The politico-housing complex comes!

You can hear the gunning of an engine in the distance. And it’s rapidly turning from an approaching whine to an extant roar. It’s the politco-housing complex and, like some blood thirsty Chevy from a Stephen King novel – panels beaten, paint fading, upholstery thread bare, demonic grin forged in its grill – it’s coming for us all!

The monster truly has no idea what it is doing, not the slightest conception that it is done. It was designed to rev and rev is what it will do, through our media, politics and economics fraternity. And nothing, not even the end of the road, an approaching brick wall, behind which is a bottomless cliff, will stop it.

VVVRRROOOOM!

That’s how it feels this morning when I read this from the national broadcaster (or any number of other sources):

New figures show big sections of Australia that are unaffected by the mining boom are effectively going backwards.

…Right at the heart of the economic weakness is the construction of new houses, or lack thereof.

“We are seeing that certainly the eastern seaboard is finding conditions very, very difficult when it comes to the housing sector,” Mr Sebastian said.

“New South Wales in particular has seen the dwelling starts have been very, very weak. And it’s a similar story for the likes of Queensland as well.”

The sting comes when you consider just how much the housing sector contributes to overall economic growth.

“You’ve just got to take into consideration when a new home is being built the amount of work that goes into it; the resources that are required; and then also in furnishing that new house, the tiling, the kitchens, the furniture, the floor coverings. And that all adds to retail activity,” Mr Sebastian said.

Stephen Koukoulas, the managing director of Market Economics, says the housing sector is a significant part of the economy.

“Housing is one where the cycle is very acute. So the weakness now is actually compounding the weakness we’re seeing in other parts of the economy, the services sector for example, education, tourism and manufacturing, where the strong dollar’s hurting them,” he said.

We have got the eastern and southern parts of Australia really struggling to grow. In fact some of them are probably in recession.

“So in a sense housing is one of the reasons why we’re having this economic under-performance right now.”

Mr Sebastian says Australians simply are not out there borrowing money to build homes.

Demand is in fact now just bouncing off 34-year lows.

“Property is a very attractive longer term investment, but I think potential homebuyers are still not committing to signing on the dotted line. And that’s going to take potentially another rate cut to try and inspire some confidence,” he said.

Is this supposed to be analysis? Why are Australians not borrowing money to build homes despite huge stimulus still being available? There are three reasons:

  • falling house prices have pushed new home valuations below the price people have to pay for them. Would you buy such a house? Let alone the fact that banks will demand a larger deposit from you to make up the loan to valuation gap
  • yes, folks don’t want to borrow, quite sensibly, especially for homes that are worth less than the price that they pay for them
  • this is the unavoidable result of a correction in household borrowing that the nation has NO CHOICE but to make in the global new normal where debt comes at a price.
It is not because:
  • the government is addicted to the politics of surpluses
  • the RBA has been overly mean
  • we have Dutch disease
  • our banks are greedy

It is because, as a nation, we borrowed WAY too much in the past business cycle from offshore sources and stuck it in assets that do not produce national income without further borrowing. That is, housing. The borrowings were channeled through our banks. When the GFC arrived, these borrowings had to be guaranteed by the government. They still are, implicitly. Thus, for foreign creditors to keep rolling over the existing debt, the guarantee from the government must be credible, which means the Budget must be stable. That is, in surplus. This has been stated openly by the rating agencies.

Since the GFC, the banks have been able to wean themselves somewhat from the nation’s foreign debt addiction by borrowing closer to home in the form of more stable deposits. But if we borrow more, as the above economists want us to, then this will cease. Deposit growth will fall, and offshore borrowing will resume. This will lead inexorably to a rising risk profile for Australia and its banks. This has been stated openly by the ratings agencies.

The economy is in a trap. The way out is doing what every other economy on the face of the earth is currently doing, find demand that is outside the economy and pump it for all it’s worth. That, and increase productivity.

Everything else is just the revving of that dumb, undead engine.

David Llewellyn-Smith
Latest posts by David Llewellyn-Smith (see all)

Comments

  1. “The way out is doing what every other economy on the face of the earth is currently doing, find demand that is outside the economy and pump it for all it’s worth.”

    Can’t all be exporters someone has to be a importer, in the end (when ever that is ) a lot of that excess debt will just have to be written off.

    • Petervm We can’t solve the world’s problems just our own. “Can’t all be exporters” is often an excuse for continued over-consumption and for Australians to continue to live with the sense of (over)entitlement to which we have brought ourselves.
      A bit of import replacement is surely possible somehow.
      Stop selling the country off to pay for consumption. Stop the Carry Trade. Fix the dollar.
      Then we would be just left with all our internal rigid frame work and problems that preclude adjustment.

