Ponzi dynamics (by Leith van Onselen)

An article in Friday’s Australian Financial Review (AFR) entitled “Getting a foot in the door” neatly highlighted the ponzi-like nature of the Australian housing market and the unsustainability of current housing values. Below are some extracts from the article along with some commentary of my own.

It took Lee Palmer two years of trying before he emerged from an auction, but in December he finally got his first house – all 40 square metres of it. The humble one-bedroom terrace in Darlinghurst, Sydney, set him back $641,000.

Actually, once you add $24,900 in stamp duty and transfer fees and deduct the $7000 first home owners’ grant (FHOG), the purchase price rises to $658,900 for the “humble one bedroom terrace”… bargain!

It was a lot of money, but for Palmer it was worth it because he had a foot in the housing market. Now he is on the other side of the fence, where rising prices are in his favour…

In his favour how exactly? Presumably Mr Palmer will want to upgrade to a larger home at some stage. And any rise in valuations across the Sydney property market will only make the upgrade more costly. Not only do stamp duties rise with property values but the monetary difference between his and the next level of home will also likely increase.

“It’s better than paying rent”, Palmer says. “Over the years I have looked at Sydney property it has never really dropped so [I thought] I might as well get in some time”.

“It’s better than paying rent”. Really? A quick Realestate.com.au search of one bedroom rental properties in Darlinghurst turned up the following results:

So Mr Palmer could have rented a one bedroom studio for between $275 and $320 per week or a larger one bedroom place for between $395 and $500. If we assume that Mr Palmer’s home would rent for $500/week, renting would cost him $26,000 a year – representing a gross rental yield of only 4% on the purchase cost. If you compare this rental yield to the current discount variable mortgage rate of 7.1% and add on a bit extra for body corporate fees/rates, maintenance, etc, then the cost of renting in Darlinghurst is likely around one half the cost of owning.

Has Mr Palmer also not heard the phrase: “past performance is no indication of future performance”? Just because Sydney’s prices have risen in the past in no way means that they will continue to rise unabated in the future. One only has to look at housing markets overseas to see that housing values can fall. Beware false axioms.

Property speculation has been a fountain of wealth for decades, and as baby boomers seek to retire and cash in, they are hoping young professionals like Palmer will take the baton. And many are going to great lengths to do just that.

So the baby boomers, who comprise around a quarter of the population and own around half of the housing stock (see here and here), somehow expect that Generation Y (slightly larger in number) will have the ways and means to pay overinflated prices to the boomers as they “cash out”. Good luck with that.

Palmer leveraged his advantage as an employee at a major national bank, which enabled him to get a loan of 95% of the house’s value, without mortgage insurance, and with no fees. It allowed him to bid higher than others with the same finances.

Seriously, if a skilled professional like Mr Palmer has to borrow 95% to purchase a “humble one bedroom terrace”, then how much more upside is left in the housing market? What’s next, young buyers borrowing 100%, 105%, 110%…? Oh well, I’m sure his bank employer is happy to have his business. What better way to tie someone to their job than enslave them in debt.

Others have had to be more resourceful. Like many first-time buyers Lauren [name removed] had a little help from her parents. She saved  a 10% deposit and they put in another 10%, enabling her to buy a one-bedroom apartment in Melbourne’s prestigious suburb of Hawthorn. She is living there now to qualify for the first-home owners’ grant, but will move back with her parents as soon as she has it in hand, and rent out her apartment. Maybe she will share house somewhere in a few years.

Does this look like sustainable behaviour to you? Many young buyers are now having to turn to their parents for support and are gaming the FHOG in order to make ends meet. How exactly do the boomers expect Gen Y to “take the baton” when so many are unable to buy on their own?

Janusz Hooker of national franchise LJ Hooker calls the new wave of Gen Y buyers the “folio investors”, building up their portfolios from a young age. “We’ve got lots of cases of this… the older generation is seeing prices will be flat median term, selling out to cash in and the folio investors are jumping in. What they are doing is instead of buying their home and living in it, which they can’t afford, they are buying an investment property because of the tax benefits… They rent it out and hopefully get a large portion of their debt and interest repayments sorted through the rentals”.

So Gen Y can’t afford to live in the homes themselves and are instead choosing to buy-to-let in the hope that the capital gains more than offset any income losses. Sounds like a ponzi scheme to me as the only way these Gen Y buyers can make a profit is if they offload their properties onto other buyers at a higher price (the ‘greater fool’ theory).

Mortgage adviser Catherine Lezer says it is common for parents to help them buy by putting some equity from their own home up as collateral… “Property goes up and rents go up, so the quicker people can get in the better”, she says.

Ah yes, the old “property only goes up” claim. Once again, beware false axioms. Past performance is no indication of future performance.

Plenty of others call it a raw deal, paying such high prices for houses that previous generations bought for a much lower proportion of their income.

Like the 21st speech where the speaker says some nice words after talking 10 minutes of smack about the birthday boy/girl, this is the token bit of the article where the reality is acknowledged. But don’t worry, it doesn’t take long for another industry representative to say everything’s ok:

But Justin Doobov [mortgage broker]… has been hearing the same complaints for years. “Five years ago they said it can’t go up any more, crazy prices, it’s too expensive, but then it went up further… People would prefer to pay their mortgage before they put food on their table”.

Yeah right, I guess they are going to eat dirt then.

“Australia has such a low arrears rate”.

So did Spain, the UK and the US prior to the bursting of their housing bubbles (see the below RBA chart). Ireland, too, had mortgage arrears below 1% before its housing market imploded. Arrears are a trailing indicator, not a predictive indicator.

