It is not just economics

Some days I get some very nice messages from readers, other days I don’t. Friday was one of those “other” days. An excerpt from my inbox after a run through the abuse filter.

When will you renter losers just accept that you are wrong and that housing isn’t going to crash. I am sick of people like you constantly talking about a “bubble” in housing trying to cause a crash. You were wrong, you missed the boat and are now jealous of others success. You and your doomsayers have been telling everyone that housing is about to crash for years yet guess what, it never happens and it never will because the government will not let it happen.  Do yourself a favour, buy a house and stop whining.

I have always found it odd how overly passionate people are about housing in comparison to other economic topics. I also find it amusing that people’s assumptions about my own personal circumstances lead them to wrong conclusions about me. But that is another story for another time.

The thing that I take away from these e-mails ( yes, this is not the first one ) is the strong belief these people seem to hold that you couldn’t possibly want to discuss the downside risks of house prices or the potential risks of property speculation unless you would in some way have personal gain from doing so. My assumption is that this breed of human only think about housing in terms of personal gain and therefore do not have broader understanding of the risks and issues housing creates for the economy and social well-being of Australian society.

All of the members of this blog talk constantly about the systemic risks caused by the massive credit binge into housing that Australia has created for itself. In my opinion it is a massive macro-economic blunder that has wasted the best opportunity for economic prosperity that Australia has had in the last century. I am still very doubtful that the economy can correct itself out of this mess without falling in a heap. I get the feeling that the nation will collectively be sitting around in ten years time looking back saying to itself “what the hell were we thinking”. This issue is something I personally have talked about at length , but I know that my fellow bloggers share the same frustrations.

But there is also another side to this, something that isn’t economic. It is a social issue that until quite recently has been below many people’s radars. It has been festering for years but I get the feeling it is going to become a big political problem over the course of this year as the housing market slides and the government is forced to make a decision about what to do about it. Let it go or intervene yet again.

There has been a long running debate about the “real” cost of housing and how today’s price to income ratio compares with history. I am not going to rehash the discussion as it is well known. But from my personal view point I don’t really have time for any debate on the issue. I have my own life experience to know that houses are far more expensive today in real terms than they were even 15 years ago, and due to this I have real empathy for young people who have massive societal pressure to purchase houses. I am not sure it is appreciated by older generations just how much pressure there is on a young person in Australia to purchase property. But nearly every week I receive at least one e-mail from a reader that is just like this example.

Thank you for the good work on your blog, and keep it up. I discovered Delusional Economics in about August last year. I had been under some pressure from family and friends to buy a house for about a year, but whenever I looked at the numbers it didn’t seem to make any sense. I began to feel like the rest of the Australia was taking crazy pills in regards to real estate. However the implications of claiming to be the only sane person in a room full of lunatics were not lost on me. It was certainly a relief to find some considered contrarian analysis on the topic from yourselves and Lewellen-Smith, van Onselen etc. to back up the opinion I had formed about our housing markets. Particularly as I’m an engineer, its good to see some trained economists saying some of this stuff!
I’ve since been using your blog to help make my arguments against buying real estate to family and friends, and have had some  considerable success in persuading them of the risks. Please keep it up!
I looked back through some records last week to check a few figures.  In 1998 I purchased a house that cost me 3 times my gross salary  at the time.  Today if I was still in that job I would be earning 140% of that salary, I know this because I am still in contact with the company I worked for then and I asked then recently what they  are paying people in that position.  The house however has increased in value by 230%, I know this because it recently sold for that amount.  A house I purchased in 2001 sold for 300% of the purchase price in 2007. Let me know if you are aware of a job that kept up.
I get the feeling from some comments I have read in regards to this topic that people confuse their own career income growth with wage growth. For instance I now earn 300% of what I did when I first started working as a fresh faced university graduate.  Therefore the fact that houses have gone up by 300% in the meantime isn’t a huge issue for me, especially since I purchased a couple of them along the way. However that is not the measurement that matters. What matters is how expensive houses would seem if I was a fresh face graduate today, and in that case they are hugely expensive.
Yes, there are mining jobs where graduates ( even at a high school level ) are earning large sums of money but this is not the norm. The mining industry is not a large employer no matter how much the government needs you to believe it is. ( Given they gave away an additional $60-$100 billion dollars in tax receipts). A university graduate at my work earns about $40,000 in their first year and around $65,000 by the third year ( before tax which includes a HECS debt ) . I am sure many would consider that a generous wage. However  the median house price in my city is $430,000. You can see the problem. Just to save up a 10% deposit quite literally takes years even when living at home with mum and dad. Older generations can rant on about young people wanting everything instantly and not knowing how to save. This is in fact a fallacy, but it misses the point that it was never that hard for them to obtain a property, I know because I am one of them.
As many of the bloggers on this site have talked about, government policy in support of  housing is no longer providing equitable outcomes. It is quite clear policies such as negative gearing and first home buyers schemes are simply pushing prices ever higher and further out of reach of the younger generations. This may not have been the case when these schemes where first introduced, but after a decade long credit binge that has now pushed housing into the stratosphere the last thing younger generations need is government policy keeping them there.  It may keep the older generations content but it is now at the expense of the young.
So now we have a situation where young Australians are being pressured into purchasing property that they realistically cannot afford at the same time the government continually introduces new policies to make the issue worse. It is no wonder that the young have had enough. As I said last week:
I am getting the distinct feeling that things are starting to change. The fact that this article made it past the editor’s desk and into print is another good first step. It may well be that there is much more support for housing policy changes than Saul and the government realises. Something that is set to continue as the younger generations become more and more political active about these policies and their inequitable effects.
Little did I know at the time of writing that article that the rumblings had already begun.
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  1. 20 years of continuous economic growth but prospective first home buyers would be feeling as poor as ever. the right tax policies could have contained land prices during the credit boom. now we have the conumdrum of either letting land prices deflate naturally or through tax reform.

  2. Second year out of uni, and I’m earning $60,000 gross. My wife is three years out earing $40,000 without using her degree. The wife and I can borrow enough to get a $375,000 place, including a $60,000 help on the deposit from both of our parents who have multiple properties each. We’ve only be saving for a year (which is nothing, I know), but we’re working hard to achieve the dream and have a pathetic lifestyle compared to many of our peers.

    That’s 3.75 times OUR gross salary, yet you’re talking about 3 times YOUR gross salary in 1998. That’s 13 years ago, when I was in my formative high school years.

    We can get a nice house in the sticks, or a pockey apartment in a good area. Right now we are renting a 2-3 bedroom house in the nicest suburb we can find, and can easily save more than we pay in rent. If we get a place we’ll still be paying a similar amount for years.

    Financially it’s a dumb idea to buy a place, but the social pressure is immense. If we’re not getting our own place we’re being talked into getting an investment property in an area ‘that’s about to be re-zoned for subdivision’. I’ve said no so many time and in so many ways, but it doesn’t stick. We’re dealing with faith, not figures here.

    • I think thats 1 of the biggest scams when it comes to peoples income. Gross means nothing. Its NET thats important.
      You gross is $60k, once U take out tax, HECS-HELP, and anything else, U end up with something closer to $40k. If U get fringe fringe benefits packages in your wage, expect you HECS to blow out at the end of the year.

    • We are pre-approved to $390,000 and we only gross $80-85k and have two children in private schooling. (My wife is part time casual as well.) That is from one of the big4. No way can we afford the repayments on $390,000 about $635 a week. (Also the 30 year term takes us past retirement).

      We rent a $400,000 house and it costs us $385 a week. So no rates, water, building insurance, maintenance blah blah blah.
      So, even if we throw in, say, $150,000 cash deposit, which we can, borrow $250,000 at 8% over 25yrs it will cost $445 a week before we have thought about rates, water bill….oh and what about the missed opportunity on the cash. (What did Einstein say about the power of compound interest?)

      It’s very hard to justify buying at current prices.

