Tag Archives: Housing Bubble

View From The Couch – 06/Sep/2014

Lessons For A Saturated Economy

I found this commentary about the impact of the property bubble in the Sydney Morning Tabloid this week. it’s written from the perspective of the younger people who cannot get into the market. A lot of people seem to think it’ young people whining, but there are lessons in history from all this property bubble business (that all these banks are denying exists here). The experience in Japan in the late 1980s through to earl 1990s was pretty instructive. The Bubble and the aftermath of the Pop created economic havoc on the Japanese Gen-X who were coming into the workforce at the time. This resulted in high youth unemployment as well as low rates of marriage and birthrates – and effectively brought forward the peak population date of Japan. The resulting impact of that event was that all the projections the government had made about pension plans and how the labour force was going to support the retiring Baby Boomers went out the window. Much of the low growth and sluggish economy of Japan in the aftermath of The Bubble can be put down to a generation of working people essentially placed out of options and never finding the traction that earlier generations had.

I have friends who are basically economic refugees from Japan. They got out because there were no immediate options that were rewarding or befit their education. Many ended up without kids, others delayed having kids. The 90s and early 2000s saw a remarkable exodus of young, educated Japanese people, who are now not over there contributing to economic growth.

The process of writing off and paying down debts in Japan has been grueling, and worse still government intervention into what they called PKOs – price keeping operations for assets – has distorted the markets leaving what can only be called zombie companies.

The PKO money came out of the government to shore up the asset values of shares and property which is to say, they socialised the debts. The Japanese government under Ryutaro Hashimoto argued that this was necessary to stop a disorderly exit, which is to say, it allowed some investors to keep their bubble profits to pay off the bubble debts instead of getting wiped out. You wonder how those parties got to enjoy such favourable treatment, but then if you see how entwined Japanese heavy industry, banking and the old MITI was in its day, it was one of those things that people acknowledged tacitly without putting up a big fight. After all, what happens to Japan should Mistubishi or Sumitomo should fail? The option cost of bailing out those companies essentially ate the future of Japan.  And that’s just Japan. The GFC has exposed the same problem in advanced economies across Europe and North America as well as Australia and New Zealand.

The point of all this is to say, private sector debt has a way of becoming public sector debt, and “too big to fail” essentially eats the future. A few things are very clear from the property bubble in Australia is that the private sector debt is bigger than it has ever been, and should it get called in, it would wipe out our four major banks (BASEL II and III notwithstanding). Because those banks are still in the TBTF category, the government will socialise those losses by bailing them out, and then we’ll see our future spending go up in smoke to preserve the inflated prices everybody paid for their houses.

The finer point of all this is, if you don’t think there’s a housing bubble, then that’s one problem. If you do thing that there is a housing bubble but think it’s just a matter of the market correcting itself, then you’ll be in for a surprise.

Ross Garnaut Says There Is a Bubble – But So What? Cut Rates

This one‘s related but really interesting. Ross Garnaut thinks there is indeed a bubble going on in the housing market, and that the Reserve Bank of Australia is keeping a close eye on it. Basically, Garnaut is saying the rest of the economy outside of housing could do with the lowering of rates. The rates being as they are keeps the Australian Dollar too high, and makes Australia’s economy less  competitive. The only thing keeping the rates where they are, is this deep concern that there is a housing bubble going on, so the rates need to sit at as high a place a possible given the parameters. Instead Garnaut is saying if the RBA cuts rates, then the rest of economy would be able to compete and grow, and the housing bubble should be dealt with specific measures. He also says governments should stop favouring housing for the purposes of capital adequacy.

“It is ludicrous to be worried about lending risks in the housing sector on the one hand while at the same time requiring banks to put more capital aside when they are lending to BHP,” he said.

“And there are several reasons to do something about negative gearing. There are budget reasons, and reasons to do with keeping within reach the old Australian dream of widespread home ownership.

“It would also contribute to putting a lid on the housing bubble so we could reduce interest rates and the exchange rate as required by the rest of the Australian economy.

“But the problems can’t be solved by the Reserve Bank alone. It requires co-ordination of prudential regulation, monetary policy and fiscal policy.”

