More on the Com­mon­wealth Bank

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My last post on the Com­mon­wealth Bank’s “there’s no hous­ing bub­ble in Aus­tralia” doc­u­ment focused sim­ply on the use of two dif­fer­ent data sources for the House Price to Income ratio; I left the argu­ments the bank made untouched.

Not so David Llewellyn-Smith, who ran a logician’s eye over the bank’s doc­u­ment and found “logic” of Monty Python “if she weighs more than a duck, she’s a witch” cal­i­ble. David pub­lished this post in the Henry Thorn­ton blog, and he has kindly con­sented to me repro­duc­ing it here.

Determined to be difficult

Every­one has seen the ads. A sturdy and com­mon sense banker con­fronts a troupe of Amer­i­can adver­tis­ing hot shots. The banker responds with steady incredulity to their fast and loose attempts to mod­ernise his brand. He is the model of pru­dence, jux­ta­posed against fad­dish spin doc­tors.

In the real world, Com­mon­wealth Bank (CBA) exec­u­tives are cur­rently trav­el­ing inter­na­tion­ally (includ­ing to, pre­sum­ably, Amer­ica) to do more than dis­pense with a fic­ti­tious adver­tis­ing agency’s fool­ish ideas. They have, in the bank’s own words, gone “over­seas to meet with some of the Group’s off­shore share­hold­ers and other investors inter­ested in Aus­tralia and the Aus­tralian bank­ing sec­tor.”

Though the goals of the trip are no doubt myr­iad, last week’s press release herald­ing their depar­ture came com­plete with a 19 page pre­sen­ta­tion that will be used on the trip to reas­sure inter­na­tional investors that there is no Aus­tralian hous­ing bub­ble. It included directly refuted quotes from such notable hous­ing bears as Mor­gan Stanley’s Ger­ard Minack and GMO’s Jeremy Grantham. CBA man­age­ment has set sail on a bub­ble-bust­ing road­show.

Given the stake we Aus­tralians have in this lit­tle exer­cise, it is fit­ting that we assess how the fun­da­men­tals of our hous­ing mar­ket are being rep­re­sented around the world by our biggest bank. Is the pre­sen­ta­tion likely to reas­sure foot­loose global investors, now acutely aware of the dam­age a hous­ing bust can do to their cap­i­tal? Per­haps, but only if they are closely related to the dun­der­headed Amer­i­cans that CBA uses so cal­lously in its own ads.

The pre­sen­ta­tion begins with the argu­ment that “tak­ing into account geo­graphic dif­fer­ences, the ratio of house prices to income in Aus­tralia is not that much dif­fer­ent to most other com­pa­ra­ble coun­tries.” The doc­u­ment pro­vides some nice slides and graphs mak­ing the com­par­isons clear. And they look rea­son­able enough, except that the sta­tis­tics aren’t explained. We don’t know what income mea­sures are being used, nor what median prices.

Worse still, as Money Morn­ing uncov­ered Fri­day, the sta­tis­tics are cherry-picked from dif­fer­ent sources to ensure the most favor­able com­par­isons.

But the lack detail in the pre­sen­ta­tion is quickly for­got­ten as CBA’s argu­ments sink into a fal­la­cious morass. Accord­ing to the bank, “Aus­tralia is the 4th least densely set­tled coun­try in the world — 83% live within 50 kms of the coast. Coastal loca­tions demand a pre­mium – Australia?s pop­u­la­tion con­cen­tra­tion in capital/coastal cities dis­torts com­par­isons to other, more densely set­tled coun­tries.”

You’ll for­give this writer if he points out that if 83% of Aus­tralians live in coastal cities then that surely con­sti­tutes 83% of the hous­ing mar­ket. There is, there­fore, no greater mar­ket against which a pre­mium for coastal prop­erty can be justified–as opposed to other nations, where an even spread of pop­u­la­tion means there is ele­vated demand for coastal liv­ing as a reward for suc­cess. Nor has there has been a great Aus­tralian exo­dus to the coast from the bush in the past fif­teen years. We’ve always lived by the seashore.