“There is going to be huge migration and a lot of them are coming with money and they’re buying property. That’s just going to fuel more demand and push up prices”.

That’s funny, I thought immigration was falling (see below RP data chart).

With arguments like those, what could possibly go wrong?

Cheers Leith

[email protected]


Unconventional Economist
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  1. I think the MSM and the RBA are caught in an insane/impossible/contradictory balancing act of doing the right thing AND maintaining the status quo (which benefits them BTW).
    “An important factor
    explaining the rise in household debt was the structural fall in nominal interest rates following the transition to low inflation in the early 1990s, which raised the borrowing potential of households”
    “Structural change” and “paradigm shift” seems to be the current fad among RBA and bank economists.
    So in the absense of structural changes that would lead households to actually REPAY that increased debt, I can only conclude that we are in the “New paradigm” phase of the ponzi bubble.

    • Have to agree with you there, the RBA is certainly at attempting to have it both ways – bring asset price inflation under control while not ‘popping the bubble’.

      This is not sustainable, ponzi schemes require rising asset prices to suck in the greater fool.

      At some point soon the RBA/government will have to inflate the bubble which will finally turn attention to the already ridiculously inflated government bond market.

      Then the trouble really starts.

    • Anthony Peterson

      Yes – this structural talk is nonsense. The only thing structural is a lack of common sense. Risk has been priced too low for too long (hence the GFC). If it were priced correctly, Uncle Kevin would have had to to step in and save the banks in 2008 (in October that year he appeared on Channel Seven and told a young couple thinking of buying a house to ‘get in early’). We are truly sick and depraved. God help us all.

      • depraved…consider for a moment the lending policy of banks towards real-estate developers…tightening lending criteria and restricting supply. In their self-interest they do not want to see an oversupply…at what point does this self-interest cross the line to manipulation to maintain the quality of their existing loan book? I think we should be told.

  2. “People would prefer to pay their mortgage before they put food on their table”

    Judging by the discounting behaviours of our major supermarket chains, I suspect this is happening as we speak. Got 10 boxes of BBQ shapes for $10 the other day!

    • Full recourse loans and heavy retail discounting could explain the low arrears rate.

      However, debt agreements/personal insolvencies are on the rise again (ala 2008) even as credit growth is decelerating.

      I’d like to know where we can get data on mortgagee-in-possession sales/listings: anecdotally, I’ve seen a rise of these advertised on the major real estate listing websites.

      Perhaps a phone call or two to Perpetual Trustees and other institutions (particularly mortgage insurers like Genworth and QBE) for an idea?

      Leith, I got 4 2 liter bottles of Coke Zero for $10 on the weekend. You pipped me at 75c – I paid 80c. Bugger. Still cheaper than Naive water mind you.

    • I started to see a trend developing in the Neutral Bay, Cremorne, Mosman area in Sydney’s well-to-do harbour side.

      Late last year a few eftpos, credit cards were being rejected at the check out at, Neutral Bay Wollies, Neutral Bay Coles, Cremorne IGA, Mosman Harris Farm, and Cremorne BP servo caught my attention (only because I was always next in the queue).

      So this year I decided to take a mental note when this happened and tally when 4 (or more) cards were rejected at the checkout. 6 a month so far, with this month seeing two. The best was at Neutral Bay Woolies were a woman in her 50’s had 1 eftpos card, and 6 credit cards rejected (this stuff always happens to me when I’m next in the queue). She called her old frailing father to come with $39bucks to pay her bill.

      “People would prefer to pay their mortgage before they put food on their table”.

      Yeah I see it. Take a walk past Military Road MacDonalds Cremorne after 6:30pm all the way to 11:00pm, and you’ll think you’re passing one of Sydney’s more exclusive golf clubs. I thought if you can afford a Maserati, you can afford 3 personal live in chefs at home. Its’ not just the mortgage, its’ the car too.

      Opportunity Cost: When one must decide between an iPad and the dentist.

      Sydney Markets Saturday morning if you want to buy red capsicum for $5/box, instead of $10-13/kilo. Will you all stop the Coke Zero, BBQ Shapes.

  3. Hi Leith,

    Long time reader, first time poster, etc.

    I’m a migration agent, and I can echo the sentiments about immigration numbers.

    Between the 08-09 & 09-10 program years the ‘economic migration’ stream fell 6% – and these are ‘high value’ migrants who are meant to be propping up… I mean, buying into the housing market.

    There are likely to be further falls this program year, particularly in the student stream, and also the general skilled stream, as structural changes in those programs implemented mid last year start to take effect.

    Immigration seems to be one of the last great unchallenged furphys of the bullish crew. It’s annoying for me as a consultant to read the number of articles that talk about ‘huge migration’ with no attribution to any source.

    • Nick, it appears most use the straight line/2B pencil analytical method for population growth without considering physical/monetary/demographic constraints that are clearly visible to any empirical observer.

      Welcome to Macro.

    • First Home Buyer

      Thanks Nick, A very valuable opinion indeed, I hadn’t considered the financial status of migrants – Probably because no one in MSM says anything about it!

      • Absolutely! UK migrants coming over are likely to have realised less capital upon liquidation of their assets. What cash they have is now only going to yield about $1.60 per GBP instead of $2.40ish a reasonable guess at a long term median. Many people I know managed $3 per GBP in the early noughties.