      • To clarify, as I see it all the excess debt world wide has to be dealt with, defaulted on/written off, if we are to prosper into the future.

        • Peter Yes but I think it’s not just debts that are out of whack. Our whole economies and societies are out of whack.
          Even if we could magically wipe out all debts we wouldn’t solve the problem.

        • +1 flawse

          imagine my mortgage magically becomes 0 over night.
          Awesome!
          wait… I should’ve borrowed more last time.

          • Mining BoganMEMBER

            If people get to keep what they couldn’t afford to buy then it’s up the belltower with a sniper rifle for me.

      • “Import Replacement” is a nice euphemism for raising import tariffs which is itself a policy of making working working class families poorer at the expense of protected company shareholders.

        Whitlamesque policy has had its day thank you very much.

  2. You can hear the gunning of an engine in the distance. And it’s rapidlY……..

    Sometimes I have a problem with your economic perception HnH but not with the writing. The paragraphs are classic!

  3. “yes, folks don’t want to borrow, quite sensibly, especially for homes that are worth less than the price that they pay for them”

    Agree 100% and I don’t think people talk about the shoddy quality of construction enough. Not only are you paying obscene amounts of money for a new house or an apartment but the materials used are cheap. Here in Sydney know loads of people who have bought flats for around 400k (1 br of course) who 6 months down the line find out they have major structural defects and the construction company has or course gone bankrupt and their only recourse is to either pay for the repairs themselves or work out a plan with their strata company. If you compare what you are actually paying for to the USA or Europe the quality of build is really cheap. In 5 years no one will be in awe of the linoleum splashback that looks like tiles.

    Rant over. Have a good day.

    • You’re not suggesting costs are higher in Australia, are you? Where on earth would you get that idea?

    • Hey James,

      Ive heard of this with friends too, the ongoing legal dispute over fire safety at Bunn St in pyrmont, waterproofing problems at Auburn Central Development and the render peeling off Kograh Town Centre apartments (cnr Kensington and Belgrave – google maps it!) All three have had mentions in the press over building defect issues.

      Do you or anyone else know of visibly deteriorating ‘new luxury apartments’? Im getting a bit of a list going. Especially with capital gain flat in sydney its a race between yield and capital maintenance and considering these are ‘new’ units, can quickly turn an investment bad.. Cheers

      • Have a look at the building in Market St Rockdale. Massive rectification due to structural building faults, unit owners having to pay multiple thousands to strata for rectification works.

        Cant remember 100% but it may not comply with the fire code either.

        • Cheers for the heads up,

          I drove through Rockdale there the other day and noticed quite a few retail vacancies down the main shopping strip.

          My mate is a painter and hes told me you often see concrete efflorescence (the white, crystalation of salts from cement etc, streaking down the front of render). It indicates water leakages. Efflorescence off the top of balconies = not to bad. Efflorescence out the side of walls = waterproofing problems inside.

          This is about all you see on from the street, but im trying to find out how one would discover less obvious building defects, cracking, breach of fire regulation etc. My mate knows some examples from his experience but obvious strata report would reveal problems, but these are obviously hard to obtain en mass.

          Cheers again.

          • The only thing i can think of is to befriend some of the companies that specialise in apartment building rectification. Or perhaps a few real estate agents around the place; they will usually know of which buildings have issues, even if they dont necessarily tell prospective buyers.

            On fire codes specifically there are a few engineering firms that do the inspections; again befriending some of those guys might help.

            But it doesnt seem to be a simple task to get this kind of information aside from on a building by building basis through strata reports and the like.

  4. These kinds of articles amuse me, because while there is bleating about how prices wont fall much because unemployment is low etc etc, their cap-in-hand begging through the articles quoted above illustrate the housing wealth effect at work, and why house price falls lead rises in unemployment.

    of course 1+1 = 7 when it comes to housing…

    • The headline unemployment rate is ALWAYS the first thing people (who I met) come to mind when “defending” the Aus economy. And no, they never bother looking under the surface, ever.

  5. “Property is a very attractive longer term investment, but I think potential homebuyers are still not committing to signing on the dotted line. And that’s going to take potentially another rate cut to try and inspire some confidence,” he said.

    Good to know my tax dollars are at work, giving this idiot bank economist the oxygen and the airtime that he craves so much.