The CBA argu­ment would still make sense if it were posi­tion­ing Aus­tralian cities in a con­text of global demand for coastal liv­ing but it is clearly not doing so. CBA’s logic is sim­ply that because coastal prop­erty every­where is expen­sive, and Aus­tralia has largely coastal prop­erty, then Aus­tralian prop­erty is jus­ti­fi­ably expen­sive.

Aris­to­tle would turn in his grave.

CBA’s sec­ond argu­ment begins: “pop­u­la­tion growth has been a key dri­ver of Aus­tralian house price appre­ci­a­tion” and offers a series of graphs show­ing that growth above his­toric aver­ages as well as falling hous­ing starts since 2005.

This ratio­nale does help account for the 50 per cent or so rise in median house prices from 2005 when the com­mod­ity boom prompted skills short­ages and immi­gra­tion rose strongly. I say helps explain it, because that is still not enough. It’s a ker­nel of truth around which an invest­ment fer­vor gath­ered pace.

What CBA doesn’t men­tion nor explain is the prior 8 year burst in prices of approx­i­mately 120 per cent, dri­ven largely through rock­et­ing demand for invest­ment mort­gages, up 308% over the period.

To under­stand that, CBA turns to its third argu­ment, that there are “other dri­vers of house price appre­ci­a­tion [that] are struc­tural, rather than cycli­cal in nature”. Accord­ing to the bank, “Australia?s low inflation/low inter­est rate envi­ron­ment has dra­mat­i­cally increased the demand for, and acces­si­bil­ity of credit.” CBA then con­cludes “On RBA esti­mates, the reduc­tion in mort­gage rates dur­ing the 1990’s expanded the poten­tial hous­ing mar­ket by 600,000 house­holds. Absent a dra­matic response from the sup­ply side, a large part of the lift in val­u­a­tion ratios is a per­ma­nent struc­tural shift.”

Those who inter­pret Aus­tralian house prices as a bub­ble would hardly dis­agree that a period of his­tor­i­cally easy credit is a major cause of asset-price growth. But for the pur­poses of CBA’s pre­sen­ta­tion, that is not the impor­tant point. The main claim is that this is a “per­ma­nent struc­tural shift” and it makes it with­out a jot of evi­dence. There is no analy­sis of infla­tion­ary dynam­ics in the Aus­tralian econ­omy. No men­tion of the effect of com­mod­ity prices. No break­down of labor mar­ket trends. Noth­ing about capac­ity util­i­sa­tion. Nor is there is any men­tion that the sup­posed same “per­ma­nent struc­tural shift” was thought to have occurred in the US, where it was dubbed the Great Mod­er­a­tion and cul­mi­nated in the mother of all cycli­cal busts.

The fail­ure to address this point with evi­dence is a key fail­ing in the report given Jeremy Grantham has stated that the Water­loo for the bub­ble will come with higher inter­est rates.

The same fail­ing is also espe­cially unfor­tu­nate given that this pre­sen­ta­tion is likely to be aimed in part at the global bond­hold­ers who deter­mine the inter­est rate at which CBA bor­rows its whole­sale dough and, there­fore, in part, Aus­tralian inter­est rates. For them, the bank isn’t argu­ing an objec­tive case for con­tin­u­ing low inter­est rates, it is assum­ing those rates will be forth­com­ing and argu­ing that that will sus­tain house prices. Need­less to say, this is dan­ger­ously cir­cu­lar.

Unde­terred, the CBA pre­sen­ta­tion ploughs on. Next it claims that “the house­hold debt ratio in Aus­tralia is sim­i­lar to many other devel­oped coun­tries”. Again it offers a pretty graph, this time of Australia’s house­hold debt as a per cent of house­hold dis­pos­able income as com­pared with the UK, NZ, Canada, US, Japan and Ger­many.

The prob­lem with this item is that Aus­tralia is sec­ond only to the UK, the other mar­ket iden­ti­fied by Jeremy Grantham as hav­ing the last of the great hous­ing bub­bles. More­over, it is clear in the graph that Aus­tralia is in a much worse sit­u­a­tion than US house­holds and almost twice as bad as the sit­u­a­tion in Ger­many. If any­thing, the graph makes it star­tlingly clear just how enor­mous Australia’s hous­ing bub­ble has become.