        The point – there is no longer a procession of cashed up Brits helping drive up the price of RE (particularly in QLD.) Where the lifestyle and cost of living was once very attractive, it no longer is.

        I speak from experience. I sold my house in the UK last year having arrived in 2009. At the time of my visa application in late 2007, my very nice house was valued at £250,000 (at that time $600,000AU). I sold it in 2010 for £250,000. That equates to $400,000AU. The problem is easy to see.

        For migrants this is a huge deciding factor. I know of two friends who have decided to now not migrate. I don’t now how important this situation is for Aussie RE but Nick’s take on immigration was very interesting so I thought I’d throw my 2c in.

      • The Wife and I have renewed our EU passports and are “downsizing” all the unneccessary detritus prior to bailing out. Combination of reasons – the most significant of which is “Renter Harassment” on a six-monthly basis from the Letting Agency. Other significant reasons – poor customer service (our local population EXPECT exemplary service, but when the tables are turned, they are not prepared to even slightly put themselves out when WE are their customers!), astronomical prices for almost everything, heavy handed policing (weekly breath testing anyone?), regular power outages, abysmally slow “broadband” performance (and ridiculously high costs too), abysmal (and again costly) mobile ‘phone coverage (just don’t have a breakdown more than 10km from any population centre . . .!), but probably (for us) the deciding factor is the continuing attitude towards renters – we’ve all mentioned it. All those who have bought when the market was “normal” (or at least less abnormal than now) feel a great sense of superiority over us “lesser mortals”, and really do like to flaunt their perceived wealth (prestige cars, holidays, investment property flotilla), the implication being that they were “smarter” than us.

        – And, we are not alone in the departure programme, and like us, the “departees” are all highly (M.Sc., Ph.D, one D.Sc.) qualified individuals, all with degrees from prestigious EU Universities. Time in Aus. ranges form 5 years, to 12 (and it’s interesting that the member whose been here the longest is the most critical of the overall decline in living standards!).

    • “Immigration seems to be one of the last great unchallenged furphys of the bullish crew. It’s annoying for me as a consultant to read the number of articles that talk about ‘huge migration’ with no attribution to any source.”

      http://www.abs.gov.au/ausstats/[email protected]/Products/A4F32EFA555E058ACA25776E00177886?opendocument

      Using data based on the current methodology, over the five years 2004-05 to 2008-09 (i.e. all NOM data currently available using the 12/16 month rule), NOM has increased by 110% (from a net of 142,500 to a net of 298,900 persons)

      the key to this is that it is till 2008-9 and as you have pointed out that is slowing … perhaps even stopping. What that does not change is that our population has grown

      using this data:
      http://www.abs.gov.au/AUSSTATS/[email protected]/DetailsPage/3105.0.65.0012008?OpenDocument

      you can quickly produce some substantiation



      • Pellicle – I’m not really sure whether you’re agreeing or disagreeing with my point (either is fine).

        To try and refine what I said above – immigration is subject to a cycle, and the peak of said cycle was 2008.

        What I’m suggesting is that we’re not only on the downslope of a credit cycle – we’re also on the downslope of an immigration cycle (for a number of reasons – government policy changes, the AUD, etc).

        This immigration tail off is likely to exacerbate any drop in housing price, or at the very least, adds weight to the argument that housing prices (particulary in Melb) are going nowhere, which exposes the investors claiming billions via negative gearing to significant downside risk.

        Also, to revisit my favouriate bugbear, the idea of ‘huge migration’ seems to be thrown around in the MSM as a given (there is another article today in the Age about rising rents which cites ‘healthy migration’). This is nonsense – people are using lag figures from 2008 which simply don’t correlate to today’s migration patterns.

        As an anecdote, http://www.liveinaustralia.com, who were a big migraton outfit, and were affiliated with seek.com.au went bust in fairly spectacular fashion mid last year. The whole industry (in Melbourne at least) took note of that.

        I’m certainly not arguing that our population hasn’t jumped a lot in 2003 – 2008 – those were the classic Howard years of, study commercial cookery / hairdressing / community welfare work for two years and get almost automatic PR. Migration was (emphasis, was) booming until the GFC. But it has dropped well back since then.

        As Leith notes in the article, a ponzi needs progressively more dollars (and bodies) at the bottom to keep the thing afloat. My point is that migration to Aus is no longer supplying the numbers needed to keep all the balls in the air at once.

        • Hi Nick

          well I was sort of doing both. I was disagreeing that it was an unsubstantiated furpy agreeing that the data is slightly old.

          Having said that the data is “old” its only 2 years and if you look at the trends (and the slope on the lines) its clear that what may seem to be a minor effect (looking only at the percentages) has a large cumulative effect on the overall results. If you project out the old growth rate line to 2009 you’ll see our population would be much much lower.

          I for one doubt that we can sustain the growth that has already happened, all our infrastructure is at bursting point and the costs of upgrading it are more or less beyond our capacity.

          I do not think that larger population means that infrastructure costs scale as does mass production. All the evidence I can see points to the exact opposite.

  4. Leith mate, that pyramid picture should be upside down by now. The lower end of the market is clearly straining under the weight of the upper end.

  5. I am always astounded at how many people accept it as an obvious truth that “it’s better than paying rent”.

    Surely the idea of opportunity cost is still being taught in high schools and universities?

    • Not unless you do economics RA, and even then I woyuldn’t bet on it. At least not in the state school system I attended in the ’90s.

      Most high school graduates barely understand the concept of compound interest, let alone opportunity cost. Actually, given the average credit card balance is around 3k, most Australians don’t get it either.

