI should point to the above comment (number 11).
http://www.debtdeflation.com/blogs/?p=3164#comment-20622
February 2nd, 2010 at 1:21 am
I would love to be able to get down there for the talks, but my own students here in Japan would, I like to believe, miss me while I was gone.
By the way, how are your plans for a more fully-featured forum going? I recently set up my first set of servers running Apache (Apache Friends version) on a set of fairly well spec’ed IBM’s I bought at a junk sale here recently (the GFC has had SOME benefits – cheap computers from defunk businesses). Each machine took literally only minutes to set up! A piece of p#ss! Forums themselves (I’m running phpBB, which is free) take quite a lot longer to configuer.
I’m not an IT pro, but not a novice either. The whole experience was WAY easier than I had expected (despite having been given a few ‘bum steers’ by certain support people who should have known better).
I do have a fair degree of experience (many years in fact) at moderating and administering busy forums, so should you need help with housekeeping a new forum, then I am happy to help in whatever way I can.
All the best,
Mike
February 2nd, 2010 at 7:21 am
Just connect the dots…
“BILLIONAIRE mining magnate Clive Palmer was Australia’s largest political donor last financial year, handing over more than $850,000 mostly to the conservative side of politics.
Australia’s fifth richest man according to the last BRW rich list, Mr Palmer donated a total of $865,000, including $400,000 to the Liberal Party of Australia through his mining company Mineralogy.”
http://www.news.com.au/business/billionaire-miner-clive-palmer-australias-biggest-political-donor/story-e6frfm1i-1225825508176
“THE nation’s fifth-richest man, Clive Palmer, has denounced the federal government’s foreign investment rules as racist, claiming they are weighted against Chinese companies seeking to buy into Australian resource projects.”
…
“Contrasting an exemption allowing US investors to invest up to $953 million in an Australian business without foreign investment approval with the tight controls applying to the Chinese in the resource sector, Mr Palmer said the absence of a “level playing field” could cause Beijing to spend its estimated $1.8 trillion in cash reserves elsewhere.
“We’ve got the opportunity to grab that if our politicians could only be fair and treat the Chinese people and Chinese government with the dignity they deserve,” Mr Palmer said.”
http://www.theaustralian.com.au/business/mining-energy/mining-magnate-clive-palmer-attacks-racist-treatment-of-chinese/story-e6frg9df-1225780976217
February 2nd, 2010 at 11:04 am
[...] This post was mentioned on Twitter by John Hacking, greychampion. greychampion said: bottomLine ©: Swinburne Talks http://bit.ly/arPFZ5 [...]
February 2nd, 2010 at 12:31 pm
Re #9 Thanks Hactuary; unfortunately at the moment I have to manually draw my Mathcad models in Vissim. It would be relatively easy for a programmer to write a conversion–since both Mathcad and Vissim use text files for their data (Mathcad using XML and Vissim a straight text file)–but this hasn’t yet been done.
However on a more positive note, there are 3 developments afoot to make the tabular approach to developing ODEs that I use more accessible:
(1) Blog member AK and a US IT professional are developing an interface in Scilab;
(2) Blog member Warren Raftshol has also done a lot of work with my models in Scilab; and
(3) A UK correspondent and IT professional is developing a brilliant stand-alone modelling tool “Scriptgraph” which is specifically designed to develop my models–though it is becoming generally applicable as a dynamic modelling engine. It’s still in the development stages, but Cyril is one very rapid developer, and it’s well worth checking out right now.
February 2nd, 2010 at 5:39 pm
SteveJust reading Soros’s “The New Paradigm for Financial Markets: The Credit Crisis of 2008 and What It Means ” and I notice that Soros’s views about modern economics are almost the same as yours. At least that’s the way it seems. I wonder why you two do not work together!
February 3rd, 2010 at 8:47 am
Steve,
Re: New FIRB* Rules on Aus Residential Real Estate
This is off topic and may have already been discussed here before. If so, my apologies for wasting everyone’s time. On March 31, 2009 there were major changes to the FIRB rules on residential real estate purchases.