At this point, if I’m an inter­na­tional investor, I’m think­ing ‘we gotta short these chumps’.

The presentation’s next argu­ment is based upon the demo­graphic dis­tri­b­u­tion of mort­gage debt, in par­tic­u­lar its con­cen­tra­tion in those classes that can most afford it. It is fine as far as it goes.

The final two argu­ments are about strong eco­nomic fun­da­men­tals min­imis­ing “the down­side risk to house prices” and his­tor­i­cally low loan-loss rates for Aus­tralian banks through var­i­ous hous­ing cycles since 1988.

Both of these argu­ments are fair enough but again rely on hid­den assump­tions. Aus­tralian bank’s loan-loss rates are low but the same con­sis­tent returns and small losses can equally be explained by the work of Hyman Min­sky. Busi­nesses that bor­row to repay other debts dis­play just such a pat­tern, until investors cot­ton on and begin to with­draw funds. At that point the losses rocket.

Now, let’s get real. The point of this analy­sis is not to pre­dict an immi­nent hous­ing crash. In fact, con­di­tions are not yet ripe for the reck­on­ing of the great Aus­tralian hous­ing bub­ble. It would have hap­pened in 2008 when global mar­kets closed to whole­sale Aus­tralian bank debt, but was post­poned by a strong Fed­eral Bud­get that sup­ported both the asset and lia­bil­ity side of the banks’ bal­ance sheets. The will­ing­ness of the Fed­eral gov­ern­ment to sup­port the bub­ble means the reck­on­ing can only come when the Bud­get also finds itself under pres­sure from a more seri­ous and long-term cor­rec­tion in com­mod­ity prices or, as Grantham has hypoth­e­sised, from a burst of seri­ous infla­tion.

But in the mean time we might rightly ask: Is CBA’s rep­u­ta­tion in global mar­kets cur­rently so at risk that it need resort to the spin pil­lo­ried in its own adver­tis­ing?

About Steve Keen

I am Professor of Economics and Head of Economics, History and Politics at Kingston University London, and a long time critic of conventional economic thought. As well as attacking mainstream thought in Debunking Economics, I am also developing an alternative dynamic approach to economic modelling. The key issue I am tackling here is the prospect for a debt-deflation on the back of the enormous private debts accumulated globally, and our very low rate of inflation.
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    Have you ever read this report from BankWest?

    A bank with a slightly dif­fer­ent opin­ion to your­self and the CBA

  • Steve,

    I obtained the fig­ure in #35 sim­ply by mul­ti­ply­ing the Good­win oscil­la­tor — (1-u)/? by 1/p where p is the price level com­puted from the his­tor­i­cal infla­tion rate. I argue that the price level is a mea­sure of the entropy in the sys­tem. Infla­tion cre­ates such a house of mir­rors that the sim­ple met­ric “1” has to be replaced by “1/p” to make any sense of any­thing.

    The fig­ure has some nice fea­tures:

    (1) The loss of wage share due to infla­tion;
    (2) The arti­fi­cially high employ­ment rate 1940 to present due to loss of wage share;
    (3) The length­en­ing of the busi­ness cycle due to dis­si­pated pur­chas­ing power 1/p;
    (4) The wage share rebound due to NAFTA and GATT which led to the “Great Mod­er­a­tion” which led to the hous­ing boom crash of 1997–2006.

    This sim­u­la­tion, with­out any tweak­ing, shows that after 4+% infla­tion since 1940 the GFC arrives right on sched­ule. Fur­ther, it pre­dicts that return­ing to non-infla­tion­ary cur­rency is not enough to restore a robust busi­ness cycle due to the built in too-high price level. To clear the mar­kets, a defla­tion­ary col­lapse of prices and wages is nec­es­sary.

    The Min­sky hypoth­e­sis with debt accu­mu­la­tion has a sim­i­lar entropic result, but the argu­ment that cap­i­tal­ism has an inher­ent flaw is incor­rect. The fault lies, rather, in the inflat­able money sys­tem.

    There is more at

  • 707338

    Elliot­wave, are you buy­ing gold in AUD?