      The fact Australian schools don’t seriously teach any sort of financial literacy is a crime. But who would teach it? The negatively-geared boomer or the credit-card loving, Iphone sporting Gen X and Gen Y teachers?

      • Perhaps my memory of high school is a bit hazy! But you are right – this is an issue of basic financial literacy and the fact that nobody teaches this stuff seriously is a crime.

        The other big one is the idea of diversification. I am also astounded at the number of Australians I hear of who in their 20s or 30s have a primary mortage and an investment property on the side. Almost their entire net worth is tied up in property. If there is any diversification at all, they have the rest of their money tied up in bank and mining company shares.

        In a crisis, all the correlations go to one…

      • Anthony Peterson

        Julia Gillard doesn’t understand compound interest. Apparently 7% is a good rate of return for Australia’s biggest IT project. Mmm, no thanks, Ill put my money in a fixed term account.

    • The sad fact is that your average punter does not understand opportunity cost. Even more strage, many home owners who otherwise understand opportunity cost don’t get it when it comes to housing.

      Try explaining imputed rent to 95% of home owners and they will give you a confused look before they say “but I’m not paying rent, I OWN my home”

    • I speak to seasoned boomer investors about relative-scenario opportunity costs, and lightbulbs often turn on.

      It’s not just a boomer thing though…

      Asking people to compare classic “good” investments vs AUD cash in a high yield term deposit brings thoughtful looks.

    • I guess that ‘they’ would not want people to understand. If the general population understood the downsides of property ownership from the outset we would probably not have negative gearing, more people would rent as a lifestyle choice and we would have a sensible national housing policy.

      Keeping people unaware has perpetuated the myth of the value of property ownership and has unfortunately produced a whole class of ‘I’m alright screw you types’ that use materialism to to judge their value to themselves.

    • I wanted to do economics in year 11 but couldn’t because that year they took it away as an elective.

  6. Ponzi or pyramid schemes are fraudulent investments that pay return to investors from money paid by subsequent investors, rather than from the sale of, or return from any tangible product.

    The property market can not be considered a Ponzi or pyramid scheme for the following reasons.

    1. It is not fraudulent. There is nothing illegal or fraudulent about the purchase of property for shelter or investment.

    2. Return is paid to investors from rental income as well as capital gain.

    3. New money flows into the property market on a constant basis, not only from new investors, but also from the rental income and regular wage income of existing property owners.

    4. Property is a real and tangible asset, providing essential shelter to millions of people.



    • “A Ponzi scheme is a fraudulent investment operation that pays returns to separate investors, not from any actual profit earned by the organization, but from their own money or money paid by subsequent investors.”
      In the Housing ponzi scheme:
      “not from any actual profit earned” refers to the rental income.
      “money paid by subsequent investors” refers to the capital gains.
      However, this ponzi scheme is legal because it is run by banks in collusion with the government.

      • Mav, just to get one thing straight (and to delineate Macro from others), the property “Ponzi” is not some great shadowy backroom conspiracy theory. Far from it.

        Governments, institutions (like the banks, the RE industry, construction) and other stakeholders genuinely believe that:

        A. Housing is a productive asset that everyone should own
        B. Increasing house prices increases wealth
        C. High home ownership equals a prosperous, stable society
        D. Borrowing to purchase an asset that goes up in value is perfectly normal

        Each of these points is contentious, but are not conspiratorial. Sure, there are some get-rich spruikers in the midst (just like there are some uber-crazy bears out there too).

        All four points I mentioned above are BELIEFS. Not facts.

        Housing is not (as) productive as genuine capital investment (e.g factories, education, infrastructure).

        Increasing house prices (above their fundamental value) only enriches those lucky enough to either get credit and/or be first “in the game” on the “ladder”.

        High home ownership is not a prerequisite for a stable, prosperous country (look at Northern Europe for a close comparison).

        Borrowing to purchase a depreciating asset exposes both the creditor and debtor to structural risk in a downturn. You should only borrow money to purchase an asset if that asset provides positive after tax returns. Not to play a waiting game for ephemeral capital gains. That is pure speculation.

        Changing these beliefs will be harder than getting a soft landing in the property market and wider economy. As Q Continuum pointed out, its a pity that these beliefs weren’t challenged and the facts taught alongside in our schooling system.

        • My opinion is that a soft landing is impossible to achieve. So changing these beliefs among the general public is imperative. Otherwise, it will continue the way it does today in the US, UK, Japan and Ireland – Year after year of “extend and pretend” with a government bailout of the banks.

        • It the daft way that we measure that economic well being that delivers an illusion of wealth – GDP is a poor measure of national wealth and even the US economist that conceptualized GDP in the 30’s said should not be used to measure economic well being.

          I would add that investment in property adds next to nothing to the productive capacity of a society. If anything a property bubble will suck in imports – in terms or raw materials, brown and white goods, etc, and result in a massive misallocation of scarce resources (like Ireland Australian’s have borrowed madly to buy off each other) away from productive investment or investment in public infrastructure to deliver a social benefit. A lot of property constructed in the US is in the wrong place, of the wrong standard, etc.

          Increases in house prices are a reflection of asset price inflation and can be wiped away in an instant – Ireland and the US where $6Trillion of imaginary has been lost and will never come back.

          A high level of home ownership does not indicate a prosperous society at all when an increasing percentage of income is consumed to maintain a roof over a families head and there is nothing left for anything else. Also sneaky changes in the way we measure house price income ratios is based on the total household income – if you measure on the basis of one income then the ratio goes through the roof (pardon the pun) and it means if one income is lost then the home may be lost.