Please find a link to the Web site of lawyers, Allens Arthur Robinson.
http://www.aar.com.au/pubs/fmres/cufmresapr09.htm
Below an extract from one of their Partner’s comments on the new FIRB rules which came into force on April 1, 2009.
“New residential developments to be sold off the plan”
“…… There will be no restrictions on the number of dwellings/unit in a new development that may be sold to foreign persons……….”
In the past only 50% of a new development could be sold to foreign buyers. They have also relaxed the rules on vacant land and existing houses provided the purchaser iintends to knock down and build a new dwelling.
This Government has thrown the first home buyers under the bus by luring them into buying over-priced housing at the worst stage of the interest rate cycle. These changes to the FIRB rules could place home ownership out of reach for future aspiring home owners.
My interpretation of these new rules is that if Australians being paid in local currency have an exchange rate or wealth disadvantage compared to a foreign buyer they can be priced out of new developments. This would herd the local demand for new product into the existing dwelling market. To make matters worse in most locations a new residential development usually involves the demolition of a number of existing dwellings or other building stock.
These FIRB changes could be a kneejerk reaction by Government to advantage the FIRE** sector with the election cycle in mind. It could also be a shot at shoring up the vote from existing boomer homeowners by propping up the value of their houses. However, the long run effects could (will?) be profoundly adverse for young Australians aspiring to own a home.
Steve et al, how do you interpret these changes? Am I over-reacting?
*Foreign Investment Review Board
**Finance Insurance Real Estate
February 3rd, 2010 at 10:04 am
Re #10. I think deleveraging is still the factor–especially since the growth in mortgage debt is now terminating with the ending of the First Home Vendors Boost. And as John Hewson observed earlier this week on Switzer’s cable show, the fact that all that stimulus only resulted in 0.2% growth for a quarter means that unemployment has to rise again.
February 3rd, 2010 at 10:09 am
Re #18. Yes this is significant Angophera. I’ve developed a simple argument to try to explain to even property spruikers why house prices have risen, and it’s by inverting the argument to look at why sellers actually make money: it’s because they get unearned income.
There are 2 sources of unearned income–someone else’s income you somehow capture, or increased debt.
If we have everyone in the country wanting to make unearned income out of housing, then that “someone else’s income” has to come from overseas–and that’s what allowing foreign residents to purchase property allows. When you give it open slather then the sale price of houses in that range is based not on incomes in the country, but on the class of incomes outside it that is doing the buying.
If we’re talking wealthy foreign business owners, then they will restrict their buying to the upper end of the market (or the prestige flat market for their kids) and cause a disconnect between that segment of the market and the rest.
If however they start to play a Ponzi game as well–hoping to sell for more than they bought–then the bubble will take off within this segment and be very prone to a crash of its own.
February 3rd, 2010 at 10:11 am
Re #13. Yes Mike, a forum is actually already linked (check the top menu) but I haven’t launched it yet. One thing I would REALLY appreciate is someone moving posts across from this blog to the relevant topics within the forum, to populate it to begin with.
I’ll try to launch the forum at the Swinburne talk tomorrow.
February 3rd, 2010 at 10:12 am
Re #17: I of course know of Soros’s work (and quite like his informal “reflexivity” concept), but I very much doubt that he knows of me. When he thinks “non-orthodox economist”, he probably has Paul Krugman in mind.
February 3rd, 2010 at 11:18 am
Steve #20
“There are 2 sources of unearned income–someone else’s income you somehow capture, or increased debt.”
3) Lotto.
I’m convinced that my numbers will come up very soon.
Seriously though, is debt necessarily unearned income? I would view it as deferred earning. Of course if that debt is paid off by unusual asset appreciation then we’re left with your first option.
My homespun view of debt is that it’s just spending brought forward from the future into the present. I see the problem being that people think that they can bring spending forward into the present and also spend the same money in the future. Some lucky people can snag it, but as a whole it’s just shoddy math unless the spending is productive.
February 3rd, 2010 at 11:24 am
Steve,
Re #20. It doesn’t need to be turned into a Ponzi scheme to have a profound impact on the wider local market. A volatile AUS$ exchange rate will achieve that on its own. Under these FIRB rules consider this: if you had sold AUS$ at US 98 cents and bought back in at US 64 cents you would have locked in around a 40% discount on Aus residential RE without appearing on anyone’s radar screen. Consider the information asymmetries under that scenario. It’s a recipe for facilitating gaming of the market if not outright market failure.