    Three months ago I decided to invest in the “safety” of gold when it was at $1,205(US) $1,419(AUD).

    Since then the USD price of gold has indeed climbed steadily higher as you say but in Aus­tralian dol­lars my invest­ment has gone BACKWARDS (now close to $1,280 US but only $1,355 AUD).

    As gold is denom­i­nated in USD I have come to realise that an invest­ment in gold is effec­tively a forex invest­ment in USD!

    Over the last three months it appears gold has not actu­ally risen — the USD has sim­ply weak­ened thereby giv­ing the illu­sion of a ris­ing gold price. 

    I believe the USD is head­ing fur­ther south (thereby cre­at­ing the illu­sion of gold head­ing north) but whether gold goes to $1,650 or $5,000 US is irrel­e­vant — it’s what it would be worth in AUD that mat­ters to me!

    So far it has not been a prof­itable invest­ment for me.

  • Gam­ma_home

    bb @ 96

    Hence net rent = $17,840
    Net yield = 3.25%
    now assum­ing…
    Long term rent growth = 4.5% (nom­i­nal wage growth)
    Total return = 7.75% (yield plus growth)

    Assum­ing 80% LVR at 7.5%
    Cost of fud­ing = 6.0%

    net return 1.75% on 20% equity = 8.7% return”

    You have effec­tively assumed 4.5% cap­i­tal price growth in your above exam­ple, so if you’re try­ing to prove that prices are going up (by show­ing the pos­i­tive returns avail­able), then your con­clu­sion is implied by your assump­tions, it’s is just a cir­cu­lar argu­ment.

    So what if we re-do the cal­cu­la­tion for some other price assump­tions?

    Price growth = 4% -> ROE = 6.2%
    Price growth = 3% -> ROE = 1.2%
    Price growth = 2% -> ROE = –3.8%
    Price growth = 0% -> ROE = –14%
    Price growth = –4.5% -> ROW = –36%

    So if prices just stag­nate you are los­ing money badly on this invest­ment (not tak­ing into account tax, which could make a dif­fer­ence depend­ing on indi­vid­ual cir­cum­stances).

    The breakeven point is around 2.76% price appre­ci­a­tion.

    I’ve done this cal­cu­la­tion many times for sim­i­lar prop­er­ties. To me the risk/reward just doesn’t make sense.

  • elliottwave


    Do not be wor­ried with your invest­ment, i mean insur­ance pol­icy, in gold.

    It will pay­off.

    You can­not be wrong when buy­ing gold it is in a sec­u­lar bull mar­ket and that bull mar­ket will cor­rect all of the mis­takes that you make when buy­ing it.

    Please rest assured that every­thing will be fine and that you have made the right deci­sion in pur­chas­ing a valu­able insur­ance pol­icy.

    Remem­ber you buy gold not to make money, but because you have money.

    Keep dol­lar cost aver­ag­ing every month and you will find that your accu­mu­la­tion will be reward­ing.

    No need to be in a hurry or be patient, just let it hap­pen and you will suc­ceed.

    Unlike the bit­ter defla­tion­ists who are dark and gloomy, you will be happy and safe.

    Gold in Aus­tralian dol­lars has a price tar­get of A$1850–1900 min­i­mum and that will be realised.


    Buy gold NOW

  • elliottwave


    Look at the attached chart and see that even if you bought at the wrong time even­tu­ally it turned out to be the right time.

    If you want to study TA tech­ni­cal analy­sis, search for a cup and han­dle pat­tern and see how it relates to the $A gold price.

    Please do not worry about the week to week or even month to month price action as that is only a blip of what is really to come.

    The $A gold train is leav­ing the sta­tion and you really want to be on this train, do not be late or even worse miss the train.

    Buy gold NOW

  • elliottwave

    Attached chart

  • bb


    Ris­ing prof­its of the builders have noth­ing to do with the bub­ble. The bub­ble grows not because a lot of new houses are built, it grows pre­cisely because it is impos­si­ble to build enough houses in the places where peo­ple want to buy them. ”

    This is the com­plete oppo­site in the US where higher prices went hand in hand with greater sup­ply (see chart)

    It seems the Aus­tralian “bub­ble” is exactly the same as the US except in areas where it is com­pletely dif­fer­ent.….