          Borrowing to purchase an asset that is increasing in price and is likely to go down is not always rational – individual purchasers do not always have enough information to make informed decisions and in fact many purchases can be irrational – the notion of the greater fool.

          I would contend that what has transpired in Australia and other countries is not conspiratorial but is in fact a deliberate policy and belief in economic dogma. After the emergence of Thatcher and Regan and the Chicago School of Economics public investment by governments was deemed irrational and investments by individuals was viewed as rational via neo-classical ‘crowding out’ nonsense. This strategy favoured the banks and ‘Finance Capital’ and over the years the rules for lending were relaxed to encourage the dream of home ownership while simultaneously demonizing of other forms of access to accommodation. This has resulted in the absurd situation where public debt is low and public infrastructure is poor while individual private debt levels in Australia are higher than the US.

          The creation of a regime of private debt entrenches vested interests (the banks, politicians, investors/constructors, etc) that are not in the best interests of broader society as we have a bubble fueled by cheap debt and poor land release policies . Not a conspiracy but a situation borne from poor policies, economic dogma. House prices are driven by the availability of debt and poor lending standards and the simplistic notion of ‘supply and demand’ is a poor mechanism for understanding increases in the value (inflation) of asset classes.

          Beliefs will change when the train crashes. This is evidenced in the US as positive sentiment towards home ownership has declined.

    • It’s not a classic Ponzi, but has enough points of commonality to make the appelation apposite, such as:

      * offering returns other investments cannot guarantee, in the form of short-term returns that are either abnormally high or unusually consistent (“doubles every 7 years”);

      * The perpetuation of the returns that a Ponzi scheme advertises and pays requires an ever-increasing flow of money from investors to keep the scheme going (the exiting of the FHBs and investors is leading to the downturn and imminent collapse you see now);

      * Ponzi schemes eventually collapse under their own weight, as is happening with the Oz Housing Ponzi;

      * A Ponzi scheme requires a continual stream of investments to fund higher returns, and once investment slows down, the scheme will begin to collapse under its own weight as the scheme has problems paying the promised returns (the higher the returns, the greater the risk of the Ponzi scheme collapsing). Such liquidity crises often trigger panics, as more people start asking for their money, similar to a bank run (or as in our case, we have tons of listings as people scramble for the exits).

      In general, yes, it’s not a true Ponzi, but rather a “bubble”. A bubble is similar to a Ponzi scheme in that one participant gets paid by contributions from a subsequent participant (until inevitable collapse), but it is not the same as a Ponzi scheme. A bubble involves ever-rising prices in an open market (for example stock, housing, or tulip bulbs) where prices rise because buyers bid more because prices are rising. Bubbles are often said to be based on the “greater fool” theory. As with the Ponzi scheme, the price exceeds the intrinsic value of the item, but unlike the Ponzi scheme, there is no single person misrepresenting the intrinsic value. With the greater fool theory in mind, some may invest even though they believe the securities are overpriced due to a bubble.

      You can see we bears just enjoy calling it a Ponzi. I know I do 🙂

    • Recent history would disagree with you Shadow.

      A Ponzi scheme starved of new funds collapses. The Australian housing market in 2008 was similarly starved during the credit crunch and began to fall off a cliff. It took $18B of RMBS, over $2B of FHOG/B, $20B of indirect industry stimulus (Batts, school halls etc) and the untold benefits of rapid monetary policy changes to save it. It’s a Ponzi.

    • FrankieFourFingers

      The valuations used to extend the Bank’s balance sheets without raising appropriate liquidity is fraudulent.

      So is the spruiking of property prices doubling every seven years.

      So is the distortion of statistics to understate the over-valuation of property prices compared to historical prices or other countries.

      So is the failure of banks to notify shareholders of the use of emergency funds during the height of the GFC.

      So is the failure of the ASX to investigate the banks for this failure to notify shareholders on information which would have a material impact to share price.

      • The_Mainlander

        He’s back… like a shadow in the night!

        no wait!

        Oh knows!


        Keep up the Bull commentary Shadow I love your tenacity.

    • Shadow, Goldman Sachs were shorting the US mortgage market while at the same time selling mortgage backed securities to their clients. So they knew the housing market was going to pop and that it was going to cost their clients dearly. Probably noone went to jail so you could call this ‘legal’. This is an extreme case but also an example that banks can make their money in boom or bust. So why would they care if we are in a bubble or not.

  7. The article unwittingly exposes just how unsustainable the Ponzi has become. High irony indeed, because the obvious intent is to inveigle more people into the scam! Delicious!

  8. I literally cannot comprehend how a buyer can justify the purchase of a single bedroom unit for $641,000. I think most property in Australia is overpriced, but that is just insane.

    They are paying hundreds of dollars more to buy than to rent on just the interest costs alone.

    What benefit does owning such a small apartment have over buying? At least with a house you can make significant improvements, changes, renovations, etc, no such opportunity with a shoebox like that. The only reason I see for buying that would be with expecation that signficant capital growth will be seen, I’m guessing they will regret this purchase in the not too distant future.


    • ~$650K for 40 square metres equates to $15,000/m2. Incredible!!!!!!!
      Are people nuts?
      I recall a few years ago when on an O/S holiday being told by a tour guide that apartments in Monte Carlo were selling for $10,000 /m2. But that made sense because of the tax advantages in being a resident and the simply glorious views.

