Inter­view on Ten’s The 7pm Project

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After Aus­tralian house prices rose 20 per­cent in one year, everyone’s talk­ing a bub­ble.  Chan­nel Ten’s new(ish) avant-garde cur­rent affairs pro­gram asked for my per­spec­tive on the day the RBA yet again increased inter­est rates.

After lead­ing in with the news and a fea­ture on Neil Rober­ston, the 26-year-old Aus­tralian snooker player who won the World Cham­pi­onship, the story on house prices began 4 min­utes and 5 sec­onds into the video below.

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  • sj

    We are all Key­ne­sian now!
    Key­ne­sian is only one thing gov­ern­ment inter­ven­tion large cen­tral plan­ning to wipe out very slowly those nasty pru­dent pro­duc­tive peo­ple.
    Mantra for Key­ne­sian fol­low­ers is “No pain for any­body except those nasty savers.”
    Pro­duc­tive peo­ple are the savers,small busi­ness­men and large for­eign investors.
    Key­ne­sian pol­i­tics of envy, works very well in elec­tion year.
    Glenn Stevens verses Steve Keen.
    Strong fiat cur­rency verses gold.
    Key­ne­sian fol­low­ers are decent peo­ple they think naively if nice peo­ple are in power large cen­tral plan­ning will work well for human­ity, by keep­ing inter­est rates below the rate of real infla­tion.
    Unfor­tu­nately his­tory is against you it paves the way for large bub­bles and power hun­gry indi­vid­u­als.
    Fed­eral Reserve was born in 1913 by Woodrow Wil­son the great cen­tral plan­ner for gov­ern­ment inter­ven­tion.
    FED fail­ure in inter­est rate pol­icy is very clear to every­one.
    Woodrow Wil­son had a stroke in 1919.
    It was a stroke of luck for the Amer­i­can peo­ple, Vice Pres­i­dent did noth­ing in the finan­cial cri­sis of 1920.
    Defla­tion in 1920 bank­rupt the unpro­duc­tive spec­u­la­tive greedy investors.
    Defla­tion hap­pen for one year then America’s great boom of the 1920s took off.
    Good exam­ple of 1920 defla­tion being less painful,quicker and more effec­tive.
    Lit­tle infla­tion in eco­nomic his­tory always ends with hyper­in­fla­tion.
    Sadly,hyperinflation causes vio­lent bloody rev­o­lu­tions.
    Gold bugs be very care­ful the story of hyper­in­fla­tion maybe wrong.
    Tea par­ties in USA are a clear sign the “peo­ple” are not docile,people will not tol­er­ate money print­ing and large gov­ern­ment cen­tal plan­ning.
    Defla­tions works!

  • bb


    Thanks for your feed­back.

    If I am read­ing you cor­rectly, your posi­tion is

    1. The tax sys­tem encour­ages invest­ment which unfairly prices-out owner occu­piers / first time buy­ers. ie “a large pro­por­tion who get out­com­peted by investors who have cer­tain advan­tages includ­ing pol­icy relat­ing to real estate invest­ment”

    2. A sys­tem which allows peo­ple to bor­row 100% for the mar­ginal prop­erty (using exist­ing equity as col­lat­eral), will per­manetly price-out gen­uine buy­ers.

    My response to both these issues would be

    1. No-one really has an unfair advan­tage via the tax sys­tem, since the sys­tem is there for every­one. The young will say they need a large deposit before they can buy any­thing (true), but they also ignore one of their great­est assets — work dura­tion.

    2. In my view, prices can not stay above replace­ment cost for any mean­ing­ful period of time. This is because it encour­ages sup­ply. We are already see­ing this in the data.

  • bb

    Huggy @ 66,

    When the crash comes it will be par­tic­u­larly ugly, and there will be many con­fus­ing sig­nals. For exam­ple, peo­ple will imme­di­ately assume defla­tion­ary forces take over but, like here in the UK, you might find that when the AUD crashes into the 60c area that the infla­tion­ary impact is sever. So the RBA will ini­tially panic on the crash and then have to look through ris­ing CPI prints. Nasty stuff indeed.”