    If the gov­ern­ment (Land­com) had guar­an­teed 400sqm blocks of land at $100k in 2000 there would have been very lit­tle incen­tive to spec­u­late.”

    You have this back to front. If peo­ple can afford $350k for land, but the gov­ern­ment sold it for $100k, there is heaps of room to spec­u­late (by at least $250k). I would sug­gest the fact it is so expen­sive to build new sup­ply in Aus­tralia, there is almost no room for a bub­ble to ever inflate.

    “Devel­op­ers may have had higher prof­its in the US but in our case (NSW) it was the state of NSW which has improved its fis­cal posi­tion:”

    Devel­op­ers have made very lit­tle return…but yes, State gov­ernemtns are bet­ter off…I beleive I have been say­ing this for about 12 months now. Thanks for the addi­tional links.

  • bb

    PETER_W @101

    Please show me where I ever said hous­ing did not have afford­abil­ity issues.

    I never made such an asser­tion.

  • bb


    Such devel­op­ment cost around 550K for two bed­room apart­ment (see my source in pre­vi­ous blog post). Do you agree that cost of two bed­room apart­ment devel­op­ment in CBD area of Syd­ney is 550K? Yes or no?”


    CBD devel­op­ment is sig­nif­i­cantly more expen­sive com­pared to infill loca­tions.

    This is dues to
    — much higher land prices. CBD land prices range from $20,000 per sqm, to $75,000 per sqm of land. Sub­ur­ban land val­ues range from $6,000 per sqm (lower north shore * east, to $3,000 per sqm inner west, to $500 per sqm, new land releases).
    — Site access. This reduces build­ing times and increase cost

    As case in point, Dexus Group is build­ing an new office tower in Syd­ney (cor­ner of bent & Ocon­nel street) at a total cost of $14,000 per square metre of built area. This is equal to $1.4m per 100sqm (about the size of a 2 bed­room unit).

    So you are con­fus­ing infll with CBD devel­op­ment. You are com­par­ing apples with.…steak.…

  • ecoN­um­bers

    @bb 110

    Land cost is already included in cost of 550k with price of 85k for two bed­room apart­ment (see ).
    30k per sqm of land in 30 floor build­ing comes to only 1000 per sqm of apart­ment and that’s exactly 85K that is already included in cost esti­mate.

    There is a rea­son why high cost of land in CBD area does not increase cost of apart­ment devel­op­ment. You hide fact that almost com­plete cost of land is cov­ered by extreme price of retail space on ground floor in CBD area. Retail space in Syd­ney CBD is priced from 20k to 50k (check online).
    So if you are build­ing high-rise in CBD and you pay for land $15 mil­lion (30k per sqm for 500 sqm lot) only by sell­ing retail space on ground floor for $17.5 (35k per sqm) you may cover almost all cost for land. This means that cost of devel­op­ment of apart­ments on higher floors comes land free.

    Your data pro­vides even more proof that devel­op­ment in CBD area enables devel­op­ers to make for­tune, and that’s why there are so many devel­op­ments that are going on right now. If they lose money as you claim I bet there will be no any devel­op­ment.

  • 707338

    Elliot­wave, thanks for the graph. Yes it is reas­sur­ing. Appre­ci­ate your com­ments. (I hope gold DOES head to $1,900 AUD; I’ll be a happy camper then!). Since I bought my gold every advance in the USD gold price has been negated by the AUD strength­en­ing com­men­su­rately and can­celling out my gains — rather frus­trat­ing when all the talk is of gold reach­ing “new record” prices.

    Steve, I fol­lowed your lead and sold my prop­erty because I agree with you that Aus­tralia is due for a major prop­erty price cor­rec­tion. I invested in gold as a “store of value” that would sur­vive dur­ing a col­lapse of the fiat money sys­tem as it seemed counter-pro­duc­tive to save my wealth from a prop­erty crash only to lose it in finan­cial crash.

    Is your atti­tude to gold chang­ing as the sov­er­eign debt cri­sis unfolds? I would be inter­ested in your opin­ion.