      With these sort of market prices you really need to consider whether it is worth selling up and moving to Kota Kina Balu and live like royalty for the rest of your life.

  9. I get the govt’s belief that higher home prices make us all feel rich and we can then go out and splurge on imported tv’s and furniture thus stimulating the economy, but this poor sucker’s looking at repayments in the order of a grand a week?!?!

    Wouldn’t we be better having some of that disposable coin go into retail, hospitality, shares, savings etc instead of paying off bank debt and interest?

    • Absolutely. That’s the hypocrisy and stupidity of it.

      On one of the other threads we heard from a swag of people (myself included) who bought for 1.5x income in the late 90s. The ability for one to broaden themselves with further education, pursuing innovation , contributing to charity, looking after their own kids, travelling, consuming etc etc was freely available without the massive noose.

      At this point in time we’ve lost that, but I think cyclically, it’s on the other side of the roundabout. We’ll be much better for it when it turns, despite the odd speculator getting burnt (late 1980s ring a bell?).

    • The transaction is two-sided: a buyer and a seller. Maybe the seller uses his “coin” from the sale to invest in R&D, infrastructure, retail, taxes, etc etc

      • except at the moment the seller uses his coin to upgrade to a more expensive, equally overpriced house and starts again.. or at least thats what i’m guessing most do, there may be some boomers downsizing.

  10. The ‘folio investor’ mentioned by the L.J. Hooker agent simply don’t know what they’re getting into. The tax benefits disappear if they become unemployed, or if there is no tenant. Thanks to negative gearing and depreciation expenses, a 500K apartment will only require less than $10 per year to maintain. They can buy an apartment even though they cannot afford to live in it. If they become unemployed, or if the loan interest rate goes up by 2%, it will be game over for all of them.

    • Sort of reminds me , when in my younger days, I wanted to buy a Series III Jag. I could afford it (good value for money really) but I couldn’t afford to run it.
      I never bought that Jag – and glad I didn’t.

  11. Wasted Opportunities

    “will move back with her parents as soon as she has it in hand, and rent out her apartment.”

    In my experience this is not conducive to good sanity or a healthy love life, whether single or otherwise. Talk about wasted opportunity! Prime years of her life down the toilet.

    • There is a societal impact to be researched on this issue. If we value housing so highly, and place relationships and children behind or as lower order needs than housing acquisition then its no surprise that we have a declining birthrate or that the maternal age is increasing.

      Take a look on any dating site at the growing army of single 30+ educated women. TICK TOCK goes the baby clock.


      • What about the amount of children who now grow up with both parents working full time and under the pump to service the mortgage, rising utilities and grocery bills. It is having a huge effect on them. This too is a massive social issue.

  12. Crazy question: I’m one of the fortunate ones who bought for about 1x household income in the early 1990s. There are several others here in a similar position. Given that many of you believe housing prices are set for a fall (or at least long-term stagnation) are any of you considering selling and renting for a while?

    FWIW, I’m not. The security and peace-of-mind of owning your own home outweighs potential losses in coming years.

    • They arent losses till you sell.. and considering the 1x multiplier when you bought it would have to be one hell of a crash to sell lower than it cost you to buy

      • But this is where opportunity cost comes in embee. Lorax may have paid about $100K for his place and it could now be worth about $450K, which is a tax free capital gain of $350K. To rent an equivalent home it would probably cost $400/week, with no maintenance, rates etc. Now Lorax only needs to make a 5% return on his $450K to be better off renting.

        But if the property market crashes 20-30% Lorax’s house could be worth $270-315K in say, five years time. So if he sold out now and rented for five years he could buy a similar home and have a spare $200K or so just from renting and investing the proceeds of his former house in the meantime.

        This is just a rough example, but it sure as hell demonstrates the whole “Rent money is dead money!” mantra only holds true in a rapidly rising market.

        • Great reply – the biggest opportunity of all is selling your own home because the gain is CAPITAL GAINS TAX FREE.

          People who want to jump a few suburbs – say 5 years from now, really ought to think about this opportunity … using the above example … it is my strategy to play this out.


    • This is an excellent question Lorax, as it directly relates to how you “treat” property as an asset.

      I contend that your PPOR – your home in non-legal parlance is NOT AN INVESTMENT ASSET.

      Its a security asset: something that is tangible/physical, but also has intangible qualities (that are extremely hard to value) that at the same time do not allow for any type of speculative excesses: namely purchasing said asset at too high above intrinsic value.

      For example, I would buy a property if it was up to say 20% above its intrinsic value .

      How do I work this out?
      Calculate simply by dividing the imputed rent by the current risk-free rate of return, or inverting the rental yield.

      E.g if you could rent the house out for $500 a week, after costs, and if the best term deposit/government bond yield is about 6%, then the intrinsic value is approx. $433K.

      I would consider a purchase up to $500K or so for my own home based on that yield, but not for an investment property.

      An investment property needs at least the same yield as a government bond, because of the risks involved and the actual (not artificial) depreciation of the dwelling. And any investor knows its always better to purchase at or below intrinsic value – so $420K or so would be my offer on that particular example if I was property investor.

      Your home is the “iron bar” that connects your well being and wealth together, but this “bar” should not be used to leverage (h/t Archimedes) the world……

      • Um, what happens when you are ready to sell your $500k property, but the govt bond yield is say 4% and rental market is the same at $500/week – does that mean you will happily sell for a capital loss?