    Not sure a lower $A leads to infla­tion. I know that is what the text book sug­gests, but In Aus­tralia our dol­lar fell to 47c in 2001. I KNOW BECAUSE I WAS ON MY HONEYMOON IN NEW YORK — OUCH!

    How­ever, Aussie infla­tion in 2002 stayed well within the 2–3% tar­get range.$File/640101.xls#A2325846C

  • TruthIs­ThereIs­NoTruth


    I kind of feel like you put that one up there for me to spike.

    That’s pretty much exactly what I am say­ing and you’re responses are right if you ignore one impor­tant detail. 

    The intro­duc­tion of these laws cre­ated oppor­tu­ni­ties for the peo­ple who were in the posi­tion to take advan­tage of them at the time. Since then as mea­sured by the first home buy­ers per­spec­tive prices have been increas­ing out of reach. This is the period where the invest­ment value of prop­erty gets priced in. For the cur­rent gen­er­a­tion of poten­tial first home buy­ers, it is like join­ing a game of monop­oly half way through the game.

    Your counter argu­ment in regards to sup­ply side reac­tion would also be cor­rect, if you assume homo­gene­ity between all prop­er­ties. Because of the geo­graph­i­cal and infra­struc­ture con­straints, most of the avail­able cheap sup­ply is avail­able in unde­sir­able and unfea­si­ble areas. 

    At this stage of the game first home buy­ers sim­ply can­not com­pete with investors. Investors are not con­strained by deposits and are allowed to lever­age 100%. Investors are also not as sen­si­tive to inter­est rate and price fluc­tu­a­tions. In fact for the estab­lished investor, falls in price present buy­ing oppor­tu­ni­ties.

  • ned

    Hey titint,

    I like that one “For the cur­rent gen­er­a­tion of poten­tial first home buy­ers, it is like join­ing a game of monop­oly half way through the game.”


    Of the total monthly mort­gage debt issued, what would be the expected monthly per­cent­age of mort­gage debt being taken on by 1st home­buy­ers 2nd upgraders 3rd upgraders etc as a per­cent­age of the total?

    I would have thought roughly 65% of all mort­gage debt issued would be for 1st 2nd and 3rd etc (owner occu­piers)

    Investors roughly 35% (rental)

    At present mort­gage debt for 1st 2nd 3rd etc (owner occu­piers) is only 26.5% of total monthly mort­gage debt being issued!

    That’s less than 1/2 what I would expect!

    Any expla­na­tions?

  • bb


    Not sure I fol­low the “half way through Monop­oly game”.

    If you are talk­ing about neg­a­tive gear­ing, this has been in place for over thirty years. Plenty of peo­ple have man­aged to afford a home dur­ing this time.

    I agree, homes are not homoge­nous. But when new houses are being built for $450-500k on the fringe, and peo­ple are con­cerned that $600k for the median is too high…well, that tells me the value still exists in exist­ing sub­urbs.

  • TruthIs­ThereIs­NoTruth

    In regard to your first point I think the key sta­tis­tic to look at over the period since the intro­duc­tion of neg­a­tive gear­ing is the price to income ratio and take into account income of first home buy­ers would be lower than the national aver­age. I’m not sure but there may also be some income con­ces­sions if you use the prop­erty as part of your retire­ment port­fo­lio, but for sure once a per­son retires the tax on the rent income would also decrease. Yes peo­ple have and still can afford to buy a home, but decreas­ingly so, afford­abil­ity is clearly dete­ri­o­rat­ing.

    On the sec­ond point, if there are houses out there which cost less than the con­struc­tion price that sug­gest exactly that those prop­er­ties are in unde­sir­able and unfea­si­ble areas.

  • ak


    I believe that neg­a­tive gear­ing can­not be defended from con­ser­v­a­tive-lib­eral posi­tions (this is the great­est dis­tor­tion of the free mar­ket mech­a­nism one can imag­ine)
    and from the left wing posi­tions (because it is unfair and penalises young peo­ple or migrants).