      • Please note, the only political party saying that the housing situation is a disgrace is the Greens. Vote accordingly.

        • Yeh, but the only issue with that is The Greens (and Labor) are actively instigating their Social Justice campaigns with wealth redistribution, meaning sending middle to high income population broke which in turn sends house prices down.

          Its nice to hear The Greens say its a disgrace, but once you look at their solution to the problem, this should be enough for anybody to realize voting Greens is/will be the most detrimental vote they could ever make in this country.

        • Sorry mate, but housing is not the only reason I might vote for someone…actually, it factors fairly low. Value system is number one for me…

      • $150K gets you $9750pa (6.5%) at Ubank. $187/week before tax.

        You are only $248 a week worse off with the mortgage (gross) in a falling market.

    • We’re in the same boat!

      Me on 80k, wife on 40k, so total of 120k. After tax and other rubbish (I finally paid off HECS last year) probably have 70k left.

      House we’re renting is 275/week, or 430k to buy. Thats about 6x income, whereas renting for 14k/year we’re putting away tons in savings.

      Screw the banks, screw the housing scam and screw the “You’ll miss the boat and never afford a house”! They almost had my wife with that, several people at her work fell for it.

      We’re going to wait it out, and with a 200k deposit we’ll probably buy the kinda place we’re renting with a < 100k loan or so in a year or 2, pay it off soon and this'll never be a dinner party conversation hold-up for us after that.

      Mind you, was interesting hearing my boss saying in the mid 90's (when I was still in highschool) NOBODY ever talked about house prices at dinner parties and wherever, now its all people talk about when they meet up, and argue about crash vs boom.

  3. The bubble will burst and a lot of people will get hurt.What are the odds on the powers that be trying to reinflate the bubble instead of looking for sensible and practical solutions to the problems you describe?

    • Well, look at the abusive comment… many who have bought think the government has given an implicit gaurantee on housing… that the Government “will not let (price falls) happen”…

      But what DE has been saying is spot on… the bubble has gone on for a decade so that people that are affected, as well as the young, are also older and in the age brackets which tend to become more politically active… plus the general sentiment in society is not as one sided as proponents that wish to push the “government won’t let it happen” line would have you believe… and finally the extreme price rises, especially in Melbourne and Sydney, are very fresh in people’s minds… there were articles in the press only a month or two back on how the price rises of last year were the strongest in the world…

      So, politically, to turn around and say that they need to re-stimulate the housing market will not be an easy sell by any stretch of the immagination… and won’t be for quite some considerable time…

      And then to anybody interested in markets, a move to re-stimulate is tantamount to an admission that our housing market is a complete shambles and can only be held aloft by ever increasing Government distortions…

      So the professional investors, especially from overseas, that ultimately must contribute the funds for the banks to put sufficient credit into the system to keep the bubble aloft must continue to believe that the rewards from investing in the bubble are worth the risks… when they are increasingly concerned about those increasing risks… Even Glenn Stevens has discussed his concern over the potential for external discipline to be placed on the market by foreign creditors…

      Then the question becomes, even if the Government does opt to put more moral hazard into the bubble, and investors are prepared to continue to provide the capital and accept the risk for the potential reward, will the Australian public continue to accept that extra risk??

      And my belief is that the psychology has turned decisively so that people are realising that 1. house prices are too high and that they have gotten there through irrational behaviour, 2. that the costs to them of buying are too great as they have seen the impacts on their cohorts who have already bought, and 3. they think it is unnecessary to make those sacrifices and take those risks in any case because house prices are likely to fall in any case…

      The banks see that political background is not conducive to extra Government-supported moral hazard… that is why they are providing it themselves through loosening of credit standards… but we are not seeing much, if any, uptake…

      At the same time those with a lot of skin in the game are thinking it’s time to bail… so far it is probably mostly those “in the know”, like the Harcourts Business Owners that DE has mentioned in recent posts…

      But those people who have followed the negative gearing path to nirvana, via the 1 house every year to a portfolio “value” of $5,000,000 with 80% leveraging, must be getting awfully nervous… even the earlier adopters of these schemes, who have not gotten carried away through the bubble and have allowed gearing levels to fall, must be considering offloading say 50% of their properties to extinguish debt as they head into retirement…

      All of this suggests to me that the bubble has indeed run it’s course… and we are now in the end game… what remains to be seen is whether the downward spiral within the lending institutions, the potential for which Deep T has been highlighting with his excellent series of articles, takes hold and what will be the wider consequences of that…

      • Hard to be Zen

        It’s inevitable that this hyper-market will fail sooner or later. Every year we have, at one end, thousands of school and Uni graduates being disgorged into the economy with a newly found political voice and not much hope of property ownership, while at the other, ever-increasing numbers of BBs retirng from productive work and wanting to free up capital. Barring any economic hits that initiate a crash (not unlikely), the market will correct back to long-term trend. Nothing surer, and nothing the Govt can do about it. The aspiration of the ‘Australian Dream’ was a practical one a decade or so ago – but at present it’s looking more like a formenting nightmare.

      • Mt 2 cents worth
        1. Governments will not let the property market crash – too many losers. All I can remember is when I paid 17% interest and the Hawke govt at the time froze mortgage rates for existing borrowers at 12%. The govt of the day worried about its voters and sacrificed everyone else.
        2. Most people (home buyers) are emotional beings and honestly believe prices will not fall and jump into RE on that basis – not so much because they think they can afford the loan/costs.
        Even my brother, who is a property developer says
        houses double in price every 10 years. He also says he has to build cheap because there is buyer resistance after prices exceed $450 – $500.
        Its got to the point where he is reluctant to buy land because it is too dear. Sort of speaks volumes to me.

        • 1. Even with the 17% interest rates the % of income spent on interest repayments was approximately half what it is now. That means that even with lower interest rates, we now pay way more interest. Respective of income.

          2. Every one of my friends (22-28) all say that they will not be buying a house anytime soon because they are simply too expensive. Many of us are earning good money as well.

          Both my fiance and me earn decent money. A house is not even an option. I have done the maths (I am an engineer) and saving the difference in mortgage repayments and rent then investing it elsewhere is by far and away the better option.

          • That, Dean, is the main problem for the spruikers and shysters (and Boomers). Not everyone is an idiot on the far left of the curve. Some are mathematicaly savvy and will watch on their iPhones whilst sipping a Latte as their property accumulating stupenda fellow gen Y’s go under.

          • Same here DeanR,

            dinky household, comfortable income. We could afford a house, even under these circumstances… but the numbers just don’t add up.

            Many young people (would be first home buyers) we know have also expressed they won’t buy property in this market.

        • “1. Governments will not let the property market crash – too many losers.”

          Governments may not have a choice in it. The whole world, especially the U.S, even the Japanese were saying the same thing not too long ago for the U.S.

          Your brother may be reluctant to buy land cause it may not be a credible investment at the moment. If there is “buyer resistence” at this “$450 – $500” mark, then what volume does that speak? Psst! It ain’t worth that much.

    • IMHO, once the powers that be believe that we are in an “unacceptable” (for the greater good – which is partly valid!) house price decline, they will interevene, AND they will intervene HARD. I expect that’s one thing they WOULD have learnt from watching many of the other housing bubbles burst around the world, coupled with the “success” the Rudd intervention had during the GFC.

      Consequently, if you thought we had high-ish govt debt before…….

      Ireland-style public debt coming at you, Yo…(on top of US style private debt).

      …intervetion –> intervention –> intervention –> intervention –> … –> where did our freedom go?


    • I’d be shocked if the government simply sat by and watched prices tumble without trying to do something about it (it would give them an excuse to spend more money). But if other nations are anything to go by it will all be for nothing. If prices are coming down, they are coming down, government intervention or not.

      The only thing the government could do to stop prices dropping is by price setting. And no, I wouldn’t put it past the current mob to do this.

