Share on Facebook Share on Twitter Share on Reddit + - Australia’s Paradox of Thrift By Unconventional Economist in Australian Economyat 11:40 am on May 25, 2012 | 134 comments Login to access MacroBusiness Members special reports. If you are not a member, sign up here. Please fill in the following form to login Username: Password: or Please fill in the following form to subscribe * Username * Email * Password About Latest Posts Unconventional EconomistLeith van Onselen is Chief Economist at the MB Fund and MB Super. Leith has previously worked at the Australian Treasury, Victorian Treasury and Goldman Sachs. Latest posts by Unconventional Economist (see all) PPI inches out of deflation - October 30, 2020 Sydney auction clearances continue to strengthen - October 30, 2020 ATO takes aim at JobKeeper rorters - October 30, 2020 Share on Facebook Share on Twitter Share on Reddit + - YOU MAY ALSO BE INTERESTED INPPI inches out of deflationThe Australian Bureau of Statistics (ABS) todayNBN not worried about 5G threat. It should be.NBN Co's CFO, Philip Knox, is unperturbed by theVictoria could remain isolated until after ChristmasThe NSW Government has signaled that it may notHotel quarantine inquiry scrutinises dodgy $30m private security contractVictoria's hotel quarantine inquiry has turned Comments Tarric May 25, 2012 at 11:50 am This is truly a great and continuing development for the people of Australia. Finally the average Aussie has realised we couldnt keep living on borrowed money and not only that we have to save for a rainy day. As the Australian people pays off its debt down to more manageable levels there is a great opportunity for the nations economy to move away from the debt driven model of the last two decades and towards something more sustainable. technofreak May 25, 2012 at 11:57 am We can hope this is the case Tarric. Pfh007MEMBER May 25, 2012 at 12:23 pm I suggest crossing lots of appendages as well. There are very loud voices who depend on the expansion of debt and they will be singing loud and clear that the government needs to do more. By more they mean stimulate activity that involves expansion of household debt. There will be plenty of calls for further cuts to interest rates and plenty of calls for policy action to encourage FHB to jump in to the deep end. But don’t count on hearing any calls to encourage economy activity that doesn’t have debt expansion at its core. As counter-intuitive as it may sound the best thing that can be done is to increase the flexibility of the housing supply so that more houses can be built at prices that will attract buyers. The market for $400-$500K new 3 bedders may be saturated but not the market for $180-$300K 3 bedders. Certainly, more low cost new housing will reduce the value of the existing stock and thus weaken the ‘wealth effect’ but having tradies and the building industry working and people living in affordable houses is more attractive than selling 3D TV’s to people who ‘feel’ rich. Janet May 25, 2012 at 12:28 pm Spot on! Tarric May 25, 2012 at 12:41 pm Couldnt agree with you more 007. If there was housing going for 3-4 average annual income we could definetly see an uptick in building activity as more people decided to become homeowners. The property spruikers are right about one thing though, there is a great deal of pent up demand for housing, unfourtunetly for the current establishment these people are waiting for prices to drop to the mean around the magic 3-4x annual income range. Just think how much retail and the service industry has suffered in this country as mortgage and housing costs continued to take more of a households income year after year as the bubble grew. Once the debt is paid down to a more manageable level and housing prices revert to something resembling the mean we could see an explosion in the retail and service sectors of the economy as people use their new found disposable income to buy whatever their hearts desire as opposed to paying off a massive mortgage. jojohotty May 25, 2012 at 1:25 pm The irony would be– by the time the house price reduced to 3-4 times the average income of TODAY, the average household income would already drop faster than that. Do you think the service industry can still affort to pay today’s wage when average house price drop down to the 200k range? campbeln May 25, 2012 at 7:49 pm @ jojohotty: They did back in 1994 and 1996 when I first traveled to Australia, and that’s what houses were back then. Correct me if I’m wrong (and I may well be), but minimum wage hasn’t raised THAT much in the last 20 years. Seems the wife (at that time the GF) was making $16-ish/hr in 1997 + penalty rates… Julius May 25, 2012 at 2:16 pm A commendable objective, 007, but I fear that, unless such a move is accompanied by changes in our taxation system as it relates to property, I know where the bulk of those affordable properties will end up. I’m not sure we should be building affordable housing to satisfy the portfolio needs of the negative-geared