It’s an interesting idea that evokes the old definition of inflation. Inflation, is essentially too much money chasing too few assets. This explains exactly why housing bubbles happen. Given that housing is given a privileged position in measuring capital adequacy, banks are better off lending out mortgages than lending out business loans for capital expenditure. The money headed to mortgages become much easier money by dint of a definitions for capital adqaucy. This devalues businesses against property ownership, even though property ownership in of itself – especially home ownership – can’t contribute to the economy in the way that a productive business can. Things like negative gearing simply make it worse. So all the money goes into the property market but of course the overall supply side of the property market itself can only grow at a certain rate. As more money gushes into the property market, it can do nothing but create a condition where the prices of homes inflates. Too much money chasing too few assets.

Is China Finally Wobbling (Just A Little bit?)

It’s been like five and a half years since the market bottom following the Lehmann Shock which triggered the GFC. Since then the world has looked on… make that Australia… Australia has looked on to China to keep its economy afloat. China in turn obliged by doing massive stimulus spending, which resulted in it sustaining its 7%+ annual GDP growth rate. There are some who think China has been inflating its GDP figures for years to get more investment, and think there is a 30%discrepancy between what China’s real size as an economy is and what the stated size is. That would explain the vast lack of growth in consumer spending that China has so needed to move from an export-driven economy to a consumer driven economy.

China subsequently pushed all levels of government to take on debt and give stimulus to the market and that has resulted in a massive ballooning of debt in China to fund this 7+% growth. Since the GFC, year after year, economists, investors, traders ad analysts of all persuasions have pointed at China and said it is unsustainable. Somehow China never imploded or popped or collapsed. All those ghost cities built in the middle of nowhere with speculation money? No problem. All that re-hypothecated collateral minerals that went missing? No problem. All those companies that started going sour and failed to pay their bonds? Government intervention has saved the day. If you had bet on China to unravel in the last few years, you would have lost money on all those bets.  It would’ve been hard losses to take too, because rationally speaking, China had every reason to come unstuck. The proof was in the pudding, and the pudding’s been magic so far.

Now, there are signs the magic pudding isn’t going to hold up. I don’t know how China is going to kick the can down the road next time, but they may yet have a way of doing so. After all, one of the interesting aspects of the great recession has been the way things just keep going on in spite of the numbers. If China can’t kick the can down the road, this is going to be it for the 23 long years of economic growth in Australia. The cracks are already showing up in commodity prices. Iron ore – the biggest corollary to the health of Chinese industry has sunk to a five year low. This is going to hit our export figures. Falling commodity prices should bring the value of Australian Dollar down. Things are about to get very bumpy.

I can report to you that the money-go-around in Sydney has stopped to a snail’s pace. There are a lot of companies sitting on unpaid bills, the companies themselves waiting to receive payment to pay those bills. I have to say it hasn’t been this slow since August 2007, which was exactly the peak of the market before the GFC. I’d start selling shares this month if I had any to sell.

 

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News That’s Fit To Punt – 03/Sep/2014

Why? Because Fuck You

Everything this Federal Government does is tainted by a sort of grubby conflict of interest. Of course that’s not confined to the Federal Government, because the greater conflict of interest might actually be Clive Palmer who owns a dirty big mining company, gets to make deals where a tax like the mining tax can get repealed. It’s hard to imagine a more egregious and gratuitous case of helping yourself because you can.

The deal has meant that the government will halt the rise of superannuation. Naturally, with the sensibility of a cheesy movie villain, Tony Abbott tried to sell this as more cash in hand for employees which, frankly made me choke on my lunch. I’m sorry to tell you Mr. Prime Minister, but that’s money that’ll stay in the pockets of companies. Paul Keating has lambasted the government but honestly, if he wanted to still have a meaningful voice, he should’ve stayed on in parliament after 1996.

The repeal of the Mining Tax was of course one of the platforms of the Coalition so we ought not be surprised, but really, it is pretty disgusting how the Coalition are totally happy to sell out Australian citizens in favour of a gaggle of mining billionaires – Clive Palmer among them – and try to sell it as being good for the worker. Can it get any worse?

Yes it can. Here’s how.

An Inconvenient Ruse

The emissions for energy generation jumped the most in eight years, since the end of the carbon tax.

So much for Al Gore coming to lend a hand in fighting the good fight against global warming. Thanks to the repeal, polluters have gone back to a kind of burn-baby-burn mentality and now it’s out of control. Of course the plan by this government is also to smash the renewables industry, and directly pay these polluters to stop polluting.