      • The other day I was wondering…

        What if government/politicians are so incredibly absent in this whole discussion just because they won’t want their name attached to a potential crash?

        Maybe they have already decided not to interfere?

        I dunno, just thinking out loud.

  4. These political campaigns against NG and FHOG are a good start. But they don’t address the problem at the core – Financial services industry and moral hazard.
    The problem is compounded by broad bipartisan support on both sides of the political divide for moral hazard, thinly disguised as “fostering competition” in the banking industry.
    In the future, the government will not bother with stuff like FHOG when they can handout cash directly to the banksters. Some of this is already underway:
    * $20 billion of taxpayers money allocated for private RMBS purchases. Did we hear a peep on that from the pollies, while they argued non-stop about the $40billion bill for the NBN?
    * Covered bond and deposit guarantee: On a standalone basis, they are not bailouts per se. But the combination means that in case of a bank insolvency, covered bond holders are first in the queue (instead of depositors) to pick thru the carcass. If anything is leftover, fine. Otherwise the government bears the burden of paying back the depositors.

  5. Hi

    Like many I have followed your blogs for a while even from afar while living in the north of sweden
    We owned our house there outright,worth much less than the ridiculous prices here
    Since returning our eyes have been opened as we are “renters” and as such seem to be considered less than.Our kids have just started school here in Melbourne and it amazing to see how people react and later treat you because of that fact.YOu can see the reactions when you tell them you rent,your either not in the “club” or you are somehow “less than”…it seems
    It doesnt matter that we actually”owned”our house prior to moving not the banks as people seem to forget
    It really has become a sad state of affairs here in OZ and how anyone with any sense cannot see how ridiculous it has become never ceases to amaze me
    Thanks for helping people see sense and helping to stop the brainwashing by the Real estate industry and Govt



    • Greg

      You have to expect nothing less in the present situation. Up in North Queensland where we live, the outlook for recent buyers is dire. The economy is riding the back of the overseas tourist, especially the Japanese. It’s all going horribly wrong. New and not so new homeowners are now trapped with constantly sinking prices and no signs of a turnaround. The rental lists are growing every month as home owners flee south for work, leaving hundreds of new houses available for rent at fractions of the mortgage cost.
      Anyone coming up to a job in this part of Australia would be insane to buy under such circumstances. I’m guessing the same thing is happening throughout Australia but at a lower intensity.
      The real estate types are understandably sensitive to the suggestion that renting is the only rational option. The open hatred is apparent when you declare your interest in renting. Quite fun really.
      An entire occupation of dubious worth will soon need retraining. So just grin and bear it, and remember to save your dollars for the day of reckoning.

      • Up here with you Greg and with you totally on what you are saying. The message to those coming here from elsewhere is a sound one.

        Absolutely right about people leaving for the south. One of the main drivers behind the reduction of unemployment from 13%+ was people leaving town.

        I’ve been looking to by for 18 months or so but am (IMO correctly) very cautious. Still agents tell me that prices will rise 5-10% this year….

    • Spot on Greg.

      It’s a kind of cult. Those who have joined at this late stage are members for life (especially in non-recourse Australia).

  6. If “young Australians are being pressured into purchasing property that they realistically cannot afford” then why are mortgage arrears rates so low, below 1.5% from memory.

    Doesn’t that suggest that 98%+ of Australians CAN afford their homes?

    And of those <2% who are in arrears, how do you know they were 'pressured' into buying. Perhaps many bought quite willingly but then had a change of personal circumstances that cause them to fall in arrears?

    Fortunately, even most of those small number in arrears will not suffer repossession, because the banks generally go to great lengths to assist these people until they get back in control of their finances. Actual repossessions in Australia are extremely low.

      • Shadow, how does the Government backed mortgage ‘holiday’ feed into the figures? I recall that during the 2008 bailout they implemented a policy to allow people 12 months grace from payments. Nothing heard since.

        Good post BTW DE. Same here, first bought 1997, $65K (15km from CBD!),grad income $35K. Same house now $400K, same grad $60K. Ratio ballooned from 6 in that specific case. The opportunities for new entrants are appalling and bad for our future. But there lies the answer to the long term future of property in this country. If the next gen can’t afford it, who the hell is going to buy it?

        • Excuse the formatting in second para. Should read;

          Good post BTW DE. Same here, first bought 1997, $65K (15km from CBD!),grad income $35K. Same house now $400K, same grad $60K. Ratio ballooned from less than 2 to greater than 6 in that specific case. The opportunities for new entrants are appalling and bad for our future. But there lies the answer to the long term future of property in this country. If the next gen can’t afford it, who the hell is going to buy it?

        • I don’t know for sure but I assume they would all be included in the 90+ days in arrears figure – i.e. the bank has given them permission to be in arrears for one year. During this time the interest is capitalised into the loan, so it’s no free lunch – they end up with a higher loan at the end of the 12 months because they now owe all the prior interest repayments, plus the capitalised interest on top of those repayments.

          • And what, some magic fairy is going to wish a wad of cash into their accounts to help them get on top of their mortgages?

            Get real Shadow, your only talking about the delaying of the inevitable, the amound of people in arrears and defaulting is increasing and if you think the majority can overturn that then you are dreaming.

          • Christian and Shadow I have edited both of your comments and removed the text that I consider to be inappropriate. Please refrain from personal attacks against each other.

            We are happy for robust conversation but not a flame war.

            Consider yourselves warned.

      • Jeez Shadow,
        You keep disagreeing on the same points and the people who comment here make the same counter-arguments back to you. Your time might be better spent chatting to spruikers somewhere else.

          • True contrarian

            The major attraction of this blog is the libertarian debate of issues free from the constraints of dogma. Please keep posting Shadow, I want to hear both sides of this debate. As Voltaire said…

          • Big P – well, I’ve been banned from lots of bear forums (GHPC, CreditCrunch,Simple&Sustainable etc) for posting non-bearish data that breaks the doom&gloom illusion. Time will tell if it happens here too. If it does happen then I can always be found on But hopefully it won’t come to that…

            Cheers, Shadow.

          • Shadow and others.

            I have no intention of banning anyone for doom & gloom we are all very supportive of robust debate on this site and welcome your input which I feel is a good balance.

            I am just asking everyone to play nicely. I have no interest for this site to turn into a flame war so stay on topic and keep the abuse of fellow commentors for other sites as it is not welcome here.

            Anyone ( and that includes people with opinions that I personally agree with ) who I deem to be not playing by these rules will be banned.

            Thank you all again for your input.

      • I graduated from university in late 2009, started working in early 2010, and secured a loan to purchase a property in JUL 2010.
        From memory, the prices of houses have been rising for around a decade. For me, a decade is a very long time; it would be fair to say it’s over 40% of my time spent on this planet. Since I was in high school I have heard from my family, friends and spruikers in the media stating house prices double every 8-10 years. What made this theory (or illusion) become a reality? What had happened after the GFC, house prices paused, taken one step back, but has taken off and not looked back.
        My savings since my first job when I was 15 and some assistance from my parents, I had enough for a deposit. Now(remember my decade long lesson)…in my mind, do I buy one now or wait till housing prices go up, need another $5000 for my deposit and stamp duty and loose my all time high FHOG? I am hoping you can now imagine the sense of urgency to get into the property market.
        Financially I am fine (as long as I don’t lose my job), I don’t and will not late pay my repayments. I would rather sacrifice the cost of my social life than get a bad credit rating.
        Please don’t misunderstand my response, I know it was my decision that I jumped into the property market, but I thought I would just share my views as a young Australian who has lived all his life in this country (minus couple months spent overseas).
        p.s. I have five other friends who also purchased their first property, the rest have given up on saving a deposit and decided to go overseas or purchased Gen Y gadgets, less than a year later paying off this debt, I think every now and then I should have just joined the rest.

        • Hi roger,

          Thanks for telling us your story. Given that you sound as though you would have friends who have not yet purchased housing do you get the feeling that they have “given up” ? Or this there some other dynamic in play here ?