brigade. An accompanying move away from the front-end cost of Stamp Duty would also be a welcome and helpful development. Pfh007MEMBER May 25, 2012 at 5:37 pm I would let them buy up until they choke. After all even the NG set hope to rent out their retirement plan. More than happy to continue renting if the NG set want to gobble up debt to buy the new houses built on newly released land or rezonings. The thing is, that rents will slide under the expanded supply until even the most dim NG investor goes ‘Doh’. But that is unlikely to happen as it seems clear that finally the messaging is sinking in – the glory days of this asset class for speculation are over. lackey May 26, 2012 at 1:36 pm Dead right pfh007. Forces that have become rich and powerful from selling products and services on credit will use that wealth and power to fight in every way possible to continue the game. Phroneo May 25, 2012 at 12:09 pm Seeing that no effort is being made anywhere in the world to prevent future property bubbles, I don’t think anything has been learned. They are in fact trying as hard as they can to get people to load up on more debt. Property prices going up is still always good and down is still bad. Consumer credit growth is still always good. Let’s face it, governments and consumers are addicted to bubble-type situations. Of course, once things starts to really slide, pulling everyone on the brink (which is everyone) to the floor, it might be a long enough depression to change things for at least a decade or so. Tarric May 25, 2012 at 12:32 pm I dont that the public is addicted to bubble type situations per say. I think that the wealth effect that Leith pointed out is definetly a key factor in a bubble enviroment, people like to feel more wealthy even when in reality they arent. The long term data and historical evidence seems to suggest that there will be another couple of decades before the next bubble will rise in this country, just long enough for most people to forget the pain of the previous bubble. md May 25, 2012 at 1:35 pm Now the government has announced its plans to give wealthy immmigrants quicker visas to move over here and quickly snap up all the overpriced properties that Australians are not willing or able to buy. The bubble must be upheld under any and all circumstances! Tarric May 25, 2012 at 1:54 pm Doesnt suprise me at all. Its one of the few things they can do without risking the AAA rating or giving the opposition any political ammo. I am somewhat worried about the issue of immigration if there is a severe economic downturn in Australia. As Europe has shown immigrants quickly become the scapegoats for the failings of governments and extremist anti-immigration’s gain traction in the polls. A recent poll conducted for the Daily Telegraph showed that 51% of Australians want a complete stop to all immigration, an informal poll on their website showed 67% of Australians want all immigration stopped. In the event of a downturn sooner or later the government/opposition will have to address this issue otherwise they will pay for it in the polls. aiecquest May 25, 2012 at 7:34 pm Think will have minimal impact as many foreigners can buy property anyway with family member on residency visa e.g. international student, but they have stopped coming…. Again immigration will be attacked and curtailed after many years of misinformation by anti immigration racist lobbies via News Corp and environmental and anti population growth lobbies in Fairfax….which also plays into the hands of the real estate industry…. Both purposely confuse or do not understand data i.e. includes both temporary and permanent residents, while Australia’s population growth has dropped to a little over 1% due to less immigration i.e. permanents, and far fewer new international students i.e. temps…. lackey May 26, 2012 at 1:49 pm Too right. We do need a new model. A core part of that model is to get rid of the high costs of buying and selling or changing houses and get rid of all taxes on income and real enterprise (thus leaving no tax advantage to be gained from speculation etc because nothing is taxed anyway) and gather almost all revenue from a flat rate tax on all land without exemption. Land not buildings. Also change a few rules like in Germany where apparently it is not secod rate to be a tenant. Result? 1. Optimum development and use of land as soon as possible. 2. More takehome income for earners. 3. Workers can “follow the jobs and money”. 