      • Where I live (holiday town) the rental yields are rubbish (say 3%) so I would be well ahead if I sold and rented. Like you say, I could get 6% on a term deposit, and even after taxes I could easily cover rent on a similar house and pocket the difference.

        Believe me I’ve been tempted, but its those things you can’t quantify (security, peace-of-mind etc) that’s keeping me here.

    • Hi Lorax

      I purchased a house in Brisbane in ’96 for a lot more than 1x income only to sell at the end of 2010 (netted about a 13% annualised gain for those who were curious). My wife and I decided to sell mostly because the house was small (we have a child on the way) and because it was a circa 1963 shoebox with a lot of asbestos and a lot of maintenance requirements. Throw in the Brisbane River encroaching upon the yard in January and I think we made the right call.

      Whilst house prices weren’t the reason to sell, they are definitely the reason we’re renting now. We will continue to rent until house prices become sane again.

      I think it would be a big call to sell a primary residence based on the bubble. The transaction and moving costs are substantial and the impact of displacement (especially on kids) also needs to be considered. Like you said, security and peace-of-mind have a value in themselves.

      Investment property is another kettle of fish – I’d be getting out yesterday.

      • My first home was 1 bedroom flat purchased in 1993 for about $140K, which was a bit more than our combined income at the time. The flat was paid off about 8-9 years later from regular incomes and old-fashion restraint, by which time it was worth $520K. We’ve since bought and sold several other homes, all of which have been our PPOR.

        The thing the Chris Joyes of the world don’t get, is that’s just not possible anymore! He prattles on about how the price-to-income ratio hasn’t risen, when everyone knows its complete bullsh*t. Now you may well argue that the price-to-income ratio has moved to a permanent higher level (because of financial deregulation, tighter supply, lower interest rates etc) but I don’t know how these guys can argue that housing is just as affordable as it used to be.

        FWIW, I can’t see things changing while China keeps throwing money at Australia. While the government is rolling in cash from mining taxes they’ll defend house prices at all costs, because they’re sh*t-scared of a US/Ireland/Spain style housing bust in this country. Its only when the money hose from China shuts off that they’ll be forced to deal with reality. ATM, I think the RBA and govt are pretty happy. The housing market is hurting but not crashing, and a long period of stagnation looms if global macro conditions remain similar.

        • And therein lies the risk – what are the chances of global macro conditions remaining static over the next 5-10 years? Take your pick of wars, natural disasters and economic shocks.

          • what are the chances of global macro conditions remaining static over the next 5-10 years?

            Very little, but that is the baseline assumption of RBA, Treasury and government. i.e. China booms forever, commodity prices remain strong, mining tax receipts continue to grow, which all supports housing prices.

        • Well said The Lorax. You hit the hammer right on the nail. When the China story crashes and everything is cut off Australia will bleed. This is when we will see a the bubble really pop.

    • not to mention that you don’t have losses only forgone gains (had you sold in 2007 and stashed that into gold say …). But as you bought in the 1990’s your “value” will still be increased …

      leaving that reply alone, another side to this is that perhaps its just a reflection of the loss of value in the dollar?

  13. Deus Forex Machina

    I know I’ll probably lose money on my home in real terms(inflation adjusted)over the next decade even if there is no house crash but its our home and as such in large part a consumption good so I’m alert but not alarmed.
    But it seems the RBA knows I’ll lose money too. Last week’s Bulletin had some data from the 2009 HILDA survey which tells me demand for housing finance and thus houses is going to be lower in the decade ahead. Just look at the percentage of Households over 50 who have home loans now compared to 2001. Its risen from 16% to 24% and they now hold 25% of the outstanding stock of home loans. Not good for the economy, paradox of thrift – as they save, and not good for house prices when/if they sell.
    The conclusion to the article reads in part “The growth of household borrowing has slowed over recent years. While the borrowing ability of households was boosted through the 1990s and the early 2000s by lower nominal interest rates and financial innovation, the associated transition to higher debt levels relative to income appears
    to have largely run its course.”
    Run its course indeed. People are paying off their debt and lower demand for housing finance will ultimately show up in prices at some point real or nominal.

  14. Debates about what a classical ‘Ponzi’ scheme is misses the point (this is primarily directed at Shadow). The Australia housing market is clearly in the “Ponzi Finance” stage of market isntability so clearly described by Hyman Minsky (http://papers.ssrn.com/sol3/papers.cfm?abstract_id=161024). The end result is all that matters.

    Leith’s article does a grat job of documenting many of the classic Ponzi Finance symptoms we see every day.

  15. If I chose I could cherry pick properties for sale in Australia that would prove any point that I chose to make.

    So come back Leith when you have some credible data.

    • Not cherry picked at all Peter. I performed a Realestate.com.au search on one bedders in Darlinghurst and that’s what turned up. Perform a search for yourself if you don’t believe me. If you think $641k for a tiny one bedroom dwelling is reasonably valued then good luck to you. How’s Brisbane real estate working out for you by the way?

    • How are you property lending figures going Peter? % Up/down/sideways?
      I’m interested in Brisbane property & would like to hear some facts to give me confidence in buying.
      For some reason I don’t think they’re good but let’s see your wordsmith skills

  16. Forgive me, but this all sounds a bit too ‘chicken little’. Predicting that the sky will fall in is one thing (and no doubt it will fall in at some point), the trick is to tell us *when* it is likely to fall in.

    And will it be a crash, or will house price growth slow, perhaps plateau?

    As others have pointed out, it’s one thing to talk about housing like anonvestment, it’s quite another when it’syour PPR. Renting might be cheaper, but being at the mercy of a landlord with young kids just doesn’t appeal.