  • cyrusp

    707338 @ 112:

    Actu­ally the case for gold in AUD is even more bull­ish than elliot­wave states.

    If the Aus­tralian house bub­ble does col­lapse we will likely see a sell off of Aus­tralian dol­lars by for­eign investors. Remem­ber — the AUD is not a reserve cur­rency and the only rea­son why for­eign­ers are buy­ing our cur­rency is because we offer high inter­est rates for now. It is not incon­ceiv­able that the AUD will fall all the way to USD50c.

    Buy­ing gold is a great way to hedge against a deval­ued Aussie dol­lar — even bet­ter than hold­ing USD in my opin­ion.

  • Yes that’s quite fea­si­ble cyrusp.


    #113 #114

    Aus­tralian hous­ing presently 1/4 head­ing toward 1/3 the value of the USA

    With 1/12 — 1/13 of the pop­u­la­tion, GDP and num­ber of dwellings

    Our float­ing exchange rate will cor­rect this price mis­match


    This is Steve’s quote…

    This is not a good thing, nor is it likely to last. The finance sec­tor exists to cre­ate debt, and the only way it can do that is by encour­ag­ing the rest of the econ­omy to take it on. If they were fund­ing pro­duc­tive invest­ments with this money, there wouldn’t be a cri­sis in the first place—and debt lev­els would be much lower, com­pared to GDP, than they are today. Instead they have enticed us into debt to spec­u­late on ris­ing asset prices, and the only way they can expand debt again is to re-ignite bub­bles in the share and prop­erty mar­kets once more.”

    The US (and UK) finan­cial sec­tor sup­plies ~50% of Aus­tralias for­eign debt i.e. short and medium term debt fund­ing to the Aus­tralian banks like the CBA so they can lend it Aus­tralians to bid up the exist­ing stock of hous­ing, to the point that our 8.5 mil­lion dwellings are now worth $4 tril­lion roughly 1/4 of the USA’s 125 mil­lion dwellings worth $16 tril­lion!

    At close to a par­ity exchange rate!

  • 707338

    cyrusp, my con­cern is that with the US Fed embark­ing on more quan­ti­ta­tive eas­ing (print­ing more USD) they will devalue the USD. That will NOT be good for my gold hold­ings in AUD.

    With Australia’s strong econ­omy and minis­cule sov­er­eign debt com­pared to other devel­oped economies, the AUD could also become some­thing of a “safe haven” in the event of the USD and Euro tank­ing.

    I bought gold when the exchange rate was at 0.85US — now it is at almost 0.95US and climb­ing!

    I hate the fact that my gold invest­ment is also a god­dam forex punt. I lost money trad­ing forex and said I wouldn’t do that again. Now I’m going back­wards buy­ing gold because of exchange rates. 

    The train HAS left the sta­tion — only trou­ble is (for those buy­ing gold in AUD) it is cur­rently trav­el­ling in reverse! 

    I hope you and Elliot­wave are right …

  • DrBob127


    I appre­ci­ate the effort that you make in mount­ing the argu­ment for the ‘no prop­erty bub­ble in Aus­tralia’ case.

    you haven’t responded to Gamma_Home’s crit­i­cism of a cir­cu­lar argu­ment to sup­port your case (see post # 104)

    You have effec­tively assumed 4.5% cap­i­tal price growth in your above exam­ple, so if you’re try­ing to prove that prices are going up (by show­ing the pos­i­tive returns avail­able), then your con­clu­sion is implied by your assump­tions, it’s is just a cir­cu­lar argu­ment.”

    I have noticed that you only respond to the parts of people’s argu­ment that you are able to able to mount a coun­ter­ar­gu­ment to and leave the valid points that they have made alone (maybe hop­ing that if you don’t respond to them at all, peo­ple will for­got that they were made).

    As far as I can see from fol­low­ing this thread. You are against a bub­ble, only on the basis of “pro­duc­tion costs are too high for there to be a spec­u­la­tive bub­ble” i.e. It is not pos­si­ble for prices to fall as they will fall below what it costs to pro­duce.