Do you seriously think the FIRE sector players who pushed this through didn’t refine their strategies and lay their plans in advance? Investor roadshows to Shanghai (by one Melbourne RE agency) will be just the start.
These types of changes were on the wish list in the late 1980s but it was politically impossible at the time. I know about some of the concepts that were quietly discussed back then. The potential profits would have been huge and I can assure you if they had been allowed to do the potential long term damage would have been of no concern to the FIRE boyz. There’s a potential case study for the type of damage we can expect in the Vanuatu RE market.
These FIRB changes should greatly concern anyone with children who aspire to home ownership one day.
I was late in picking this up because it never occurred to me that the FIRE sector would attempt this again let alone finally succeeed in having the FIRB rules trashed.
I just joined the bubblepedia blog forum and offered to do a detailed analysis and explanation of the far reaching implications of these FIRB rule changes and the type of schemes that the FIRE sector could/will hatch. If you think this is worth doing I make the same offer here.
February 3rd, 2010 at 11:32 am
Hi Steve,
I heard Soros speaking on radio last week and he was calling for a new international Bretton-Woods system but said we don’t have anyone like Keynes to put it together. He does fund political freedom and social justice organisations in Eastern Europe, so he is a man who likes to put money in things he believes in. Maybe if you somehow get his attention with your work there is a chance of getting some funding? Just a suggestion.
February 3rd, 2010 at 11:50 am
angophera @24
Do you think the change in the FIRB rules is a bad thing?
February 3rd, 2010 at 11:55 am
I’ve tried TININT, but as you can imagine a man as wealthy as Soros is difficult to contact. There is a conference he’s sponsoring in Cambridge that I put in a paper abstract to, but I haven’t heard a word from the organiser since.
I think I’ll continue doing my work on the smell of an oily rag as always–though supplemented by donations from this site.
On that note, about $10K has been raised to date, about $4K of which has been spent on the laptop I use for research while travelling and a professional audio recorder (though I’m making heavier use of the video camera I purchased before I established the donation widget!). I’m currently formalising that since I was informed recently that, even though the money is donated, it does have personal tax implications for me unless paid into a trust to which I don’t have direct access. I have spent a year waiting for others to arrange that (including UWS and a couple of non-for-profit groups) but nothing has been done; so as usual I have to do it myself…
February 3rd, 2010 at 11:57 am
Re #27 yes angophera, It’s worth doing and I’ll happily post once you have something detailed. This is the sort of FIRE manipulation we have to unwind.
February 3rd, 2010 at 12:48 pm
I’ve been sitting on a new paper for a bit – hoping that I can get portions of it – preferably a series of articles – published in the popular press to counter some of the spruiking.
But with this latest release from FitchRatings
http://www.brokernews.com.au/news/mortgage-defaults-to-rise-fitch-ratings/40099
and with the recent intensification in debate about the housing bubble, it is just too timely to hold back any longer.
The report can be accessed on my revamped website on the page entitled “The Greatest Bubble in History” or directly at:
http://homes4aussies.com/h4a100131.pdf
February 3rd, 2010 at 1:18 pm
TITINT,
Re: #25. Soros seems to have profited enormously from the turmoil in the Balkans and the colour revolutions in part supported by his foundations in the region. This is worth a read:
http://www.mindfully.org/WTO/2003/George-Soros-Statesman2jun03.htm
“In Kosovo, for example, he has invested $50m in an attempt to gain control of the Trepca mine complex, where there are vast reserves of gold, silver, lead and other minerals estimated to be worth in the region of $5bn.
He thus copied a pattern he has deployed to great effect over the whole of eastern Europe: of advocating “shock therapy” and “economic reform”, then swooping in with his associates to buy valuable state assets at knock-down prices.”
Article attributed to:
NEIL CLARK / New Statesman 2jun03
bb,
Re: #26. I am convinced the FIRB changes are a bad thing. I think it will be a “long tail” issue to borrow a phrase from the Insurance industry. It will take a while for the problems to fully emerge and by then it may be too late. The good news is that there is time to get a discussion going and also there is a Federal election looming.
