Weekend Musings: REIV Capitulation, Stimulus, Chinese Speculation

It’s the weekend again, my yard apes are tucked up for the night so it is time for a small post on what is rumbling around in my thought factory and I would be interested to hear others opinion on.

REIV Capitulation

As noted by Jimbo this morning the REIV has suddenly decided a strategic capitulation is in order as sales volumes and stock on market in Victoria run off in opposite directions.

Melbourne’s property bubble is bursting, with $400 a day wiped off the average house price in the past three months.

After peaking at $601,000 late last year, the median price has fallen to $565,000 – down $36,000.

The 6 per cent slump is the biggest quarterly drop in more than two years and one of the biggest the Real Estate Insititute of Victoria has recorded since the height of the global financial crisis.

REIV chief executive Enzo Raimondo said that although it was normal for prices to ease at the start of the year, it was clear the market had turned after an astonishing period of runaway growth.

“The honeymoon for sellers is over,” he said.


Mr Raimondo warned vendors would need to adjust their expectations.

So this seems to put Melbourne about 4 months behind the Gold Coast in terms of REA strategy. I noted the same type of talk spewing from their real estate agents back in the new year. I am also aware that the REIV is calling for the government to do more to help them out under the guise of helping young families in their latest submission to the Victorian government. (Spew warning!).


Back on Friday I linked to an article by Satyajit Das on QE effects. If you haven’t already I recommend you read the article in full as it is well worth it. In the article there was one paragraph that I caught my attention and I have been thinking about it.

Criticism of QE has focused on the risk of Weimar like hyperinflation. Debasement of a currency through debt monetisation can lead to very high levels of inflation.

In reality, the low velocity of money, the lack of demand and excess productive capacity in many industries means the inflation outlook in the near term remains subdued. Inflation will only result if bank lending accelerates and aggregate demand exceeds aggregate supply. America’s output gap is between 5% and 10% and considerably more monetisation would be necessary to create high levels of inflation.

QE’s real side effects are subtle. It discourages savings, drives a rush to re-risk, encourages volatile capital flows into emerging markets and forces up commodity prices.

Low interest rates perversely discourage saving, at a time when indebted countries, like America, need to increase saving to pay down high levels of debt. Low interest rates reduce the income of retirees or others living off savings, further reducing consumption.

Another thing that the large increase in the monetary base in the US is doing is driving down its value relative to other floating currencies. A weaker currency doesn’t directly lead to inflation, it makes imported goods and services more expensive and also makes debt denominated in foreign currency rise. In certain circumstances this is actually a good thing, because it re-directs purchases towards domestically sourced goods which leads to employment. It also makes your exports more competitive and there is some evidence that this has begun with LA port shipping data showing some large rises in export volumes.

I also think that it is important to understand how QE is being used, because there are some significant differences between various countries stimulus programs. The term “helicopter drop” is mentioned in the article, however this is not really what has been occurring in the US. “Helicopter drop” implies that the money is scattered in the wind and everyone gets to pick it up. However that is not the case in the US. What actually happened was that the money was provided to the banks directly through the Fed and various programs (TARP, TALF). The money was not provided to the public via direct payments. The money did not “circulate” around the economy at all, it resided with the banks and those that were in a position to be able to access those funds through the bank assistance programs. In reality this meant the rich and the rest of the financial sector and you would be well aware what they did with it amongst other things.

I will not go into the politics of why I think this occurred, but if the US government actually wanted to “helicopter drop” then they should have given direct payments to the lowest 25% cohort on the socio-economic scale and credit incentives to the middle class. I am in no way suggesting that this sort of behaviour is a good idea, I have posted previously about my lack of support for stimulating unproductive debt. But it is basically what the Australian government did and it was very successful in its attempts to re-inflate the economy. China did something in the middle but due to its political structure the government had no problems making sure the money left the banking system.

In my opinion the US “helicopter drop” was anything but, it was more like a “under the desk brown paper bag” operation. I have talked previously about banking operations. In an environment where the central bank would repo your cat reserves were never the issue for credit issuance. The fact that the US Fed began paying interest on reserves in a ZIRP environment suggests that this was never the plan anyway.

Chinese Speculation

Just a short thought on China. In recent days it has become increasingly obvious that the Chinese government is stepping on house prices. If they continue to do so you can assume that housing is dead as a speculative tool in China. So assuming that you believe that China can perform the juggling act of slowing housing and keeping its economy strong ( I know it is a large assumption ) then where will the speculation go next. Will we suddenly see yet another massive property price boom in Hong Kong?  Chinese Equities ? Gold ? Moon rocks ?

Gold bugs are very excited with the prediction from JPMorgan.