It’s like government by stupidity. You’d never have guessed thing would get this bad. No sane mind would have guess it would get this bad. But this unrelenting awfulness – “Operation Ongoing Enormous Clusterfuck” according to FDOM – was their platform! Grin and bear it.

Pink Batts Coming Home To Roost

Pleiades swung this one at me today. The best bit of news might be how the Royal Commission into the Pink Batts has yielded interesting results. In as much as it was a blatant witch hunt, it looks like it delivered a result that was assumed by the proponents of the Commission. Here’s something from Crikey which is behind a pay wall:

 

First, Hanger found the training regime and regulations at the time of the first of four fatalities in October 2009 to have been seriously inadequate:
“With the exception of South Australia, which had a licensing regime for insulation installers, there was no insulation-industry specific regulation beyond the generally applicable occupational health and safety regulation.”
But here’s the thing: then-minister for the environment Peter Garrett and his staff had spent most of 2009 tightening regulations and procedures. Hanger listed more than 40 interventions to address safety deficiencies — all completed before October. So if the safety framework was still deficient by then, it must have been woefully, if not criminally, inadequate prior to 2008. Having presided over industry growth to the level of about 200,000 new and existing houses insulated annually, the previous Coalition government cannot escape culpability.

Secondly, Hanger opened wide the door to those wanting compensation for the program’s sudden termination:
“I find as follows:
“… the effect of the losses was to devastate many long-standing businesses … and to cause as well personal financial collapse and severe despair and emotional harm;
“that harm and such circumstances justifies pre-existing businesses being compensated.”
If compensation is won, it will be the Abbott government scrambling to find the funds.
This has a certain rough justice about it, of course. There is an argument that the scheme was not intrinsically dangerous and was not failing, rather that it suffered from extreme misreporting from the outset, by both Coalition MPs and a feral media.

Thirdly, the Commissioner was scathing about Abbott’s staff in the course of the inquiry:
“The Commonwealth did not suggest one witness that ought to be called. It did not generally volunteer documents that were not the subject of a summons to produce. It did not elicit any evidence of its own volition. All of this is despite the fact that it was the repository of the critical documents and the corporate knowledge of what had transpired.”

Not even Peter Garrett copped such a shellacking:
“Furthermore, the Commonwealth hampered the work of those assisting me by the way in which documents were produced … Other than in response to a specific request from the Commission, there seemed no logic in the order in which documents were produced. The Commission asked that documents be produced chronologically, however the Commonwealth did not oblige.”

Finally, the Commissioner made it clear that if the federal government initiated the program, then safety is definitely its problem. Never mind the long history of state responsibility.
“There was much debate about whether workplace health and safety issues were a matter that was of any concern to the Australian Government, or whether it was more properly the concern of the States and Territories. It was said, by a number of federal public servants, that the Australian Government had no regulatory power in the field of workplace health and safety, and therefore that it was not a risk that the Australian Government could control. In my view, this attitude was deplorable.”

That means occupational health and safety is now firmly a problem for the Federal Government. Every time somebody dies in an accident, he article suggests a ministerial head is going to roll. Worse still, the responsibility for the failure didn’t just get sheeted home to the Rudd Government, it also got sheeted home to the Howard Government, and last I checked Tony Abbott was the health minister in the government. This thing is going to boomerang right back at him.

The Housing Bubble That Isn’t But Of Which We Must Be Wary

For months – no make that years! -we’ve been hearing that Australia does not have a housing bubble problem. All the economists who have come and pointed out the great anomalies of housing prices in Australia have been laughed out of the public discourse while the anomalies only get bigger. As late as last month Glenn Stevens of the RBA was talking down any possibility that what we had on our hands was an actual bubble! No, he simply reiterated that sometimes the property market goes down. This month he’s taking a different tack and saying there might be nasty shocks. Included in that link is a bit covering China where he cites a downturn in China might manifest itself as a nasty shock. If that wasn’t enough, David Gonski of the ANZ Bank told the Australian British Chamber of Commerce that booming prices cannot possibly continue forever (now there‘s a brave call).

And lo an behold there’s news that China’s real estate market is going screwy. Some might even say it is crashing like it was a Global Financial Crisis. Speaking of crashing, the commodities market in China is crashing. I wonder if those things combined would form this so-called ‘Nasty Shock’ Glenn Stevens is talking about? Or will Sydney’s housing prices simply just shrug it off and keep climbing?

Stay tuned for more fun!

 

 

 

 

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