Steve,
Re: #28. I will start drafting a piece on the FIRB FIRE Govt nexus shortly.
homes4aussies,
Re: #29. Looking forward to reading your latest material.
February 3rd, 2010 at 1:48 pm
Steve,
I assume he asked for your permission beforehand but the international doomsayer Marc Faber has attached your case against Ben Bernanke to his latest monthly report.
Aside from his Austrian school ‘we’re-all-doomed-because-of government-and-money printing’ antics, he usually provides a good take on global market movements and different asset classes.
Jim Rogers and him would also know Soros, in case you’ve got Faber’s ear.
Also , and without wanting to sound like I’m trying to pin you down here- did you overestimate the rate of private sector deleveraging last year, aside from the extent of fiscal stimulus?
Cheers,
A
February 3rd, 2010 at 1:56 pm
More misleading statistics: Half the US PCE is comprised of economic rent.
http://www.itulip.com/forums/showthread.php?p=146070#post146070
“What is “Personal Consumption Expenditures” anyway?”
“A seemingly simple and innocent question about personal expenditures once again leads us to unexpected places, in this case through the bowels of the U.S. National Income and Product Accounts (NIPA) and Fed Flow of Funds data.
There we discovered that approximately half of the Personal Consumption Expenditures (PCE) measure appears to have little to do with consumers spending money on dinners and iPods in the Productive Economy and everything to do with paying interest on mortgages, bank fees, and other economic rents in the FIRE Economy.”
February 3rd, 2010 at 2:06 pm
Angophera and Steve re: FIRB
As with a lot of these changes, there could be positive affects if done with the right aims in mind. I strongly hold the view – having lived in central Europe for a few years – that we would be better served by having a much more professional large scale residential housing sector (so that the pandering to speculators who are chasing quick returns and ever increasing prices is less of an issue). With appropriate controls, you could have stable large scale investment that is looking for a return from a reasonable rental yield not dissimilar to the return from bond funds (probably a percent or two better). This is what I outlined in my submission to the Henry Tax review.
If done responsibly – to not add to the bubble but ameliorate it – this could lead the way and push potential local partipants to get off their bums (eg. superannuation funds)
Unfortunately I have zero trust that this would be their aim because everything I have seen from the Rudd government is about propping up the bubble. They sell their policies as helping the first home buyer or the homeless, but they really are propping up the bubble to advantage vendors, middle class voters, and the property developers that don’t mind paying $5K to sit down to lunch with a Queensland Labor politician.
Oops, is that the type of comment that they are moving towards censoring – somehow I think they know who I am and my postcode
February 3rd, 2010 at 2:13 pm
home4aussies,
I’ve read your article and I hope you are right about the correction. Given that the boost is now reduced and interest rates higher, how would you explain if prices go up in 2010?
The reason I’m asking is because to me the housing shortage story is based on objective analysis. Also you mention in your article that young buyers have brought forward their purchases. I think in the period of the last 3-4 years first home buyers have reduced participation in the market, leading to the ‘pent up demand’ story and higher rents, so it’s probably more a case of a rush of people who were biting at the bit to buy a home.
I also think that there is a premium people are willing to pay for owning their own home as opposed to renting without even considering the future price. Home ownership carries with it social contract type rewards, the financial stress is compensated by bragging rights and feeling like you are achieving something in life.
I ask you this, if the government is propping up the bubble, isn’t controlling supply one of the ways they can do this?
February 3rd, 2010 at 3:01 pm
Hi TITINT
First up, I’m saying what I think will happen – I have never said myself I hope there is a correction – but I must admit to having zero respect for people saying they care about vulnerable people and acting to the contrary.
Controlling the supply is one of the ways they could do it – and they’ve been attempting to do it. But their political donors also make money out of developing, so they had (and have) to find the balance.
Personally I think the undersupply argument is weak – and I’d use the views of Dan on Bubblepedia (backed up with Census data) and the views that Steve himself has posted here, as well as others. Obviously Garnaut found these persuasive, also.