0147 GMT [Dow Jones] The slowdown in China’s property market, being directed by Beijing to rein in housing affordability issues, is driving gold demand by the country’s “mass affluent”, argues JP Morgan’s China equities and commodities MD Jing Ulrich. This group “has seen its investment options sharply affected by restrictive housing measures” such as property taxes, increases in down-payment requirements, and raised interest rates, “since these households possess sufficient capital to purchase investment property, but do not have the same degree of access to investment vehicles such as private equity funds and retail property” as the super-rich, she says, adding that equities, gold and alternative property investments are therefore the key beneficiaries. “Chinese demand for gold jewelry increased 13.5% (on year) in 2010, while demand for bars & coins rose 70.5%. Most market participants expect that China’s gold demand could grow at a still-stronger pace in 2011,” she notes. At 0137 GMT, spot gold is at $1,476.20/oz, off its earlier record peak.

If this prediction is true then $1476.20 is cheap.

Enjoy what’s left of your weekends.

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  1. I think Jim Chanos said it perfect about China. That the country is on a treadmill to hell. They are a train wreck waiting to happen and all they are going to do is bring Australia down with them.

    • “bring Australia down with them”

      Honestly LBS i’m almost hoping it does. We have gotten far too smug as a society here in Australia. We are just a little bit to infatuated with ourselves.

    • The ringing bell in the night of this sign of infatuation is the new “Amazing Race:Australia” edition about to hit our screens.

      Watching a bunch of buffoon Australians tear around this great planet, just like the American version, puts us squarely on the map as a vain, infatuated, shallow society.

      I don’t wish ill will on my fellow Strayans, but I will have a sense of schadenfreude for those who have had the chance and intelligence to consider there position and yet stick to it due to their arrogance.

      A certain $100 million bet rings another bell.

  2. “QE’s real side effects are subtle. It discourages savings, drives a rush to re-risk, encourages volatile capital flows into emerging markets and forces up commodity prices.

    Low interest rates perversely discourage saving, at a time when indebted countries, like America, need to increase saving to pay down high levels of debt. Low interest rates reduce the income of retirees or others living off savings, further reducing consumption.”

    Personally i agree with 100%. I agree with people who believe asset bubbles lead to misallocation of capital as the price action forces more and more capital into the bubble asset. Expansion of the fed’s balance sheet has the same effect but on a larger scale as it’s difficult to tell what demand is actually real and what is artificial (i.e. the result of the increase in money supply circulating) which again will likely lead to resources being allocated incorrectly (to the wrong place).

    Also what is going on right now is morally bankrupt and disgusting. The real brunt of QE will be felt by the poor and middle class.

  3. Dave From Pakenham

    Re QE, issuing coupons to the needy would have missed the point. There was and still is perhaps a need to reflate confidence and risky assets to give some illusion that wealth destruction (as perceived today forget future destruction) was not ongoing. By building confidence the Fed was able to replace the rapidly slowing velocity of money.

    Unlike in the West, China’s reflation and its huge stimulus in 2009 was succesful because borrowers were forced to take on debt and undertake spending. In the west there is no mechanism to force use of debt, the only obvious course is to reflate confidence, so I think the Fed has been succesful if not delaying the pain.

    Re inflation here the US is in a fortunate position, much of its CPI number is linked to its endogenous economy, where it isn’t it has a massive trade deficit with the only country in the world that maintains a peg to its own, China. Coupled with the fact that the US issues debt in its own currency, it is the only country that can undertake QE with success, therefore no imported inflation and no larger interest payments.

    So it appears that US can continue to grow, and China will be dragged along for a little longer yet..

    Lucky US and lucky aussie miners, china gets to sell its goods to the US, therefore affording Australian resources while QE creates pricing tension in commodity markets…a sweet spot!

  4. You have to consider the political situation – Any fiscal stimulus for the poor is impossible to get with a Republican filibuster in the senate. And Larry Summers was in charge of designing the stimulus anyway.
    Fed’s monetary stimulus cannot possibly be routed to the poor. They bought a lot of credit card and student loan debt as security, but only the already rich benefited from this.

  5. What happened in Aus and US is a political refusal to let a recession and bankruptcy laws take their proper course and cleanse the system of some reckless investment. How it turns out remains to be seen as it is an experiment at best and an invitation to hyperinflation at worst.

    • First Home Buyer

      I Agree. If something is gangenous you need to remove it before it spreads further. There will probably be a huge “amputation” down the track.

  6. The ‘low interest rate discourages saving’ idea is simply wrong. It is putting the cart before the horse. The correct relationship is ‘high saving rate produces low interest rate’. Low interest rate also means debts are cheaper to rollover, since no government ever repays their debt these days.

    QE2 is designed to give free profit to the banks so they can write off the bad debts. As to ‘helicoptor drop’, that just means the US have to increase it’s deficit by even more. It is not possible politically with US is already over 15 trillion in the red. The only possible expansionary policy now is another massive tax cuts for the top 1% of the income bracket.

    In regard to China, if the Chinese government goes through with it’s promise of cheap housing, the slack in private real estate development will be soaked up by the massive development of public housing construction. As to speculations, there is alway the crooked casino known as the Chinese stock market..

    • Are you really saying that the low interest rate that we have now was ’caused’ by too high a saving rate?

      Are you serious?

      If I recall, very sinply, everyone got into too much debt, overextended themselves, the machine started to crash, so central banks hit the low interest rate button and 3 years on we’re still there.