          Thanks for you input

          • They haven’t “completely” given up, they’re just “majorly” delaying their decision on the purchase until they can save for a deposit. They rather live at home, pay $100-$150 per week to their parents and live up the GEN Y life, than pay $300 rent per week and live off instant noodles.

            When I say Gen Y life, it is an important factor. To the older generations, Gen Y are selfish and too demanding. I agree, but that’s how we have been brought up. Everything is now, now or at the latest, tomorrow. It is the era that has moulded us, where all of our life issues have been solved by our parents or technology. Please keep in mind, we are young, ambitious and want to experience as much as possible while we can. People feel sad turning 25, they call it the quarter century mark. It’s selfish and crazy but that’s reality.

            For the moment accept what I mentioned above while reading below and it might give you an insight of Gen Y thought process.

            You can own or do a lot for the average working person, for example:
            It is easier to save for 3-4 months and spend $2k on a tv, $1k on a laptop than it takes minimum 3 years to save $45k for a deposit (assuming 10%).

            After that, it is easier then to save $3-8k for flights and accommodation to Asia/Europe because all my friends want to go. Hey that was fun last year, let’s go again later this year.

            This cuts into your savings, regardless of WHETHER OR NOT it’s for a deposit.

            With the rising of everyday expenditure (foods, fuel, social life) it is too hard to save for a deposit, being GEN Y, we end up wanting something “within reach”. $45k is just too much.

            In addition, my friends know how tough it is for me to keep up my social life while paying off a mortgage. It makes them reconsider, especially when the feeling is mutual among our first home owner’s friends.

            Also why do I want to pay $600k (SE suburbs in VIC) when I can live at home(it is sad, but becoming very commmon), have my laundry washed and dinner cooked. If parent’s aren’t home, I can call my friends and get take away.

            Hope that helps you.

          • oops. When I say my friends who will reconsider, it is those who haven’t purchased their homes.

            Something to add, the ones that have purchased a property could only do so with the assistance of their parents. None that I know have done it on their own.

      • I would expect to see this pattern in our current market. I have made the point previously that defaults will always be low in a rising market because people who get into trouble can sell out pay down their debts. The fact that 90 day arrears are lower than 30 day suggest they are doing just that.

        The other thing about a rising market is that people are able to use “equity mate”, so even when they cannot “technically” afford the house they can reach into the wealth of that asset to make ends meet. This is ponzi economics though, because once the growth stalls the trouble begins as people are forced to live on just their wage while trying to service the debt that they have continually made larger along the way. I am not sure exactly how wide spread this behaviour is, but I certainly know people who have done it. The fact that refinancing sits around 35%-40% of AFG’s mortgage stats suggests it could be quite common, although I have no long term trend info to back this up.

        However as I said in the post, I have little time to argue the point about affordability. I am well aware it was far easier for me to purchase a house in the past that it would be if I was in the same position today. I could probably dig up some statistics from various web site to argue that this is not the case because some measure tell me so, but if I did I would simply not be telling the truth about what I know is the case.

        The other thing that tends to confuse discussions of this type is that people confuse/miss-state affordability and credit availability. They are certainly not the same thing.

        As I said in the comments in another post my feeling is that the 2008 real estate market turn around was purely government incentive driven. It had nothing to do with economic fundamentals. That stimulus has now run its course and the market is once again stalling as is retail and many other sectors of the community that live off the credit expansion caused by housing.

        This is going to be a political problem for the government because it highlights that the government’s policy of intervening in the real estate market did nothing to resolve housing affordability, in fact it did the opposite. This means that if the government is knowingly continuing this policy it will be doing so to the advantage some and the disadvantage of others.

        It seems that the younger generations have had enough of it and are becoming more vocal. I personally think the campaign is a little misguided, but that is not the point. The point is that a section of the community is demanding a public voice about government policy that is adversely effecting its ability to provide itself with something it desires.

        In my mind this significant, both politically and economically which is why I decided to mention it.

        • “The other thing about a rising market is that people are able to use “equity mate”, so even when they cannot “technically” afford the house they can reach into the wealth of that asset to make ends meet”….DE

          I have a friend who borrowed $650K at the peak, earns $150K+, cannot make ends meet and has refinanced once to cover bills and general consumption. Hello USA! I think it’s rampant.

        • “The fact that refinancing sits around 35%-40% of AFG’s mortgage stats suggests it could be quite common, although I have no long term trend info to back this up.”

          A considerable proportion of this refinancing is to fund renovations rather than moving to another home.

      • Most (all) of the burst bubbles I’ve read about have mortgage arrears low until right before the bubble burst.

        ie. you’re looking at the wrong things, initially.

        Look at instead (but not limited to):

        – stock on the market, and historical trends
        – reduction trends
        – sold vs listed dynamics
        (you’ll find a number of those at my website, for example)
        – arrears for utility bills
        – arrears for personal loans
        – arrears for credit cards
        – time to pay for business transactions
        – etc, etc

        ie. the smaller things. Why? In Australia, generally, the house will be the last thing that people will let go (they will, and have, and are, sacrifice even food to pay the mortgage).

        Hence, if you watch mortgage arrears in this country, then, like in another countries which have burst housing bubbles, you will not see it all happening until it is upon you.

        My 2c

        • Stewart, a good “precursor” is a particular company we follow that does Debt Agreements and Personal Insolvencies.

          Funnily enough, their business “suffered” during the GFC – why?

          Because the super low interest rates and $900 handouts forestalled the number of debt agreements in place. Because they also do loans as well, this side of the business offset the loss on the debt agreement/insolvency side.

          Fast forward through 2010 and its now the other way around: new loans are slumping, and DA/insolvencies are rising up 16% so far..

          Watching mortgage arrears rates is like watching the 2003-07 super trend in equities markets: everything is fine, until it isn’t. Very linear thinking…..

      • In January 2007, the number of mortgage defaults in Ireland was very low and reflected by ultra low unemployment (circa 4.5%).

        Then the spiral started.

        Daft 2008

        Check out the posts going back 4 years to late 2006 and early 2007.

        This is great
        “We want to sell our house in Co. Wexford. It was originally valued in January 2007 at €950k. No sale was achieved. We went back to the market with an asking price of €495k but haven’t had any enquiries. We’ve reduced the price hugely and just don’t know what else to do. We would love to move on.”

    • “Doesn’t that suggest that 98%+ of Australians CAN afford their homes?”
      No. It does not. I don’t see the correlation between affordability and low arrear rates.
      I think the industry accepted practice is to look at Mortgage stress – Spending more than 30% of household income on mortgage repayment means that household is under mortgage stress.
      You will find that this number keeps going up and up, while the rest of the household spending is cannibalized to feed the mortgage. This also has a detrimental effect on the economy, especially in the retail sector.

      • Or housing affordability could be measured by the numbers of younger generations being locked out altogether from home ownership. I read a study about the effect of FHOG’s since the 60’s in Australia and it showed the proportion of younger generations entering the housing market has declined. The reason home ownership rates are still high? That extra slack was just picked up by the older boomers. For me it’s a moot point, I’m a single woman earning 55K in Melbourne; I wish I was wealthy enough to afford mortgage stress!

      • Mortgage stress!!!!! I shudder when i hear about these huge home loans – I am suffering as a house owner with no mortgage.
        I don’t know how some people take on these huge debts and maintain a reasonable living standard.
        But then again who can you blame for these escalating prices? Sure banks extend the credit but ultimately is is the person that signs the contract that sets the price/market.

      • You will find that this number keeps going up and up, while the rest of the household spending is cannibalized to feed the mortgage. This also has a detrimental effect on the economy, especially in the retail sector.

        Bingo. I’m seeing a lot of retail stress here in Perth, shops closing left and right. It’s started.