I cannot agree with you on the pent up demand argument you raise. The JP Morgan\Fujitsu consulting data on deposits provide the evidence – if it were genuine pent up demand, then surely there would have been higher levels of savings used as deposits ontop of the grants (and it would be interesting to know what % of these deposits were gifts from parents).
No, I would expect that the genuine pent up demand is covered in the section “why credit worthy first home buyers won’t buy”
If prices were to go higher – especially at the affordable end of the market – it would need to be on the back of investors. It’s possible but unlikely in my view.
February 3rd, 2010 at 3:22 pm
Thanks for the reply homes4aussies,
Controlling supply and keeping developers happy are mutually inclusive actions. Developers who get awarded DA approvals don’t want anyone walking off the street to be given the same privilage. In my mind controlling supply benefits developers.
I haven’t looked into the arguments you mention, if you have a easy link to the specific argument I would appreciate it. The arguments against that I have seen so far are static – ie using snapshot census data and trying to work out vacancy rates. The arguments for undersupply I have seen are more dynamic in that they look at construction starts, population growth and persons per dwelling. Basically saying regardless of vacancy rates, are we building enough to satisfy population growth.
Again the pent up demand is looking at the primary evidence which is participation rate, I’m sorry I can’t point you to specific source here. Just because people are not buying a place does not mean they are saving money so looking at LVR to counter the pent up demand argument is long shot compared to looking at market participation rates with a demographic perspective.
I try to be objective, that’s all. I’m not a spruiker but I’m careful not be the opposite of that biasing the argument in the other direction.
February 3rd, 2010 at 4:24 pm
Appreciate your views TITINT. I know you aren’t a spruiker – you like to look at things from a few angles. That’s good.
A quick look at Bubblepedia front page and you’ll be right with that reference. I’ll have dig through this site for the other information I refered to – it’s basically what Garnaut quoted from Steve about building rates and household formation.
I thought of another, too – the SQM data (Louis Christopher) showing that vacancy rates are no where near as low as many would have us believe. The spruikes have used the pressure at the affordable end of the market to develop this “truism”.
We’ll have to agree to disagree about the pent up demand issue – I think genuine pent up demand from “3-4 years” would be reflected in a higher level of deposits. As I more or less said in my earlier response – the boost has brought forward the lesser prepared, mostly younger, first time buyers. The genuine pent up demand from 3 or 4 years (or more) will be more credit worthy and as such more discerning on when they lay down their cash.
And I agree with you about developers benefits – as I said, it’s a balancing act.
February 3rd, 2010 at 4:37 pm
Angophera, re the FIRB changes, i wrote to a few ministers (and shadow ministers) last year with some of the concerns you mention. Two occasions, no response!
February 3rd, 2010 at 5:24 pm
#22, #25, #27
Re: Soros
Well I think it would be wonderful if you could cooperate.
Mr.Soros is being very explicit about financial reform, not just in terms of regulation, but in underlying philosophy. In Mr.Soros’s book I mentioned earlier, he explicitly states that his success comes largely from his early recognition of the fact that markets do not tend to equilibrium as mainstream economics would have some believe.
Here is a link to contacts on his OSI.
http://www.soros.org/about/staff
Perhaps if someone on this blog could try to initiate raising awareness? There also does not seem to be an Australian represenation of OSI.
By the way, on a philosophical tangent, Mr.Soros’s concept of an “open society” seems to be closely related to Popper’s philosophies and his idea of reflexivity. In that book I mentioned, Mr. Soros recognises that an “open society” (after the disaster of the Bush admin) must *necessitate* the ‘pursuit of truth’. To avoid further convolution, the kind of scientific, objective study of human behaviour being espoused on this forum fits neatly into that philosophy, I think.
February 3rd, 2010 at 5:27 pm
On another topic. I have read that one idea gaining momentum is that the finance sector should create its own bailout fund as a solution to future banking crises. Apparently the cost of operating such an unstable system should be included in banking and finance sector fees.
I think this is a potentially disastrous and disappointing attempt at preserving the status quo.
February 3rd, 2010 at 5:33 pm
homes4aussie,
I have read your paper. A few thoughts, if I may.