    • dumb_non_economist

      Sorry Mav, but it’s working. SMH (w/end) online article the state gov is considering removing stamp duty on ALL new builds. That will keep the triangle going for a while yet.

  6. Victoria has reached peak apartment purchasing, and we are set to see seven billion more going up.

    No matter what happens the coming collapse in Victoria is going to shed light on the rest of Australia, people grinding it out in Sydney will definitely pause for thought when the same house costs a quarter in Melbourne.

  7. HnH. Nicely pulled together and a I fully concur. If the holders of debt issued by the big four banks get the jitters because they fear that the Federal Government cannot be taken seriously to guarantee paper issued by the big four, we are heading for free fall. Thus this next round of State and Federal Governments is going to need to pass the “austerity” test, but will the Greens allow it? I suspect we might be heading towards the events that the Dutch experienced yesterday, with a relatively sensible government pulled down by the nutters on the fringes. Sadly the nutters have no idea how bad this can get.

    • If the holders of debt issued by the big four banks get the jitters because they fear that the Federal Government cannot be taken seriously to guarantee paper issued by the big four

      Why call the Greens “socialists”, “Water melon – Green on the outside, Red inside” etc etc ..when you seem to be perfectly happy for the government to socialise the private losses at taxpayer expense?

      It seems you are the one who is the socialist here; an oligo-corporate socialist – capitalist on the outside (when profits are to be had) and socialist inside (when losses have to be somebody else’s)

      • Mav. I agree with your concerns regarding privatising profits and nationalising losses. Sadly it is where we are. If the debt markets stop rolling over debt for MegaBank, we are all v v stuffed. The losses will be even more ghastly than the moral bankruptcy you refer to.

        • Bullshit (pardon the French).

          We will not be all stuffed. The banks might need to be nationalised and asset prices will fall – big deal.

          The sooner the FIRE economy whithers and dies the better Australia will be in the long term.

    • The government should not guarantee private bank debt. Full stop. I would rather lose my savings in a bank bankruptcy than become a debt slave to someone overseas who is already far richer than I’ll ever be.

      • Is it the fact that they are foreigners or that they are richer than you, that upsets you? Why should either matter? From a moral stand point, I find it objectionable that you think it is okay to be such a xenophobe. On a rational basis, if you would prefer that Australians and Australian corporates borrowed nothing from overseas, how do you think we could have funded the development of this country over the past 200 years? I am happy to buy you a plane ticket to Argentina so you can see what how populism of your ilk has turned the world’s richest country into a basket case.

        • I did word it badly saying “someone overseas” when I meant the “international banking cartel” so I understand that it may have appeared xenophobic. However, I think you are wrong regarding the overseas funding issue. The Commonwealth Bank, when it was owned by the government, created money to fund the country’s development. Where do you think those countries got their money from? They also just created it. Where do you think the money for QE comes from?

          • See http://www.macrobusiness.com.au/2012/04/here-come-the-rate-cuts/#comment-143469

            I was trying to remember “TPTB” but couldn’t and since they are mostly in the U.S. and Europe I just lumped them into “someone overseas” instead. But it does irritate me that they can just print money and buy “our” assets because we are small fry. Also, foreign investment/borrowing for development is fine but just to sell the same houses to each other which is basically all the banks seem to be interested in these days is not.

        • Sneaky. Take the phrase “someone overseas who is already far richer than I’ll ever be” meaning the bankers in Wall Street and the City of London and break it in two to claim hatred of the rich and foreigners to make accusations of xenophobia. It did work though because it throw me off and it took until later that night to realise what you did.

  8. “It is not because:our banks are greedy”
    Here we go again, the banks are innocent victims of populous irresponsibility. I would ask you that:
    Who has the monopoly of creating cheap fiat (credit) money – the populous or the banks? If the banks was so pleased to give cheap credit and to push for higher housing demand in this way, who is to blame, the populous or the banks?

  9. Politico Houso complex will call for increased Immigration to be ramped up plenty of austerity ridden countries happy to come to australia

  10. innocent bystanderMEMBER

    “Thus, for foreign creditors to keep rolling over the existing debt, the guarantee from the government must be credible, which means the Budget must be stable. That is, in surplus”

    so what happens when the projected surplus in the next budget fails to materialise?

  11. Back to the poor construction quality issue. FWIW I couldn’t help noticing about 5 years ago the number of obvious non tradespeople doing skilled building work…. A lot of those apartment blocks were giant washing machines for dirty money….and now that the property market has slowed the drive by shootings in Sydney are rising…I have to wonder!!!
    Great post HnH classic analogy. Vroom Vroom

  12. How deep the politico houso complex runneth.

    Legal Aid in NSW is partially funded from a levee on solicitors trust funds, as conveyancing is slow, the amount being levied is down. Work however is up due to people having no more money. Work is then contracted out to private practitioners at a higher rate costing the government more.