        • I frequent then Sydney, newcastle and central coast regions of new south wales (all very major population and economic areas and I am seeing anh hearing signs of significant retail, industrial and property stress.

          When you listen to the media and the govt, you don’t hearnabout it; when you look around and speak to people, you do…

      • The_Mainlander

        I like that Shadow participates… (why is he called shadow.. weird (ghost of the RE industry to come?)) but Shadow is always looking for a debate… (which is good!) I think these days it has become easier to contradict one’s self as your opinion changes (well may) over time but those posts you made – well they never do!

        Interesting to see what Shadow thinks of his posts in 3-5 years time.


    • It’s not raining, doesn’t that suggest we don’t need umbrellas?

      According to Fitch Ratings “[…] delinquent mortgages rose from 1.3 to 1.37 per cent in the final three months of 2010.” (

      I don’t have the data to see if that’s significant or not. But a 5% increase during times of strong economy, low unemployment and only average interest rates doesn’t look that good to me. Let’s see what happens in Q1 2011.

    • Unlike, say the USA were a mortgagor can effectively post back the keys of the home to the Bank and walk away unencumbered, Australians are effectively trapped on the debt treadmill.
      The debt will remain until paid in full or the mortgagor seeks bankruptcy. That is why purchasing in a falling market is so dangerous in Australia.
      The time to buy will come after some event such as a Chinese growth stall or similar, shocks the Australian economy.

  7. I guess the problem is that Australia has been too long without a really bad recession and never really had a bad house price crash. At the same time, a high level of inflation and immigration has meant that property prices have continuously grown. The (potentially false) confidence this has given over time has resulted in the entire financial / economic system of the country, and I’d also say, the way that society works and to an extent reflected in people’s values and culture, to be based around perpetual property price increases. It’s so embedded in the system at every single level that unfortunately I believe it is impossible to undo.

    The proof of this is the perception that ‘capital gains’ are a ‘success’. Despite the fact that a.) you’ve still got to live somewhere, and b.) they really only constitute general inflation – the same people who celebrate their ‘value increases’ then go on to complain about cost of living!

    I think this embeddedness is becoming more apparent though. Talking to a lot of professional people here in Melbourne, I can tell you that the number of people who are seriously considering leaving Australia is huge, especially in light of the new tax announcements and the opportunities available elsewhere in the world.

    Sad really. Australia stuffed up.

    • “I guess the problem is that Australia has been too long without a really bad recession and never really had a bad house price crash.”

      Absolutely, I think Melbourne’s prices are just recovering now from their downturn after the mega-boom of the 1880s, when we had some of the most expensive land in the WORLD.

      “I think this embeddedness is becoming more apparent though. Talking to a lot of professional people here in Melbourne, I can tell you that the number of people who are seriously considering leaving Australia is huge, especially in light of the new tax announcements and the opportunities available elsewhere in the world.”

      True, if people aren’t leaving physically, they’re starting to move a lot of investments o/s as they see the AUD as overpriced.

      • “I think this embeddedness is becoming more apparent though. Talking to a lot of professional people here in Melbourne, I can tell you that the number of people who are seriously considering leaving Australia is huge, especially in light of the new tax announcements and the opportunities available elsewhere in the world.”

        Can’t say I’ve heard of too many people leaving, but on the flip side of the same scenario, I do know some who have changed their plans to migrate here. Their reason being the cost of living in Oz and the overpriced dollar. You just aren’t getting value anywhere. I find it incredible that Australia has considerably higher living costs than the UK. (It was always “rip off Britain”.) Incidentally I reckon the flow of liquidated equity from “cashed up Brits” into QLD RE is being sorely missed.

      • Being a migrant it is an easier decision for me perhaps but if housing (read: Australia) remains as expensive as it is it will be a huge factor in deciding whether we stay or go (without disregarding some of the major things Oz gets right).

        It’s not just prices, but also the fact that there are simply way less opportunities (at least in my field) over here.

        The positive ‘lucky country’ thing doesn’t line up with my personal experience in Europe and over here.

    • Agreed. I’m in Sydney and this ‘never ending’ housing boom has made Australia into an intellectual wasteland. We’ve become a complacent lazy society where the rewards from speculating far outweigh the rewards from innovating.

      I think the root cause is the strong mining boom causing other export industries to become uncompetitive, so we end up with a much more insular and less diversified economy.

  8. Endrortsonhousing

    If the government intervenes again to prop up the housing market I will have to go overseas. I have had enough.
    The fact you have an inbox full of complaints DE means that the property bulls are getting scared – they are in the denial phase of the biggest bubble ever.

    • I agree. When people tend to resort to these abusive measures, it suggest that all is not well in their world or there’s definitely something that they’re concerned about or would prefer kept secret from the masses.

      Clearly, the winds of change are in the air and sites like this superblog are at the forefront making you all a target for this kind of harassment.

    • The fact you have an inbox full of complaints DE means that the property bulls are getting scared – they are in the denial phase of the biggest bubble ever.

      There is one well-known permabull whose devotion to internet proselytising on the issue is legendary, as is his adoption of multiple personalities to give the impression of “many voices”. I would not be surprised to find out that he is behind the deluge of emails.

  9. Like with the Irish crash I think we are destined as taxpayers to end up paying for the whole shebang. Why? Because too many people have a vested interest in the status quo. Governments at every level have a vested interest in trying to keep prices rising and they’ll do ANYTHING to keep prices from falling. Expect more free covered bonds to our already highly profitable banks and another huge boost to First Homebuyers before the end of the year to try and keep the sagging capital gains off the front pages…

  10. The ‘family home’ has become the status of socialeconomic success. Social status goods does not have a normal demand’ curve : their desirabily increases as price increases, and it’s constrainted only by what the buyer can afford.

    After the SE Asian crisis and the dot-com bust, housing and mortgage bonds become the next ‘safe’ place for investors to park their money. The low loan interest rate environment after 9/11 means people can now afford to buy bigger, better houses on the same income, and they went nuts. As the price of houses increases, the banks and lending institution have to drop their lending criteria to chase customers. “If something cannot continue forever, it will stop”. When the ‘cheap money’ dried up, nobody can afford the inflated price, and the mortgage holders discover their ‘social status’ is falling with the price of the house. Even worse, the banks tigtens credit criterias in response to the drop in asset price, and a full blown deflationary house price spiral is born.

    The best way to stop the ‘boom/bust’ cycle is to regulate the lending criteria of the bank. Tigtening the lending criteria when house prices increase will act as an automatic stablizer. Unfortunately, we’ll need to suffer from a very severve crisis before the politicians find the political will to address the issue. This may come very soon as Japanese investors liquidate their Australian investments after the earthquake. The rebuilding of Japan will see internation cost of money go up, and things can soon get very, very ugly.

  11. I’m not a psychologist but here’s how I see this…

    The thing with discussions is that people feel the need to win and loose track of the quality and validity of arguments. Discussions are no different from sports… people feel the outcome shows their personal capabilities.

    If what is being said on this blog turns out to be true (and I think it will) many people/investors will see that as a personal failure (as if they got it ‘wrong’). The reverse works as well, if there is no ‘pop’ many of ‘us’ will probably interpret that as a failure as well. This human behaviour clouds the discussion and makes people more susceptible for one side of the argument.

    People seem to forget that someone who bought property 10+ (5+?) years ago was probably still making a really good judgement. Nowadays the numbers have changed though and it shows in the growing number of people unwilling to buy. Neither ‘side’ is foolish, dumb or evil… This is just the economy with people’s behaviour adapting to the current situation.

    The current situation made me decide not to buy, even if that means I never get to own a home in Oz (It may urge me to go back to my country of origin but that’s a different story). Even being proven ‘wrong’ I will not change my mind. For me all that matters is that I came here to enjoy my life, not to be enslaved for 20 years so I can finally reap property-related fruits. 🙂

    • In response to that first email snippit…

      Can’t speak for others, but I am certainly not out to cause a crash. I know there will be no winners when the bubble pops as the whole economy will be in shambles as a result of it.