Firstly, your analysis at the begining of the paper comparing rent versus buying appears to be incomplete. Sure, it is $1000 per month cheaper to rent today. But what about over the long run. My simple calculation increases your annual rent by 2.5% per annum (inflation) and the PV of these cashflow is $531k – so it would be cheaper to buy the house and allow for a $30k upfront sinking fund to cover maintenence.
Moreover, if rents increase in line with nominal income (ie: a more realistic c4% per annum), the PV of these cashflows = $800k. Therefore much cheaper to buy.
Further, the delinquency rate chart you showed would be the envy of most Western Countries. My guess is the weighted average delinqunce rate is c60bpts. Since average GNIM for a residential mortgage is 250-300bpts, there is plenty of room for delinquencies to increase, and banks to remain profitable. After that, the banks call on the remaining equity of the loan, and after that, they call on the future income of the borrower (after rent).
This brings me to my next point. To compare first home buyers in Australia to sub-prime borrowers in the US shows a lack of understanding of the credit process in Australia.
The US loans are non-recourse, and had re-draw facilities. So borrowers could use their house equity like an ATM without any personel risk or recourse. This was the equivilant to banking suicide and is unheard of in CRE (commercial real estate).
Aussie loans are full recourse. Banks gain further security from the home owner in the form of future wages. This may not be good for the borrower, but assists greatly in bank solvency. Thus the real economic LVR’s are much much lower than your chart suggests (ie: the banks lends against two assets – not one).
This is one of many reasons why local banks are rated so highly – which means your forecast of a loss of foreign funding for the local banks is a very gutsy assumption IMO.
Further, while your paper went to great lengths discrediting anyone who had a different view to you as being a “conflicted spruiker”, I could not find any compelling reason that supports the notion there is a property bubble. Put simply, if prices are way above intrinsic value, why are the suppliers of the product (developers / builders / land traders) losing money?
See here
http://www.abc.net.au/news/stories/2009/08/25/2666305.htm
and here
http://www.abc.net.au/news/stories/2009/08/12/2653424.htm
and here
http://www.theaustralian.com.au/news/australand-seeks-raising-after-269m-loss/story-0-1225755349244
Why have prices increased so much? Because the cost of production has increased. See here.
http://www.abs.gov.au/ausstats/abs@.nsf/featurearticlesbytitle/BEF19E4062997FEFCA25759A001A1E49?OpenDocument
In addition, local & state goverments charge up to $160k per lot for each new home in the form of levies & taxes. We also had a 10% GST in 2000 on building which was excluded from underlying CPI. Further the collapse of FAI/HIH in 2001 increased Home Warrenty Insurance which was passed onto the consumer (and higher profits for the likes of QBE).
House prices are expensive in Australia. However this due to goverment taxes, rising building & regulatory costs and the outsourcing of building services. While that is not to say prices can’t fall, there is no bubble (IMO).
February 3rd, 2010 at 6:36 pm
Frank,
Soros is very influential in the country I used to live. I believe his early contribution was generally positive – but some may disagree. He sponsored dismantling communism and free market reforms in Hungary and Poland.
http://en.wikipedia.org/wiki/Stefan_Batory_Foundation
But his later attempts to influence Georgia and Ukraine failed. Enormous mess was created when colour revolutions failed to deliver and a war was triggered in Georgia.
Soros should try to penetrate the Great Wall of China with his Open Society. I understand why he (and Zbigniew Brzezinski) were so obsessed with Russia. But it’s time to wake up and move on now. If he fails we in rotten Western societies may learn one day how a Closed Society works. (Well I probably know how it works – it will be your pleasure to discover).
I believe he is not a guy who will just pay for research. If he thinks he can buy Steve and use him to achieve his own goals he will do it. Otherwise he will not bother.
I am not convinced whether his views are really close to what Steve is doing. Yes there is some dynamics there but what he proposed is more a generic and rather naive model of the interaction between humans and the environment.
http://arxiv.org/PS_cache/arxiv/pdf/0901/0901.4447v1.pdf
February 3rd, 2010 at 6:38 pm
Vfe,
Re: #38. I’m late to this FIRB issue as I mentioned. I hope to make up for that if I can.
bb,
Re #41. There was an excellent synopsis of how the money is made in land development in an earlier discussion on this blog. I will try and find it and copy it to this discussion. On-costs are huge but I’ve never met a land developer who wasn’t “losing money”. They play games too.