    It is the pop­u­lar­ity of neg­a­tive gear­ing what will undo the marked when the prices stop ris­ing for what­ever rea­son. These guys have no rea­son to hold on to assets when they stop mak­ing cap­i­tal gains. They will have to sell to cut off the loses.

    Once the heav­ily mort­gaged first home own­ers get into neg­a­tive equity we can expect the sec­ond wave.

    Think about dead wood mak­ing an ordi­nary bush­fire a dis­as­ter because small fires have been put off for 30 years. With­out dead wood only grass and leaves can burn. But there is a lot of dead wood in our forests…

    This will be our own sub­prime loans cri­sis. In my opin­ion it is inevitable sooner or later but I don’t know when and how it is trig­gered. It doesn’t have to be 40% drop, it may be less if the Gov­ern­ment steps in …

    Aus­tralia is not dif­fer­ent and it will not be dif­fer­ent this time.

  • bb


    No sure we will ever resolve this. I sim­ply do not agree neg­a­tive gear­ing affect house prices over the long term. Of course I can’t prove it (i don’t think any­one can), but my main argu­ments are;

    1. Neg­a­tive gear­ing has been in place for over thirty years (maybe even longer, but I cant find a rel­e­vant link)

    2. Cer­tainly since the 1980’s homes were afford­able — espe­cially com­pared to today

    3. Seri­ous price growth started the mid 1990’s (start of the so called bub­ble) and began 15 years AFTER, neg­a­tive gear­ing

    4. price growth reflects numer­ous fac­tors. How­ever IMO, the main fac­tors are;
    — cost of con­struc­tion (sup­ply side)
    — Eas­ier / bet­ter credit prod­ucts (demand side)

    5 The­o­ret­i­cally, higher house prices (caused by amongst other things, tax deductabil­ity), leads to new sup­ply. This is hap­pen­ing today. Even if this sup­ply increases in fringe loca­tions (unde­sir­able), his­tory proves it has a knock on effect across the entire sub-mar­ket (ie: Syd­ney 2003)

    Check out sup­ply growth 2000–2004 Syd­ney)
    2000/01 18.9k
    2001/02 27.3k (up 44%)
    2002/03 25.0k
    2003/04 23.1k

    2006/07 15.8k
    2007/08 15.6k$File/8731001.xls#A418458A

    Then see what the sup­ply boom did to prices.!OpenElement&FieldElemFormat=gif

    Per­haps we may just have to agree to dis­agree.

  • ak

    Cer­tain things seem to be inevitable.

    (Reuters) — The Euro­pean Cen­tral Bank will buy euro zone gov­ern­ment bonds to help sup­port frac­tured mar­kets, aban­don­ing firm resis­tance to full-scale asset pur­chases in light of Greece’s debt cri­sis.”

  • Philip

    mar­venger1 @ 70,

    I agree with what you say; there is only par­tial evi­dence at best that unsub­si­dized mar­kets actu­ally exist. Since the 1970s, there has been a mas­sive state-cap­i­tal­ist pro­pa­ganda cam­paign car­ried out to con­vince the pub­lic that we have a free® mar­ket econ­omy. It takes only a bit of research to find out this is just a load of crap.

    There are sec­tions of the econ­omy where mar­kets are inefficient/unworkable: edu­ca­tion, health, R&D, trans­port, defense, law, etc. and it makes sense not to have mar­kets. Oth­er­wise, the rest of the sup­pos­edly pri­vate econ­omy is sat­u­rated with state sup­port: cor­po­rate char­ters, intel­lec­tual prop­erty rights, cen­tral bank­ing, restricted trade for highly-paid pro­fes­sion­als, pref­er­en­tial tax treat­ment, FTAs, crim­i­nal­ized drugs, sub­si­dies, bailouts, etc. The econ­o­mist Dean Baker cov­ers some of this in his excel­lent book The Con­ser­v­a­tive Nanny State: How the Wealthy Use the Gov­ern­ment to Stay Rich and Get Richer.