    Have you thought to ques­tion your own logic an assump­tions or do you still think that every­one who is try­ing to mount the case against you is wrong and that only you are right?

    Also remem­ber that con­tin­u­ally mak­ing the same point by writ­ing the same thin does not go any fur­ther towards explain­ing your point. Remem­ber the debate that was estab­lished around some data that you were argu­ing had some ‘minor sam­pling error’ that you said didn’t mat­ter and kept say­ing the same thing until Mar­co2 in frus­tra­tion wrote that terse piece to you explain­ing why you were in fact the one who was wrong.

    To every­one who con­tributes to this forum I say a big thank you. I am just try­ing to keep a bit of objec­tive intel­lec­tual hon­esty.

  • bb


    I have noticed that you only respond to the parts of people’s argu­ment that you are able to able to mount a coun­ter­ar­gu­ment to and leave the valid points that they have made alone (maybe hop­ing that if you don’t respond to them at all, peo­ple will for­got that they were made).”
    I respond to every com­ment I can with my time (I have a full time job).

    Like all peo­ple I visit this site when I can. I answer where I can, and when data is pre­sented to me that I can not answer, I am the first to say it.

    I note Steve Keen does not answer every ques­tion either.…have you made the same accu­sa­tion to him?

    So I reject your asser­tion out­right.

    To the com­ment on 4.5% growth. I have said on many occa­sions this is based on trend nom­i­nal wage growth (2.5% infla­tion which is the RBA tar­get, and 2.0% real). 2.0% real is equal to 6x improve­ment in the stan­dard of liv­ing over 100 years.

    This would be a down­grade on the 20th Cen­tury where we had a 8.0x improve­ment in the stan­dard of liv­ing. As usual, I will pro­vide the evi­dence. See here.

    It would seem log­i­cal that rents will grow in line with nom­i­nal incomes…so the ratio to take home income remains sta­tic (all other things being equal). Over the long run (100 years) it is the growth that is impor­tant, rather than the start­ing yield.

    I think this growth is fea­si­ble using his­toric data.

    So no, my analy­sis was not based on a cir­cu­lar argu­ment.

    I would say the oppo­site is true. Most on this forum sug­gest there is no growth in house prices, there­fore they are over­val­ued.…

  • bb


    You are get­ting con­fused again.

    $30k per sqm of land in Syd­ney means $90m for the 3000sqm site.

    In Syd­ney the LEP (local envi­ron­men­tal Plan) allows for a plot ratio of 14.5 to 1 GFA. This means for 1 sqm of land, you can build 14.5sqm of improve­ments.

    A nor­mal apart­ment build­ing loses 40% of GFA to com­mon areas (Lobby, lift areas, pool / Gym etc).

    So lets to the Maths

    $90m for land (30k x 3,000sqm)
    Build GLA 43,500 sqm (3000 x 14.5)
    Lose 17400 sqm ot com­mon area
    Net Are 26,100
    Land per built sqm = $3,448 (90m / 26100)
    Land per 100 sqm 2 bed apart­ment = $344,827

    This com­pares to land in “infill loca­tions” of 80k.

    Other cost con­sid­er­a­tions include
    — dif­fi­cult site access
    — higher con­struc­tion costs for higher build­ing
    — higher qual­ity fin­ishes for CBD apart­ments
    — More costly exca­va­tion due to the under­pin­ning of adja­cent build­ings

    Are your delib­er­ately quot­ing mis­lead­ing fig­ures or are you just try­ing to get a han­dle on basic devel­op­ment? Gen­uine ques­tion.


    bb (cap­tain)

    Any idea what a 1% inter­est rate rise will do to the investor sec­tion of the hous­ing mar­ket?

    Specif­i­cally, will we be able to increase beyond +920,000 the num­ber of ‘investors’ earn­ing 0 — $75,000 claim­ing $8.850 bil­lion of tax losses (ATO 2007 –8) given, roughly 39% of mort­gages presently (AFG 2010) are taken out by ‘investors’ to buy into a poten­tial 8.5% mort­gage rate (inter­est only) with a 2.5% net rental yield and 77% of them seem to be claim­ing a 6% tax loss on incomes of $75,000 or less at present prices?