      The only problem now is that people misinterpreted the low rates and instead of seeing ‘WARNING’ they read ‘PARTY AND BORROW MORE!’…

  7. To my mind, Dave from Pakenham is right. Though I would go further. In a securities based financial system, all their is is confidence. There are no fundamental prices for anything because everything is tradable, always, including money itself.

    What we see with various QEs are rises in inflation expectations amongst the traders that control the secutities, not those of any actors within the “real economy”. Seems to me $600 billion is nothing in the scheme of things, unless the traders perceive it to be a lot, and then they all buy.

    Except where real economic actors (you and me) connect to that system, such as in stocks, there is no real economic pricing effect (until of course we all start believing the system is going up again for ever and pile in, then spend like mad on stuff with the illusory wealth).

    As SON rightly says, it’s a system of signals, not a “real economy” at all.

  8. Ronin says: “The ‘low interest rate discourages saving’ idea is simply wrong. It is putting the cart before the horse. The correct relationship is ‘high saving rate produces low interest rate’. ‘

    Actually, this is also inaccurate. The relationship is not one way. An interest rate should be the intersection of supply and demand. High savings implies a low rate of interest, which discourages savings further. It prevents a negative feedback loop. This is good because there is a “surplus” of savings.

    This is the reason I don’t think central banks should fix the price of borrowing money: it distorts supply and demand.

    • The mentality behind saving and investment are different. Investors look at risk and rate of return, so a higher interest rate may prompt some investors to switch to bank deposits. In contrast, savings is driven largely by insecurity, and money is saved even if the interest rate is zero. The increase in saving rate in the US post GFC is a good example of the mechanics in action.

  9. REIV has no money to make its members more honest!!
    “The ban was supposed to end the use of written and verbal quoting methods such as ”$500,000+”, ”in excess of”, ”opening bid”, ”offers from” and ”expect over” and require agents to advertise using a single figure, price range or no figure.”
    “But the REIV has since quietly dropped its plan, citing costs associated with getting a more restrictive code of conduct approved by the Australian Competition and Consumer Commission. ”We found that the cost of achieving the authorisation through the ACCC was quite prohibitive for us as a not-for-profit organisation,” REIV spokesman Robert Larocca said.”
    I suggest a charity drive to raise that money and donate it to REIV 🙂

    • Coming from a fairly heavily regulated profession that used to be akin to the wild west, I’ll offer the following:

      If prices really do tank the way it’s looking like they might, the gov’t will look to shift blame to wherever it is political convenient. I suggest that in that case an easy target would be real estate agents.

      So I think in the event of a crash followed by recession the govt (probably Cth but maybe the states – not sure about jurisdiction) will institute a national CoC for real estate agents. The legislative framework would be quite straightforward, given that similar schemes exist for other professions.

      Such a scheme would probably relate to quoting in a uniform way, mandatory reporting of auction results, record keeping requirements, and possibly a provision for clients to recover monies from agents who do not act in compliance w/ the code. Just a thought.

  10. Interestingly, the 6% drop was front page of the Herald Sun, but the real estate ad revenue reliant The Age buried the stat away in a small article on p.5 (or 7?) which had a headline about how apartments/units in Brighton had broken thru the $1m median price.
    Regardless of the Herald-Sun placement was strategic, I think the Age article was unprofessional and bordering on dishonest journalism i.e. making the headline about a bizarre curiousity rather than alerting its readers to the fact the market is sinking.

  11. Michael C,
    I definitely noticed that with the Age. They *did* originally definitely had an article on Sat morning about the big price drop and later changed it be mentioned in the text below a headline that was only about Brighton units going past 1 million. Absolutely disgraceful. As if that’s even worth mentioning in the context of the biggest median price drop in years, let alone having in a headline.

    I know someone who works at the Age, and I can tell you they don’t like giving property any bad publicity – that’s a fact.

  12. G’day DE

    A lot of people think that “foreign debt” (as in the case of Australia or the US) is money that has been borrowed from counterparties overseas, and that has to be repaid. This is incorrect – the term “foreign debt” is misleading for the Aust and US case. A better term is “national currency held by parties overseas” – it is national currency that belongs to people overseas, like the Peoples’ Bank of China holding an Australian $20 note, or (almost equivalently) Australian Government securities or reserves at the RBA. The only difference between physical cash and the latter two is that interest is paid on the latter to the holder – but this money doesn’t have to be earned from elsewhere in the economy, it can be spent into existence by the Government, through the agency of the RBA.

    The real issue of “foreign debt” (I don’t like that term) is that Australian currency held overseas can potentially be used to make claims on Australian resources and assets.

    I also have a problem with the throwaway reference to Weimar hyperinflation – Billy Blog (I think) made an excellent argument that the actual problem of Weimar inflation was not caused by printing too much money and spending it into existence, but rather due to the German Government’s defaulting on their onerous Versailles Treaty obligations, and the subsequent economic results of French and Belgian army occupation of the Ruhr by way of penalty.

    The problem with implicit assumptions is that sometimes they turn out to be wrong!


    Systems & Limits