That said, this time is for real IMO to a large extent due to hitting the “debt wall” that Steve has been warning about. That’s why I’m fired up about the FIRB issue. This looks like a case of eff the locals we’ll find buyers elsewhere. If The Great Recession turns into the Greater Depression there might be a flood of economic refugees. A cash strapped Aus Fed Govt might be happy to “sell” a passport to them.
February 3rd, 2010 at 7:14 pm
Frank @ #39,
The book The Crisis of Global Capitalism: Open Society Endangered by Soros is certainly worth reading, even if it is rather light for general economic theory. His thinking is more advanced than that of neoclassical theorists.
bb @ #41,
According to the best real construction cost index I could find, such costs have not had influence of property prices. In fact, they are lagging real property price increases. (I’ve uploaded the image file using the new function that Steve has added, I hope it works).
Source: Stapledon, Nigel D. 2006. “Long Term Housing Prices in Australia and Some Economic Perspectives,” Ph.D Thesis, University of New South Wales, p. 108.
February 3rd, 2010 at 7:42 pm
bb
Thanks for your detailed response, and you certainly may.
You know why – I would love to be convinced that it would be the right decision to buy – it would be nice for my family, and it would ease some guilt I have for occupying a rental place. If it were a good decision to buy, then a lot of that genuine pent up demand would do so, and put some downward pressure on rents in the affordable range.
Alas your comments come nowhere near it, and I will do my best to explain why I have that view.
I never said it will never be a good decision to buy – just not at these prices. Your point about rental increase of course is correct. But you neglect to consider that the amount saved can be invested at a good return.
All of this is inferred as I chose my words carefully around key sentences. I admit that it is not spelt out – that is actually intentional – I err on the side of making the analysis simple so as to be understood by a broader range of readers. Remember, a large part of my aim is to give young Aussies some tools to think through their own decisions. Make it complicated and the target audience will not be able to understand and will switch off. The simplicity that I impose is then counterbalanced by making the assumptions lean towards the null hypothesis (ie. advantage the buy side of the argument) – eg. since when are basic ownership costs on a $500K house going to be only $2,600??
With regards delinquency rates, agreed – envy of the world. But they haven’t been tested either. In my earliest paper on delinquency rates on my website you might like to read some of the choice quotes from analysts with regards the credit quality of US RMBS even as the subprime crisis was unfolding. Illuminating!
Delinquency rates are really tested when markets stagnate or begin to fall. And if I’m right, we are going to see that test arrive here in Australia soon, so let’s see how things develop.
But I will say that I had a good chat some time back with an analyst who was modelling Aussie residential mortgage delinquency rates. Some very high rates were being quoted – and that was well before the vendor’s boost. (This was a Government agency.)
I would have to admit that I have little handle on the development costs. But I do know that prices have more than trippled in less than 8 years in the market with which I am most familiar. And I cannot imagine that the actual $ amounts has a lot to do with real costs increases – it is much more likely a reflection of opportunism by business and government. And that can and will be unwound.
And yes, as angophera says above, the credit crunch is affecting those costs in itself – many businesses become less profitable or non-viable when funding costs increase, especially after a prolonged period of easy credit.
But more importantly, as you say, the actual cost of production does not mean that prices can not come down because essentially the price of anything is what somebody is ultimately prepared to pay. If buyers decide that owning a home is not worth the financial and personal imposts at a certain price, when there is an essential product of basically the same quality but for much lower price, then no amount jawboning will get the buyer to pay for the new product. In order to move inventory the business may need to consider writing down the value of it’s assets – happened a bit to developers last year, but the Government shifted a lot of the revaluation pressure to the public purse – “thanks Kev – when is your next lunch”
Finally bb, I’d really be interested if you can tell me the names of 5 well known Aussies who think that we do not have a bubble AND have no vested interest in property prices remaining stable or increasing (and of course, politicians and bureacrats are not an acceptable choice – they are as conflicted as spruiker).