4. All improvements to infrastructure, quality communities and liveability accrue to the revenue rather than to the passive land banker. Meanwhile… why rent the money for 5% and pay all the landlord costs if the property is not going up and you can rent it for 5% without the landlord costs and move to follow the money whenever you like. david collyerMEMBER May 27, 2012 at 7:23 pm Top comment, Lackey. We tax labor and enterprise, add deadweight costs and distort behavior when there are admirable government revenue instruments without these failings: RSPT and LVT. Peter Fraser May 25, 2012 at 12:11 pm Demand did increase after the November and December cuts, but it faded around March. I did expect the latest rate cut to do something, but it has been pretty minimal so far. I saw Louis Christopher get excited when auction rates rose but that hasn’t transposed across to the general community of home buyers, and there is extra demand from FTB’s in Victoria to get the extra $13,000 grant before it runs out at the end of June, but really it is rather quiet. I see that the banks are still offering quite good rates on TD’s so they may be reluctant to lose those first class deposits, due to the existing level of borrowings, and how that might play out with future borrowings in a tricky o/s market. If they don’t pass on the major share of any fresh rate cut in June/July then that will probably tell a tale. thomickersMEMBER May 25, 2012 at 12:49 pm unfortunately, too many full-time jobs have been lost over the last 6 months. If you are under 40 and in a family with 2.2 children you will have to sell your home. A $300,000 cannot be serviced with 1 or 2 part time jobs. And in other sad news, some of my banking network buddies are starting to get the chop. Luckily they don’t own homes but they will move from the renting market back to the “BB nest”. GB May 25, 2012 at 2:43 pm “Demand did increase after the November and December cuts, but it faded around March. I did expect the latest rate cut to do something, but it has been pretty minimal so far.” we tried to warn you PF. that slight increase in demand gets hit with a bigger wave of supply i.e a bear market. Once the bubble pops they could take inters rates to zero and it wont make any difference. Peter Fraser May 25, 2012 at 4:23 pm GB – Certainly lower rates will make a difference – that is my friendly warning to you. Make something cheaper that has a net return and it will sell. Already most investment property owners are turning positive – almost as we speak. CBA fixed rates of 5.7% are available – variable rates will shortly be 2% lower than what was available until very recently. That is a 26.7% reduction in cost, and if rates fall to 5% that is a 33% reduction in cost. Investors will love you GB. XXXX GB May 25, 2012 at 8:25 pm PF, sorry mate, but this lower interest rates = higher property prices that property spruikers cling to is over. just have a look overseas and see what .25% in the US, 0.5% in the UK and 1% rates in the EU have done for prices…..nothing. see your problem, which is why we clash, is that you still dont understand a. deleveraging b. its effect on the economy and credit and c. its impact on house prices. but then again i didnt “expect the latest rate cut to do something” a massive 100 bps worth of cuts in 6 months and any effect? No, are you starting to work it out yet? Peter Fraser May 26, 2012 at 8:09 am GB – it will turn GB. We are certainly in a deleveraging phase, and I’m happy to see that, but as the cost of home ownership falls, people will consider buying. But of course neither of our opinions really count – it is the market that will choose, not us. indo May 26, 2012 at 8:34 am I havent been in Australia long enough , but in the time I have been here , interest rate had no effect on buyers willingness to borrow. In 2007 RBA was increasing rates to take heat off the market but as the rates rose so did the demand. It was only in 2008 when a wiff of US recession started to Australian shores did the demand quell. The GFC interest rate cut was followed by large fiscal expansion through a FHB boost and cash splash and the windfalls of China stimulus. Would demand have risen on the back of an interest rate cut alone? Demand did fall as interest rates rose after the GFC but havent picked up as they have started cutting. But this also coincided with the pairing back of spending by the government. For me it is hard to say what if interest rates have a significant role. Structurally Australian interest rates are approaching ZIRP like in the US. (8% interest rate is unthinkable) .Once you get there monetary policy is useless. Quality Focus May 26, 2012 at 12:23 pm PF – given the ridiculously high prices of Australian property, a reduction in interest rates will have a minimal effect. People know interest rates will move higher at some point. Its the huge amount of debt required to be taken on that is prohibitive/making people reluctant to buy reusachtigeMEMBER May 25, 2012 at 12:12 pm Definitely a turning point here. It’s happening! Sweet as!! Greconomics May 25, 2012 at 1:44 pm I agree. I was expecting to see some recovery in house prices during May resulting from the rate cuts and demand brought forward in VIC but prices everywhere except Adelaide are still melting, in some cases even faster than before the rate cuts. It’s game over for the great Australian property bubble – called by Greconomics at 1:44pm on Friday 25 May 2012. Peter Fraser May 25, 2012 at 4:27 pm I’m in a benevolent mood greco – I won’t hold you to that call. Quality Focus May 26, 2012 at 12:27 pm A large reduction in interest rates tells people the economy is in trouble. The people recognise this, they are also seeing/hearing about redundancies everyday. Who in their right mind would want to buy a property when the economy is heading south, redundancies are rife, China is slowing, the resources boom is over and Europe is about to blow!! Jumping jack flash May 28, 2012 at 7:29 am The average punter is far thicker than many give them credit for. They will blindly borrow and buy stuff and houses until they borrow themselves into bankruptcy, where the repayments + the cost of living increases (arguably because of the debt wave) crushes them, and everything around them. Thankfully that is happening check the state of retail, and the state of houshold balance sheets. Pretty much everything is being spent on essentials or housing, and the essentials are being gouged for all they are worth. Pfh007MEMBER May 25, 2012 at 12:12 pm It is good news that people are getting wise and resisting the lure of manipulated interest rates feverishly promoted by the Merchants of Debt and their crowd of cheerleader. However, the idea that somehow we are helpless to engage in meaningful economic activity unless the debt mountain is growing is wrong headed. Certainly, that perception will be promoted by the Merchants of Debt as the last thing they want is for economic activity that is not reliant on expanding credit. The only thing stopping housing construction activity (outside inner Melbourne) is the inflated price of land and excessive regulation that renders development too difficult/expensive/risky and time consuming for small business builders/developers. There are plenty of things that need doing and can be done without relying on interest rate manipulation. drsmithyMEMBER May 25, 2012 at 12:47 pm There are plenty of things that need doing and can be done without relying on interest rate manipulation. Ah, but all of those would bring down house prices and stamp duty revenues. Janet May 25, 2012 at 12:16 pm “.. with most banks passing on a significant amount of the rate cut, mortgage holders have been able to start better combat the rising cost of living..” Here’s a thought, Mr. Smith. How about if the mortgage AMOUNT was smaller, it would be easier to combat that rising cost of living? How about you set about lowering the principal cost of the asset so none of us need to borrow as much, Mr. Smith? No? It wouldn’t be because you have a sizable ‘investment’ portfolio of your own; heavily leveraged, that a lower price might impact, would it, Mr. SMith? Serenco May 25, 2012 at 12:22 pm can someone answer me this question: Is the RBA targeting house prices with rate cuts? ie do they want more people to buy houses with lower rates or do they want increased retail spending with the extra money from repayments? If it is the latter (which I believe is at least the convenient lie which they feed us) then surely statistics on financing wont move them to lower the rate further. You’d need numbers on retail spending. Janet May 25, 2012 at 12:24 pm Possibly neither. They may just want to avoid turfing people out onto the street ’cause they cant afford their home. Greek street scenes in Melbourne are the last thing ‘they’ want! Pfh007MEMBER May 25, 2012 at 12:39 pm I agree that may be part of their thinking but they certainly would not admit to that as that amounts to having one part of the community effectively pay the mortgages for another section of the community. In effect a HDC (Housing Debt Crisis) Levy where the RBA facilitates donations from people with savings to people who borrowed money, they now find difficult to repay (even when interest rates are at rock bottom). In short debtors squeal louder than savers and will demand a cut in their debt re-payments before they sell the asset that secures the debt. david collyerMEMBER May 25, 2012 at 1:18 pm Janet is closer. RBA and Treasury want an orderly deflate of land prices to minimize the cost of dislocation. They are extremely sensitive to being identified as encouraging or discouraging the new downward price trend. They know we have a debt mountain to flatten and will prove dexterous and accommodative in both monetary and fiscal settings as events unfold. Their capacity to measure and assess economic activity is matched only by Canada’s, and the low fed debt, good credit rating, fiat currency and high $A will all be deployed. We also have a few secondary features that are very useful in a prolonged recession. My list is not exhaustive: a flexible workforce, 230 tpa domestic gold production, a biddable media (!), permanent capital creation in superannuation, a food and energy surplus, sealable borders, a social security and health care system designed to keep citizens intact during bad times, a skilled bureaucracy willing to speak truth to power, etc. Big lessons were learned in the Australian government response to the 2007 downturn. We