      I just think it is inevitable and it has to happen in order for Oz’ economy to become healthy again.

      Certainly not putting myself in a bad position just to delay what will happen.

    • Good post AnonNL
      My personal judgement of the market being grossly over-priced may well turn out to be wrong. However, I see no value in either monetary or lifestyle terms, for me to be taking out a mortgage in the present market conditions. But many evidently still do (at least I hope they do see value as opposed to potential riches), so are happy to buy. One of the side-effects of a bubble that is becoming clearer, is that it creates social divisions where people that happened to be on the magic carpet ride seem to feel wealthier, more intelligent and generally superior to those that weren’t tempted or were not able to take the ride for whatever reason. And those that didn’t may feel foolish and maybe a little jealous.
      I earn a decent salary, but have always believed that there’s no such thing as a free lunch. All the govt stimulus packages just didn’t and still don’t make much long-term sense to me. Something has to keep feeding the beast, and its a big hungry beast to feed, not just in money terms. Did the govt believe that everyone could be winners forever if they just got on to the property ladder? No, prob not, but have well and truly set the country up for boom/ bust conditions.

  12. Only half a percent of mortgages are 90+ days in arrears. To the people who think mortgage arrears in Australia are high, read this…

    Mortgage arrears well below levels in other nations

    “Australian mortgage arrears have risen, but still remain well below levels seen in many other nations

    Fitch Ratings analyst Natasha Vojvodic told ABC News that while mortgage delinquency is expected to rise in the January quarter, things should improve from there as long as the Reserve Bank keeps official interest rates on hold for a while longer.

    “Even though arrears have increased, they are still at relatively low numbers and the economy is still strong,” she said.”

    • Shadow,

      I really wonder whether you are a RE or banking ‘plant’. A few percentage point increases in interest rates will destroy this housing bubble based on the huge increase in the size of the aussie mortgage in recent years. Yes arrears are low in this relatively low interest environment, but as already pointed out by another blogger, it is mortgage stress that counts. Recent surveys have shown that many ‘investors’ will exit in droves in the event of small interest rate rises of 1 – 2 %. Sure, perhaps they won’t walk away altogether (given full recourse loans), but they will still be listing in what is developing as a declining market.

      This housing market is indefensible based on any standard measures of affordability and it amazes me that people like yourself continue to try and defend it. This market is not different and it will return (painfully) to long term averages. Unfortunately, a lot of people will be burnt in the process.

      • “it will return (painfully) to long term averages”

        Are you aware of the implications of that statement? Stapledon’s thesis (table 2.5) gives house prices going back to 1880 in inflation adjusted 2005 dollars. Prices were roughly flat between 1880 and 1949 at around $50k in 2005 dollars. Is that the long term average you are saying that prices “WILL” return to? They have trended up in real terms since 1949. Are you saying that period since 1949 was abnormal and prices will revert to their previous long term average? If not, what else do you mean by long term average?

        • I’d say 60 years is fairly long term, given the move from the developing/agricultural pre-WW2 economy into 1st world living standards that occurred over that timeframe e.g when Brisbane went from being a big country town to a major city.

          Non waterfront capital city house prices should go up, in real terms, by about 2-4% p.a over the long run, given the depreciation of the dwelling offset by the relative scarcity of the land within city limits.

          Outside the major capitals, non-waterfront house prices should probably only go up between 1 and 3% p.a over the long run, because of the availability of land supply.

          That’s the fundamentals of both the primary and secondary market in housing as I see it.

          Same with stocks: they should only be going up, in real terms, in line with GDP and productivity increases (so roughly 4-6% p.a, plus dividends)

          Unfortunately, both of these secondary markets (property and equities) do not follow fundamentals at all, due to factors clearly detailed in analysis here at MacroBusiness.

          Its a hard reality, but due to the bubble (in both markets) caused by these inter-relating factors, there is great potential to overshoot the fundamentals, whereby house and stock prices may not go up in real terms for years or even a decade or so.

          On top of that is a greater macroeconomic structure: where is Australia heading into the 21st century?

          Will we see a similar shift from post-WW2 to modern age? I think we are heading towards a southern European style malaise for a variety of reasons.

          • “Non waterfront capital city house prices should go up, in real terms, by about 2-4% p.a over the long run, given the depreciation of the dwelling offset by the relative scarcity of the land within city limits.”

            The median capital city house price in 1950 was $4,720 (Stapledon). CPI inflation since then to now is a factor of 23. An additional 3% (mid point of the 2-4% you suggest) for 61 years provides another 6 fold factor. Taking those two factors together gives a factor of 140. So if house prices had increased since 1950 at CPI inflation+3% then the median capital city house would now be $660k. But its lower than that. Are you saying that houses are undervalued?

          • At no time did The Prince state 2-4% in excess of CPI. That would unsustainable. Hang on, thats the bubble we find ouselves in now.


          • 787 Dudliner writes “At no time did The Prince state 2-4% in excess of CPI. That would unsustainable.”

            But Prince DID state that. He wrote:
            “Non waterfront capital city house prices should go up, [b]in real terms[/b], by about 2-4% p.a over the long run,”

          • Hi Sarah,

            I made a boo-boo – I meant in real terms of inflation, as measured by actual purchasing power, not by the ABS-collected CPI. CPI is not real, its artificial in almost every way unfortunately.

            I apologise for the confusion.

            As 787 said, I did not mention CPI as I don’t use it as a measure of inflation as it does not include nominal house price appreciation (only rent) and uses hedonics to artificially reduce discretionary consumption items which mask the real cost of living increases from an monetary inflation environment.

            Given that the median house price in Melbourne is approx. $550K (and this is an hedonic adjustment, according to RPData/Rismark Hedonic Index) that implies an inflation rate on the price of housing of 8% p.a for 61 years- well above what it should be (i.e 2-4%) not the modest 5% that CPI says overall inflation (which is defined as the decline of purchasing power of the dollar).

      • “Shadow I really wonder whether you are a RE or banking ‘plant’”

        Yes, of course, anyone who doesn’t follow the bears faith in the imminent property crash must be an RE or plant. Sure.

        Bears have been telling me for many years that house prices are about to crash. But it never happens. If the GFC didn’t do it, what will?

      • Sam Birmingham


        I recall you mentioning a week or two ago that you were doing some work on forward-looking and rear-view indicators of property market strength.

        I suggest that you file arrears levels in the rear-view column.

        As DE and others have explained, low arrears/default levels do not necessarily reflect a positive outlook – the data could easily be skewed by refinancing (“equity mate”) and/or selling into a positive or flat market.

        But look in the rear view mirror and see what happens to arrears/default levels if/when the real downtrend begins and people can’t afford to sell…

        “Negative equity, maaaaaate”

    • Think you have missed my response to your earlier post. Let me repeat it:
      I don’t see the correlation between affordability and low arrear rates.
      I think the industry accepted practice is to look at Mortgage Stress – Spending more than 30% of household income on mortgage repayment means that household is under mortgage stress.
      You will find that this number keeps going up and up, while the rest of the household spending is cannibalized to feed the mortgage. This also has a detrimental effect on the wider economy, especially on the retail sector.

    • Did you you look at H4As post and the graph he linked?

      Mortgages in arrears is a poor forward indicator.

    • Shadow, I know you’re just responding to opinions here. But what do mortgage arrears have to do with any stats? If (and I believe we have) there is a cultural disposition towards property as a way of life / investment, then surely this would mean that people will pay as much as they can (in detriment to everything else) in order to keep their homes? I.e. other things get sacrificed for the mortgage. So – the greater the belief in the ‘property religion’, the less relevant such stats are? I would personally try to find a measure of disposable income.