I’ll happily real off 6 that think we have a massive bubble but have absolutely no vested interest in property prices going down
1. Steve Keen (got to be number 1)
2. Prof Ross Garnaut
3. Adam Schwabb
4. Scott Pape (barefoot investor)
5. Stephen Walters
6. Gerard Minack
February 3rd, 2010 at 7:46 pm
bb @#41,
Increased availability of credit affects prices and costs right down the line as everyone in the chain (developers, builders etc.) takes their cut.
I don’t see any evidence of the causality you are claiming. Credit growth causes higher prices and allows costs to be raised to what the market can now bear (with credit).
By the way, developers and builders only started losing over the last couple of years. Steve’s thesis and others is that this is a multi-decade bubble.
Think about it this way – imagine a country where even you agree there is a bubble. Do you think the cost of new land and the cost of new buildings would not increase in line with the bubble? If not, why would anyone buy existing properties?
February 3rd, 2010 at 8:26 pm
I think this all depends a bit on how we define what a bubble is, however the current debate seems to be centered around the causes and sustainability of the current prices, which no matter how you look at it are very high.
In their own way everyone that has posted so far is right, the trick is to find the perspective from which this is the case.
Of course increase in credit will drive up prices. Of course increase in construction cost will drive up prices. These things are not mutually exclusive. Most things we are arguing here are not. Just because there is some pent up demand it doesn’t mean that some people have not brought forward their purchases.
Another one worth a mention is increased credit could cause an increase in employment while at the same time increased employment could cause increased credit. The economy isn’t a variable on a chart. Different things can happen all at the same time. If it is at all feasible at a micro level, than it is happening somewhere, and at the micro level a lot of things are feasible.
If you accept that and then start arguing it’s more this than it is that, it becomes an opinion unless you can verify statistically that it is the case. In such a complex system, it takes more than a chart of a few selected variables to convince me however. We have a tendency to draw one dimensional conclusions from two dimensional charts.
The opinion I have formed so far on the market is as follows. I don’t see how the market could go up much further, there is certainly a limit to how much of their future incomes people can promise to a bank. I also don’t believe that prices can fall either because I am pretty convinced by the shortage argument which is more of a strong population growth argument.
Of course things are so much more complex than that and my view is really an accumulation of different considerations.
What I am thinking about at the moment is how it works when people pass on their properties to their kids or upgrade. I mean in terms of value. A lot of the arguments are based on the first home buyer, and this is intuitively simple because it is not a complicated situation from a value perspective – the choice is rent or buy, sum up your cashflows add a “ownership” premium and you can have a comparison. But with people who already have a home and look to upgrade or invest the consideration becomes not as simple. What is the value in this case, how do you put a value on the home they live in or a potential upgrade. What vexes me is that I see some potential for this type of upgrade mechanism to explain at least some pressure on median prices.
February 3rd, 2010 at 9:33 pm
Re #31.
Yes I did overestimate the rate of private sector deleveraging here alex78–or rather more correctly I underestimated how successful government policy would be at reversing that deleveraging.
The image I hope is attached below(!) shows the impact the First Home Vendors Boost had on debt levels in Australia: while business debt has dropped dramatically, the increase in mortgage debt has been so great that deleveraging has been stopped in its tracks, and debt levels are now rising again compared to GDP.
Do I expect this trend to continue? Not on your nellie: the FHVB delayed deleveraging, it hasn’t prevented it. And the household sector will now be deleveraging from a higher level, and with more vulnerable borrowers in the firing line, than would have happened without the FHVB.
February 3rd, 2010 at 10:43 pm
Steve,
Is there an option within WordPress to add multiple rather than single images?
February 3rd, 2010 at 11:15 pm
TITINT
Bringing up whether or not it’s a bubble reminded me of the post I left this morning on the earlier thread – it got lost in a very active conversation. And I thought it follows on from your last comment so I’ve reposted the link below.
In any discussion of whether we have a bubble surely it is very worthwhile comparing what we have witnessed in our markets with the most recent “declared” housing bubble.
http://www.bubblepedia.net.au/tiki-view_forum_thread.php?forumId=7&comments_parentId=3732