    Great example of an automatic stabiliser.

  13. As an architect who moved from the UK just over a year ago I am in some respects surprised by the crap construction quality issue, although not in quite the same way. The issue of poor finishing and cheap materials is true everywhere – developers will always start cutting quality of finish when they fear their margins reducing, as will the builders start cutting corners, particular in the rush to finish work. This is made worse in a boom but new volume housing construction in the UK is little better in quality than here, relative to what you would expect for the money.

    What is more relevant to me is how far behind the standards are with respect to energy efficiency, insulation and sustainable use of materials. Whether you are a greenie or not, you cannot really argue against a well insulated building that retains the heat or keeps the cool air in, rather than pissing all of your energy use out of the door. Things are changing, but it is amazing how slowly.

    Rant over.

    • Re building quality. I had never seen a “draft stopper” before moving to Aus. What a moment it was to have it explained to me that the soft toy snakey thingo is used to insulate…

      On windy days leaves blew into the house in our previous rental place. Didn’t have a clue what to look out for when we first moved from northern Europe.
      Lucky to have found a nice place and a good landlord since then. The first place was sold for around 600k+ in 2010 by the investor. Nice timing by someone who knew what they were doing.

      On the topic H&H I think you nailed it saying that the economy is in a trap. RBA knows it for sure. Politicians must be gradually getting an idea of where things are headed but some others still haven’t figured out the big picture.

      I agree that exporting is important, and trying to develop such exporters that have a chance of succeeding even in a downturn. Cochlear, medical supplies, wine industry etc come to mind as examples that could do well?

        • Good question. My comment was not thought through. I guess I am in some hope mode, thinking that there must be industries other than the FIRE out there, from which manufacturing and exporting could get a boost.Probably naive thinking.

    • JunkyardMEMBER

      In the news last week, the Victorian government plans to chuck out what little efficiency regulation there currently is on construction in Victoria.

      (however, they may have done a backflip on that when everyone did a WTF?)

      Probably one partial answer to your question bwr, is that is it’s because we can get away with it due to our relatively temperate climate.

      Chuck an extra blanket on the bed in winter, and just tough it out though those two really hot weeks we usually get in summer.

      It’s Oz, she’ll be right mate!

      To be honest I blame the buyers. If people want to fork over megabucks for a poorly constructed and insulated home, that will start fall apart literally as they move in, then so be it. As long as it’s got a home cinema room and an “al fresco”, it’s all good mate!

      • Case in point, I avoided buying a flash house in Merimbula which was fashionably large, huge windows etc. when my wife pointed out rows of small rust marks on the exterior. Yep, they used steel nails to hold up the external sheeting crap which were already on their way to wrecking that finish.

        Someone else bought it. Not sure how you would fix that problem.

    • Good point.
      It’s unbelievable that in Australia you can ask a window manufacturer about double glazing, and they’ll say “Why do you want that?” then, “I think we can do double gazing? but it will be another $50,000”
      Double glazing keeps the heat OUT too.
      Sheesh.

  14. “…which means the Budget must be stable. That is, in surplus. This has been stated openly by the rating agencies.”

    But a budget in surplus is a drain on the real economy, which could lead to inadequate aggregate demand causing economic slowdown with consequent lowered tax reciepts. You could well end up in a downward spiral that will quickly erase any gov’t surplus, along with large sections of the real economy. Also, beware the statements of the Ratings Agencies. After all the shenanigans they’ve been involved in over the last decade we should never take their words at face value.

    “The economy is in a trap. The way out is doing what every other economy on the face of the earth is currently doing, find demand that is outside the economy and pump it for all it’s worth. That, and increase productivity.”

    As has been pointed out already, not every country can pump demand in foreign markets, since global net exports must equal global net imports. The more countries that follow this strategy, the less effective it becomes for any of them. If the US seriously tried to follow this strategy the fallacy of composition would become clear quite quickly. Joe Stiglitz talked about this a little at the recent INET conference in Berlin.

    As for increasing productivity, the problem is that for the last number of decades gains from productivity increases not been realized by the majority of the citizenry. If wages don’t follow productivity, then increasing productivity simply adds to profits which accrue to a small percentage of the population. Namely, those that all ready have more money than they know what to do with. Not a way to stimulate, or even just maintain, an economy.