may never learn who (pollies, bureaucracy) put the First Home Vendors’ Boost in the stimulus package, but they are very, very sorry about that and promise to never, never do that again. Hewell May 25, 2012 at 2:21 pm DD, Did they really learn? Do you have a link that says they promised never to do that again? I will be very much relieved. Thanks. Hewell May 25, 2012 at 2:21 pm I meant DC… nicolas May 25, 2012 at 3:14 pm +100 Roberto May 26, 2012 at 3:32 am The bureacracy does not speak truth to power. On the whole, they keep quiet to keep their jobs. First rule for your career there is dont rock the boat, and dont make mistakes. That is what they are judged on. Edward DeBono made this observation and it has always rung true. That’s why everything they do is extra ‘safe’ by being wrapped up in endless red tape. Hewell – agreed, they do what they can politically get away with. The gov pump & private buy the dips mentality will take some time to work through. Quality Focus May 26, 2012 at 12:33 pm Agree RBA and Treasury are trying to slowly deflate house/land prices but will not admit this is what they are trying to do The Patrician May 26, 2012 at 12:53 pm I don’t know if this had been picked up yet http://afr.com/p/business/property/embrace_the_mcmansion_us_expert_cCAvzHWzgl5ZU1xOcqqJXJ Pfh007MEMBER May 25, 2012 at 12:30 pm They will never admit to targeting house prices but there is no other possible conclusion. Targeting people who will just pay down their existing debts will have no short term economic effect as they just save the money. The only rational reason for reducing interest rates is to stimulate debt growth and the economic activity that rises when people borrow money and spend it. It is daft idea at the end of a credit boom. After all the interest money they are taking from savers and giving to debtors can just as easily be spent by the savers on consumption activity. In effect they are taking money from those who could spend it and giving it to people who are now largely too scared to spend it in the hope that some new entrants to the debt ponzi scheme can be sucked in. Janet May 25, 2012 at 12:37 pm What can I say, but …spot on part deux. We’re savers, also called gloomsters depending what we say to people, and have two cars. Each year we spent a set $X to keep one of them new; the other 2 years old – a rotation thing. Guess what we spent this year, given that our income has taken such a massive hit from bank deposit rates falling? Let’s just say, I drive a 3 year old car, now! Tarric May 25, 2012 at 12:52 pm Well said Janet, I know many people who have put off purchases because their incomes have been hit by lower interest rates and they now cant afford what they once could. We savers are the pariahs of the modern world, we are looked down upon for not jumping on the debt bubble band wagon and then we become hated because we were smart with our money and can now afford the things we desire as opposed to the average person who is paying off piles of debt. “Rich People plan for three generations, Poor people plan for Saturday night” VirusMEMBER May 25, 2012 at 1:34 pm >“Rich People plan for three generations, Poor people plan for Saturday night” true that… When I was 18, my dad told the same thing (but in a different language) and at that time I was thinking, “he has no clue” (as all teenagers do)..but now being 30+… I certainly appreciate my old man’s wisdom! flawse May 25, 2012 at 3:32 pm Virus Mark Twain observed ‘It was amazing how much teh old man learned between the ages i was 18 and 24’ littleguy May 25, 2012 at 4:33 pm Don’t feel too bad about that. I drive a 21 year old car. Mining BoganMEMBER May 25, 2012 at 12:43 pm A battle to the death between Paradox of Thrift and long-standing champion Wealth Effect. Get your seats now. But not too close. Get caught between those two and you’ll lose a limb. boyracerMEMBER May 25, 2012 at 2:30 pm While not affecting me a great deal personally, being essentially debt free and still working (and my super TD’s being locked in long term at the tippy top of the market – my 3rd best call of 2011!!) this reduction in interest rates is having an effect on my self funded retired parents. To make up for lower interest income they are turning to riskier investments. I can forsee more IR reductions spurring this effect on. I counsel my old man repeatedly and it is sinking in but he still makes what I would consider ill considered (ie. quite risky) share market investments driven solely by the need to earn enough money to live on. So I reckon there is a good chance many more retirees will end up torching some/all of their nest eggs and end up on a part/full pension. Hardly a good result for the taxpayers of this country. flawse May 25, 2012 at 3:36 pm bingo! Over the long term that applies to the whole economy. At zero interest rates the value of everything is infinity. The closer you are to zero the less one can distinguish between the real valuen of investments. Hence we get such a mass