    And until we have an oversupply of housing, rents have only one way to go.

    Bottom line, perhaps don’t get an investment property or two, but one home ain’t a bad idea.

    • When you lose your job and the value of the property is collapsing I think you’ll change your mind. Optimists (although beginning to grasp the situation) still secretly believe prices will continue to rise. That’s how they are wired and brainwashed.

    • Sure, I’ll have a stab.

      20% drop in nominal terms over the next 12-18 months.

      Then relatively stagnant nominal changes for a fewnyears, with massive ramping up of govt intervention starting in 2012, mainly in the form of buyer incentives and reduced RBA interest rates.

      How’s that for a stab?


      Now to see how wrong I might be…!

      • “massive ramping up of govt intervention starting in 2012”

        Oh boy here comes a Carbon Tax to pay for it all.

        With massive outgoings on one’s income, one can have a house and nothing else. Unless of course, housing is too big to fail.

    • So spend twice the weekly take home than you need to, to live in an abode/shelter while your net asset value is falling.

      All the while there are 2.50 per dwelling in Australia (2.8 in 1988) compared to Ireland’s 3.0 when the boom crash opera started.

      Charlie Sheen?

  17. Pity they did not include emigration on the population growth chart.. that would have shocked!

  18. I just love the bubble nay-sayers.

    Isn’t the old axiom “high returns= high risk”?

    Melbourne prices tripled in a decade!

    Do people really truly believe that not only is that maintainable, but indeed exceed-able?

    Mass psychosis is not the basis for a market place.

  19. This may be slightly off topic and I apologise, but I recommend you watch SBS’s Dateline about the China property bubble. 64 million apartments unsold…

  20. If Lee Palmer is able to improve his productivity and therefore increase his wage/repayments as a percentage of what he paid, maybe it isn’t a housing bubble? I don’t think so!

  21. I’m not an economist, I’m just a curious reader. I’d be interested in people’s thoughts on the following (which I have always though as good reason to buy a house):

    1. When you purchase a house with a mortgage you payment stay relatively static* (*subject to interest rates movement) as a function of your principal. Your repayments stay the same over time* even as your income increases. Rent, on the other hand, will presumably continue to increase, so purchasing a house is a way to ‘lock in’ the total cost of your housing at a fixed time, regardless of what happens to the actual value of your home. So you can either front-end the pain (i.e. the first few years when you have an oppressive mortgage) or back-end it (later on when rents have risen to more than your mortgage repayment).

    2. The though of paying rent when I am old and no longer have a income (other than superannuation) terrifies me.


    • Except that, if you are wise, you will have saved the difference between rent and mortgage payments in the early years. The return on investment of these savings will more than outweigh rises in rents.

    • RD, my rent is $420 and exactly the same apartment in my building just sold for around $520K. So if I bought my repayments would be around double of what I pay in rent. While the repayments will be fixed they are just too high compared to rent. It has been mentioned on this blog that, contrary to what many believe, rents more or less do follow income increases of 2-3% a year. (Property prices have been going up at a much higher rate than incomes which is the main reason why many call Australian property a bubble.) So it will be many years before my rent will be as high as loan repayments. While renting I can also save. In the past decade property prices would definitely beat anyone’s savings while renting. So to make the call you need to pick what is going to happen with prices in the next decade. Easy 🙂
      For people that think that property prices always go up I read the other day that 1 in 4 US homes are in negative equity.

      • At 4% rental growth it will take 18 years for your rent to double. Thats a lot of saving!

    • Let’s not forget in any long-term analysis, if you own (rather than rent) you will also find yourself:

      – replacing a water heater (or two)
      – renovating the kitchen at least once
      – calling a plumber or electrician out at least several times
      – re-roofing once or twice
      – maintaining gardens, roller doors and air-conditioners
      – paying council rates which tend to go up much faster than CPI

      All of which in a PPOR are paid with post-tax dollars.

      • One thing seems to be missing from the above buy / rent analysis : after paying a mortgage for x years , you own a house! Renting for x years , you do not.

        • That might have been true once but not anymore. These days people are retiring with hundreds of thousands in debt. Their only option is to sell up and trade down.

        • A lot of people I know do think property prices always go up. So they overcommit getting large loans to benefit more from growing equity. As a result, after x years, they haven’t payed much principle off. Yes, most of them did benefit from growing equity. The question is at today’s prices if equity will keep growing. If not, people would have borrowed a lot less and the game to rent or buy changes completely. Not to mention possibility of falling equity.

        • That can be true for the renter who saves the difference as well. After 20 years, what stops them from simply paying cash for a house with their invested money?

          The only possible difference is the “forced savings” argument, which is not without merit, but is far outweighed by the heightened risk of having the uninitiated, who are somehow not disciplined enough to save the difference as renters but are instead being handed large amounts of leverage to play with. Not a good trade-off.

    • Why is it that when you are older you will not have an income? Surely you can work towards building a nest egg that can go towards productive investments which can possibly churn out passive income to provide for yourself in retirement.

  22. Interesting and insightful article.
    Looks like Australia shall is inline to join the ZIRP club in not too distance future….

  23. Nice take down.

    What really gets me going is the use of the word “wealth” to describe numbers on paper, or worse yet, numbers on millions of liens held by the banks.

    During the downturn analysts will even call it “wealth destruction”. You can’t destroy what never existed in the first place.

  24. Typical stuff from AFR. Question is, When will Australia’s pool of “greater fools” dry up?