  13. At the moment mortgage arrears appear to be in control but there are a number of second and third order effects bubbling away under the radar that will put pressure on arrears. published a survey today of 1000 Queenslanders today of that shows a number of concerning points:

    79% struggle to make ends meet
    59% spend beyond their menas
    67% feel they’ll be worse off this year
    33% can’t pay bills on time
    76% will have to cut back this year
    23% would stop buying meat
    30% would struggle to meet an $80 p/m mortgage increase.

    I’ll caveat this survey noting 1000 is not a large sample and it is a Ch 9 / Sunday Mail survey; would prefer a reliable Gallup survey but none the less, if these figures are somewhat correct, then future mortgage arrears numbers are likely to deteriorate and/or lead to an increase in forced sales as cost pressures increase.

    • A litre of unleaded is approaching $1.50/L.

      What will $2.00/L bring if 79% struggle to make ends meet?

      There will also be an inflationary flow on effect to all goods transported any significanlt distance and harvested by petroluem products.

      The AUD at 0.80USD and WTI at $120/bbl and its bingo(!).

  14. Leith

    I’m a few years behind you – I graduated at end ’99, and just missed lower housing prices by a few years. Although my experience is different, I agree strongly with your perspective.

    I’ve been renting ever since I graduated, and in my experience Australian rental housing quality is quite poor. In Germany, it is common for families to rent for a lifetime, and if they move house they often take their kitchen with them! They have strict standards on insulation and quality of plumbing fittings in rental accommodation – all this from a German friend of mine.

    The other problem with renting is that the Australian rules provide no security of long term tenure. The landlord can jack the rent or kick you out easily, so there is no point spending good money on good furniture that fits into a specific floor plan, and as for buying my own gas oven and cook top and gas hot water service (which I would happily do were I living under German rules), forget it.

    I have had a choice and I have exercised that choice, but this constant insecurity is beginning to affect me emotionally, as I’m now looking at moving again as I’ve never been able to find co-tenants at half the rent. However, I believe that it is in my long term interest NOT to buy and to keep on renting until after whatever correction and restructuring we have coming – but it is still difficult to do!

    While I might be making my own choices based on what I think must happen, I also fear for my generation – many of my friends have recently bought places, and taken on quite high levels of debt – I don’t know how much, but many of them have been the first home buyers of recent years. I do NOT want to see them facing massive losses of equity and potentially being under water on their loans.

    I attended an auction for a house nearby (in North Carlton) – it was a 3 bedroomer with a pretty old and tired floor plan, but in very good nick on a largeish block of land on Rathdowne – about 8.35 * 49 m. It is overshadowed on the northern side by a high block of flats – so winter sun access is non existent. It went for $1,452,000 to a very young looking couple on my right (I’m 34), which made me wonder how they’d been able to justify the price. Call rent $3,000/month – that gives a rental income to price ratio of 40 years. Yeah right. I cannot see how the utility provided by that house and land can possibly be worth one and a half million dollars in current day dollars.

    There are many posters – on this blog and on others – who constantly make vindictive statements that “renters are losers”, and gloating that “prices will never go down and renters will be locked out forever”. I don’t want to see the current housing bubble continue as it would mean my being stuck in crappy rentals with no security of tenure – but equally I don’t want to see friends and fellow citizens in negative equity with debts that they cannot hope to pay until several decades into the future, and dependent on a continued strong economy in order to keep their heads above water on their debt until the debt is paid. If that isn’t a gamble, I don’t know what is.

    Is our community becoming divided to the extent that one group will treat another with contempt based on their personal financial arrangements? Sooner or later the housing roulette wheel will stop spinning, and whether you are on the winning or losing colour will depend on whether you own property and massive debt, or whether you are safely cashed out in secure financial assets. What happens to Australian civil society when that happens – when you have one large class of big losers and another small class of big winners?

    I really don’t like the terms “boomer”, or “gen X/Y/Z”, but if this isn’t setting us up for inter-generational conflict then I don’t know what is – many of my generation would be right to complain that they were advised to take out massive debts and buy on the basis of advice from the same people who allowed the Australian housing ponzi to happen.


    • Hi Andrew,

      I think your post answers your question in some sense. By that I mean that we live in a globalised world now and if housing in this particular country is overpriced, well there are plenty of great places to live that are quite affordable.

      Moving country merely because of cost of living/house prices might seem over dramatic, but in my mind the value of that experience (even if just for a few years) is worth far more than a pile of bricks could ever be worth.

  15. One point that is overlooked is the structural uplift in building costs competing with mining wages. Typical renovations in my area start around $400k, but of course this doesn’t explain all of the housing price uplift. That can be sheeted home to our Economics profession in collusion with the pollies of the day that says consenting adults in the private sector are the best judges of where to invest. So despite Gittins trying to convince us otherwise that meant bidding up existing house prices using overseas money. Thank goodness Steven’s has found some backbone and so far intends to stall the ponzi scheme.

  16. No engineering in ‘GAMING’ places of
    ‘Generational growth’…like shelter.
    Just less engineers..


  17. Is it the same people claiming that there is no housing bubble, housing prices are only 4 x income, juking stats on housing affordibility, juking data on auction clearance and borrowing tens of billions from the Fed Reserve without disclosure now telling us that mortgage arrears are practically non -existant. Believe that and you believe anything.

  18. I have followed the DE blog for quite a while, and have enjoyed the debate amongst those who have felt the need to defend their position on real estate through this forum. I have no wish to use any statistic or metric to advance my opinion on the future of the different asset classes in the economy,the MM has used this type of opinion justification for so long many in society believe they can understand the depth and direction of an asset class simply by following data sets from the ABS,Rismark,Moodys etc etc.
    The peril in this thinking is similar to those tireless and dedicated statisticians who over the ages have built trading systems or “black box” share market tradig tools,all of these systems are built on historical data, the complexity in some of these systems makes them a thing of mathematical beauty. Yet none of these systems have ever generated positive returns over a long period of time.
    Why? You can sit and watch a stream for years be farmiliar with every eddy, pool and flow,you can become so confident you know exactly how the water reacts. The problem comes when you act to take advantage of what you observe, you place your stone in the river and change its flow.Now the stream acts in an unfamiliar way and all you observed is obsolete.
    When we make a decision to buy assets, because they never go down, or the double every 7 to 10 years etc etc we are making the same mistake, economics is not a mathematical pursuit it is a human discipline. Economic fundamentals are more about understanding the motivations of the boomer generation than the mortgage arrears rate. When we can answer these questions we will have a greater idea of where asset prices are heading.

  19. It seems to me that for those of us who believe we are well overdue for this bubble to burst, are ruled by a government who is our enemy. We know that the government has a vested interested in keeping house prices high, we know that not one politician would even breathe the words “negative gearing” and we know that the government has the power to put in place as many policies as they need to, to keep this bubble going. Nothing they do would surprise me. Australian farmland is already being sold off to Chinese investors, and of course plenty of residential stock has been sold to overseas buyers, with RE spruikers actively seeking them. If Australians can’t afford to buy houses, there are plenty of rich Asians who can. And no, I’m not being racist, but if it means the bubble is kept aloft, and let’s face it, most home-owners are in favour of their properties being worth more, then what’s to stop the government from opening the floodgates to more and more immigrants and overseas purchasers, as wide as necessary to keep the ponzi scheme going? Another thing – they could increase FHOG – why not just give $200,000 or $500,000 to get first home owners onto the property ladder? And if rents compared to prices are too low, then why not increase negative gearing benefits?

    Sorry for the pessimism, but there’s no telling what the government has up their sleeve. And if all of this seems far-fetched, is there even one MP in favour of lower house prices?

    • Vote Green. A Bankwest study claimed that most of the Perth metropolitan area was unaffordable for so-called “key” workers such as nurses, police, teachers and emergency workers.

      WA Greens senator Scott Ludlam said most of the problem was because of “the one that never speaks its name” – why governments effectively subsidised investors and house buyers at the expense of providing affordable housing.