    I think the rea­son for the pro­pa­ganda cam­paign over the years is that it is a dif­fi­cult task for the rich to strip away ben­e­fits for the mid­dle & work­ing class while they (mil­lion­aires, bil­lion­aires, exec­u­tives, direc­tors, share­hold­ers, spec­u­la­tors, fund man­agers, etc.) are been lav­ishly sub­si­dized by the wel­fare state. So the pre­tense is made that the rich live by the rules of the free mar­ket and thus every­one else should be made to live by them as well.

    The ide­ol­ogy is inter­est­ing in that it equates pri­va­ti­za­tion to the free mar­ket. A great deal of the pri­vate sec­tor has its mar­kets rigged to ensure that wealth flows to the rich. In fact, the only pri­vate aspect of the pri­vate econ­omy is that prof­its are pri­va­tized. The phrase ‘pub­lic sub­sidy, pri­vate profit’ seems apt.

    If one exam­ines our insti­tu­tions, it will be found that the state has a griev­ous flaw: it is poten­tially demo­c­ra­tic, mean­ing that the pub­lic at least has a chance to influ­ence pol­icy in cer­tain direc­tions. I think that peo­ple will be bet­ter off once they real­ize our won­der­ful demo­c­ra­tic free mar­ket econ­omy has very lit­tle to do with democ­racy and mar­kets.

  • TruthIs­ThereIs­NoTruth


    The essence of what I was say­ing wasn’t that the main fac­tor in ris­ing prices is neg­a­tive gear­ing. I pre­sented a mech­a­nism which seems to explains a few things, includ­ing ris­ing debt.

    I think Philip’s post fits nicely into what I am say­ing, in the sense that the idea of a free mar­ket is really just an idea which is used to present this kind of mech­a­nism, which in essence make the rich richer and the poor poorer under the ban­ner of free mar­ket. Free mar­ket is what you can call it, but you could cre­ate any num­ber mech­a­nisms and call it free mar­ket. The mech­a­nism in Aus­tralian Real Estate effec­tively per­pet­u­ates the gap between rich and poor. In pure hypo­thet­i­cal cap­i­tal­ism it’s nec­es­sary to have rich and poor but by prin­ci­ple the free mar­ket should reward pro­duc­tiv­ity with wealth, where pro­duc­tiv­ity may include good allo­ca­tion of resources. How­ever this is not what is hap­pen­ing here. I can’t under­stand how buy­ing exist­ing homes for invest­ment is pro­duc­tive on the part of the indi­vid­ual investor.

    My point in terms of neg­a­tive gear­ing is that the gov­ern­ment favours investors at the expense of poten­tial first home buy­ers. It doesn’t mean that neg­a­tive gear­ing is the only fac­tor for deter­min­ing price.


    Neg­a­tive gear­ing real estate is for the finan­cially illit­er­ate cap­i­tal allo­ca­tors who wish to sub­sidise the bank­ing indus­try and renters with their wage. Usu­ally their entire net worth is pledged and they earn a return free risk with a highly asy­met­ric chance of total bank­rupcy.

    A fool and his money are soon invited every­where

  • mar­venger1


    I prob­a­bly don’t know enough about democ­racy to say too much about its oper­a­tion but I’m con­vinced there’s no such thing as a free mar­ket and you bring up many per­ti­nent exam­ples to show this. The half truths expounded by gov­ern­ment and busi­ness about free mar­kets has cer­tainly served a small por­tion of the pop­u­la­tion extremely well in a mate­r­ial and power sense. I’m not sure how you do it but I believe there needs to be a far more par­tic­i­pa­tory envi­ron­ment where the incen­tives are far dif­fer­ent, more broadly and long term focused, from the cur­rent car­rots and sticks of cor­po­rate life. In this envi­ron­ment I believe qual­ity ideas will be given a chance to thrive rather than peo­ple being forced into Dar­win­ian com­pe­ti­tion for money and power. How do peo­ple change in spite of them­selves?


    All ponzi finance schemes require increas­ing quan­ti­ties of dumb money to flow into the scheme to sup­port the pyra­mid.

    At present the entire par­a­sitic finan­cial sec­tor is on the precipice and des­per­ate for new play­ers…

    Presently only 26.5% of all new mort­gage debt is bor­rowed by owner occu­piers… This ponzi scheme is run­ning out of new dumb money!

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