    That’s roughly an after tax cash cost equal to wages growth ~4%

    The cap­i­tal gains tax for those who believe they can con­vert a 4% cash loss into a +4% after tax cap­i­tal gain surely need wages/rents to grow +5% or they are going to loose money!

    At 8.5% inter­est rates, will the present 39% X 77% of the buy side credit money also begin to drop out on the ‘buy side’ just like the 1st home buy­ers and the upgraders (who are not gov­ern­ment inter­est rate sub­sidised) and also cease to spec­u­late in this ponzi scheme?

  • ecoN­um­bers

    @ bb
    “A nor­mal apart­ment build­ing loses 40% of GFA to com­mon areas (Lobby, lift areas, pool / Gym etc).”

    You must be funny per­son. So, one gym of 30sqm per each two bed­room apart­ment? Nice build­ing!

    So lets to the Maths

    $90m for land (30k x 3,000sqm)
    Build GLA 43,500 sqm (3000 x 14.5)
    Lose 17400 sqm ot com­mon area
    Net Are 26,100
    Land per built sqm = $3,448 (90m / 26100)
    Land per 100 sqm 2 bed apart­ment = $344,827”

    I like num­bers!
    It seems that you missed some­thing!

    Ground floor is exclu­sively used for retail space. That is 3000 sqm minus 200sqm for lobby + lifts and stairs (gym and pool are never on ground floor) and 100 sqm for con­struc­tion space. Cur­rent prices for retail space in CBD are $20k to $50k per sqm. Let’s use $35k: Let say there is a con­struc­tion cost for retail space of $5k per sqm. All this gives us: 2700 sqm of retail space times $30k left for land cost of retail space = $81 m. 

    Net area in the build­ing is 26100 sqm (your cal­cu­la­tion) – 2700 sqm of retail space = 23200 sqm. Lend cost per sqm of non-retail space $90m — $81m$=$9m, $9m/23200=$390 per sqm

    For two bed­room apart­ment ~100sqm = $39000, that’s 40k lower than esti­mate that I quoted. I guess that $40k per apart­ment can cover all of:

    Other cost con­sid­er­a­tions include
    — dif­fi­cult site access
    — higher con­struc­tion costs for higher build­ing
    — higher qual­ity fin­ishes for CBD apart­ments
    — More costly exca­va­tion due to the under­pin­ning of adja­cent build­ings”

    watch for num­bers they are good in uncov­er­ing the lies


    bb (Cap­tain)

    Quote from Chris Joye…

    Bor­row­ers apply­ing for loans today should be pre­pared to ser­vice rates that are 150 basis points higher than what they are cur­rently pay­ing. They can, how­ever, take suc­cour from the fact that the peak rate is unlikely to endure for too long, and the ‘through-the-cycle’ head­line mort­gage rate should aver­age between seven and eight per cent”

    So we presently have ~920,000 ‘investors’ who will pay 7 — 8% and close to 9% very soon to recieve a net 2.5% rent and claim up to 6.5% tax loss in the < $75,000 income bracket ~ 4%+ cash cost that need 4%+ cap­i­tal gain after tax to breakeven with 7% buy/sell trans­ac­tional costs.

    Would it be rea­son­able to assume ‘investors’ as a per­cent­age of buy­ers will decline over the next few years as total net returns on cash paid decline to zero or neg­a­tive?



    check #104

    When 37% — 39% of all loans are ‘investor loans’ and the cap­i­tal gains dry up surely ‘car­ry­ing’ the ‘after tax cash loss’ will cause a neg­a­tive feed­back loop and ‘investors’ as a per­cent­age on the buy side will decline.

    This will cause buy/sell dis­e­qui­lib­rium lead­ing to a fall in prices.


    bb (cap­tain)

    I noticed this from Chris Joye today


    Do you think an ‘investor’ should jump into an imme­di­ate 9% neg­a­tive gear­ing –4% loss plus –5% pur­chase cost loss, or should they or wait and watch for a year or two. Do you believe an ‘investor’ can make up a 9% loss and still make a 4% p.a. total cap­i­tal gain account­ing for the sales cost and still come out with a bank­able tax­able profit?