      “The country spends 50 times (about $50 billion) as much on tax concessions to inflate house prices as it does on affordability solutions,” he said.

      “Investors want 8 or 9 per cent annual growth otherwise they consider the market sluggish, and lobby groups like the Housing Industry Association and Master Builders squeal about increasing the first home owners grant every time they think there’s a downturn.”

    • Aussie Renter really like you comments but there will come a point where the govt can do all they want to but it will not fix the problem. Look at China they can control inflation and are doing everything they can. At some point the there will come a time where the govt will try to keep it propped up but it wont work. It is only a matter of time.

    • Aussie Renter: All true, but it all falls apart if China crashes –> Australian govt. can no longer afford to prop up local housing market with bribes, and Asian buyers will vanish.

    • I think it’s fair to say the Good Lady will NOT be supporting any (downward) changes in negative gearing!!

      Wonder how many more of our “Elected Representatives” have a flotilla of IPs? Probably the majority, and whilst this is the case their (well demonstrated) self interest will ensure no negative changes to this particular “Middle Class” benefit!

  20. Looking beyond the immediate problem of astronomical housing costs, Australia’s “Housing Obsession” has created an entire raft of industries entirely dependent on the continuation of the perceived “good times”, where buying, doing-up, and onward selling is seen (and historically HAS been) a “very good way of making LOTS of money in a (relatively) short time, for (relatively) minimal or nil risk”. None of these “Me Too” Industries actually produces an exportable commodity or service, but all contribute to the calculated GDP. Our “Flagship” export industries (digging up and selling dirt to elsewhere) have not significantly increased their employee numbers since the 1980’s (although the employee profile has progressively moved from non, or semi-skilled to skilled / Graduate level over that period, as mechanisation has replaced the “labour” intensive activities). My concern (and I note also the concern of many others contributing to this Superblog) is what will happen once the “goose that (continues) to lay the golden egg” stops laying? Once the House-flipper’s sure road to instant riches disappears then so do all the other Industries tied to this business model, and in Australia’s case that’s a lot of small, medium, and large industries (from the self-employed “Interior Design Consultant” right up to the likes of Isons and Bunnings). If these people are no longer earning, they’re no longer spending – which means reduced taxation income (direct and indirect), inability to meet fixed costs (housing (Mortgage / Strata / Body Corp. / Rent), utilities, finance costs), and eliminated discretionary spending. Add on the costs to the remaining Taxpayers of support costs (e.g. via Centrelink payments) and all of a sudden things start to look particularly scary, not just for the short term. Retail has just had one of the worst Christmases for decades, and big names are starting to fall (e.g. Angus & Robertson, Borders). Last year Spotlight was having significant difficulties, and we know The Reject Shop is experiencing “difficult” trading conditions right now. Just walk around you local Shopping Malls and notice the vacant shops, or empty shop locations occupied by “fly by night” traders – hardly the sign of a “booming” economy. This is now – can you imagine what the future will be like once the “Housing road to Riches” unwinds, as is evidently happening around Australia right now??

    • One profession which I won’t miss when the property crash happened is the RE agents.

      I remembered a few years back when Kevin Rudd started the FHBG boost and created the last property boom the RE agents were so smug coming to property inspection sites with their Audi/BMWs and treat many interested home buyers with contempt when we tried to submit any offer below the advertised price. I would see in the property crash whether they can still show their smug attitudes.

      • I now it’s wrong, but it was a joy seeing them have to work for their money for a change when the market went down in Holland.

        At one point a director of a RE company came to talk to us because we were looking to sell our house. They simply couldn’t afford to have people sitting in the office anymore…

  21. Rest assured the crash is coming, and yes, it is a matter of time – however being able to pinpoint this to specific days/weeks/months is a window into the future that no-one has – but the time is fast running out for the spruikers and fools that opted to invest in property (those that are highly geared that is).

    [Content removed by moderator – Chris we have no time for this discussion on our site]

    Great discussion, and great Blog guys… keep up the stellar work.

  22. Having said that, who does have an estimate in their own mind of when to see the downward spiral pick up pace?

    There just seems to be one bad event after another that can and could contribute to this going down in a bad bad way.

  23. Doesn’t matter whether the housing market go up or down there is no win for ordinary people, esp for those people who are now renting and saving the money for buying house later(btw, I do believe it will happen eventually)

    When the housing market crashed, gov will just start money printing, as we have seen happening in many countries right now. It is in effect a transfer payment from net saver(many of you) to net debtor(who own large property per folio and in deep shit). The nominal property price won’t fall that much, but you will see your hard earned saving inflated away.

    • Josh, you may see the US Fed exercise of QE as possible way Australian gov / RBA in the future tried to print money.

      But this is not a very simple comparison because unlike USD which has a privilege status as global de-facto trading currency, the AUD is far from that high-status.

      If the Australian gov / RBA tried to do similar QE exercise in the future, there will be double whammy effects to population wealth / incomes, i.e. higher national inflation and lower AUD exchange rate against other currencies. With current account deficit that we usually have, I don’t think the government would dare to risk people’s rage: not only the economy tanks due to property bust which translates to lower income and assets growth but high inflation due to money printing and higher priced imported goods that will further badly affect the household budget ?

      Even though MPs are mostly ignorant bunch but I don’t think the RBA folks are that stupid. They know that the minute there’s rumor about QE in Australia, I’m pretty sure people will short AUD and long anything else especially gold.

      • Partially agree with you. yea, US can run QE safely as Ben knew newly created money will be absorbed by emergiong economy. however, when facing total banking system collapse, RBA will have no choice but to choose one of the two devils that is less evil. RBA are not stupid, by then, they may ban short on assets and outlaw private gold ownership.

        • Josh, I agree that Australian gov / RBA might resort to those antique draconian measures, i.e. banning short transaction and outlawing the private gold ownership. They might as well regulate exchange rate and capital-flow control.

          But, how can they regulate and enforce the gold ownership for the ones already owned physically up to announcement ? I may bury them in my front-yard 😉

          Another thing to remember is that up until now, Australia has successfully attracted so much foreign capitals both from foreign investors and non-OZ current residents because they understand that Australian capital regime is relatively free and not draconian controlling type.

          But this may change quite drastically overnight once the foreign investors and residents started to smell change of situation and I’m sure the huge risk of capital flights from Australia would further deter RBA folks to try setting up the draconian rules above.

          One thing that many Australians don’t understand is that the ongoing migration inflows have strengthen Australian stocks of skilled labors and capitals because most migrants are from upper middle-class and they’re not stupid. They would liquidate their assets here and move offshore (prob back to their country of origin) once they knew there is not much economic future in Australia, especially with draconian capital regime rule.

          • Like what was happened in US during 1930s, gov will fix the gold price way below market price(e.g. $300/ounce) and announce private ownership is illegal and fore everyone seller their gold to gov/RBA. Yes, you may hide your gold, but it has no value if you can not liquidate it for very long period time, e.g. 10-20years. You can not eat/drink gold, can you?

            Things can change dramatically, by the time, I doubt people has time to liquidate their assets or have to take a huge haircut.

            Anyway, I hope this situation didn’t happen and the bubble deflate in a managed way.

      • without QE, whole banking system will collapse. we will back to stone age. there will be no housing stats anymore at all, as all transactions stop.

        • I wasn’t an issue of whether something very bad was going to happen – that was inevitable, as the system died.

          However, QE didn’t and doesn’t allow for the system to correct by flushing out the problems.

          Hence, we end up “choosing” between two scenarios:

          – deep, market induced Depression
          – or a very deep, very long govt induced Stagflation

          …and Deep Stagflation >> Deep Depression over the long term.

          Therefore, it is not a matter of “can we escape ‘this’, by doing this and that, as if we were dealing with a natural system?”

          No, we cannot escape it.

          It is simply a matter of what route we take: a corrective route (market induced); or a non-corrective route that will likely result in a change in the economic paradigm (govt induced).