misallocation that is evident throughout the western world. forty-niner May 25, 2012 at 4:55 pm boyracer: “To make up for lower interest they are turning to riskier investments.” Isn’t this the reason why ASX has underperformed OS share markets recently (esp. USA), and why Chinese citizens en masse turned to property investment (and thus created a bubble) – because US and Chinese interest rates were too low for investors (i.e. there is a ‘goldilocks zone’ for interest rates – if rates are too low savers eschew interest for riskier investments, if rates are too high borrowers can’t repay their debt).? Deo May 25, 2012 at 1:57 pm It is daft idea at the end of a credit boom. After all the interest money they are taking from savers and giving to debtors can just as easily be spent by the savers on consumption activity. The low interest regime is a form of financial repression commonly done in prior recession and sovereign-debt crisis. Their intention is to force the savers to spend either for consumption or risky assets buying to prop-up the general economy by forcing negative real-return to the savers. Currently, you may be right that the savers may still be discouraged to shop / spend but in a little while when RBA kept lowering rate and saving rate at around 3% which usually represents negative real return to savers, you will see the savers to start spending or at least moving their cash to other assets / currencies in drove. This is a very good way to ensure inflated asset price to continue till it can’t eventually. Nathan Webb May 25, 2012 at 3:55 pm That’s the theory, but the reality is that the savers aren’t going to suddenly think, “hey, all this money I’ve saved isn’t earning enough, so I’ll spend it instead”. I’m sitting on a pile of cash, waiting for opportunities, but when RAT rates get below zero, I’m not spending it. I’ve worked to hard to just spend it on shit. I’ll do the opposite and start saving even harder, to meet my self-imposed goals. Just look at German bond yields of 0% for proof that people value the money that they have saved far more than the possessions that they could have now. Deo May 25, 2012 at 4:07 pm Yes, there’re always exceptions but I did say that if you have negative real return meaning not only your savings not earning anything but you actually LOSING money. In addition, I did say that the savers will have options whether to consume or allocate savings to other asset classes. I guess this is reasonable and I actually did that in 2008-2009 when the interest rate was so low by actually buying computers, new TVs etc and some cheap shares. But to be fair, yes there’re always exception. Serenco May 25, 2012 at 4:48 pm well you are losing your purchasing power Lori May 25, 2012 at 4:56 pm I don’t understand why the government would do something to hurt the savers? Isn’t it better for the government if there are more savers, which means less financial engagement for the government when those savers get old? Only the banks won’t be happy, because the are want to financially enslave everyone on this planet. Deo May 25, 2012 at 5:08 pm I don’t understand why the government would do something to hurt the savers? Because Lori, as I mentioned above, when the govt is in trouble during recession and/or sovereign-debt crisis, the government also like to inflate their debt away and austerity policy is not popular with voters. Therefore, the govt like to keep spending and creating debts and of course, it’s better to have low interest regime to do that right ? That’s why it was called “financial repression”… Julius May 25, 2012 at 2:23 pm Sometimes I think they drop the rates just to shut the bloody politicans up, so that they can get a good nights sleep. Mav May 25, 2012 at 12:36 pm The writing is on the wall and even the banks know it. RAMS (Westpac) has now launched a savings account with 5.85% interest rate (with a lot of conditions though). Good to see banks competing for savers instead of the usual mega mortgage mugs. Tarric May 25, 2012 at 2:40 pm Good catch Mav, I know where my money is going for the time being. You are right that the jig is up and domestic savings are taking on an even greater importance for the banks rather than the classic attention placed on low rates for debt holders. thomickersMEMBER May 25, 2012 at 12:41 pm if we had a zero interest rate scenario with the RBA we would likely have mortgage rates at 4.0-5.0%pa. Unconventional EconomistMEMBER May 25, 2012 at 12:48 pm We’d also have a swag of retirees and savers earning less in term deposits / fixed interest, who would spend less. Robbing Peter to pay Paul… thomickersMEMBER May 25, 2012 at 12:59 pm yes very bleak outcome indeed. but last year though we managed to allocate some retiree savings in pension to 3 year TDs @ 6.3%pa 🙂 Unconventional EconomistMEMBER May 25, 2012 at 1:02 pm Good one. My dad fortunately locked in some good rates too last year. VirusMEMBER May 25, 2012 at 1:35 pm My name is neither Peter nor Paul, what abt me? :-).. The_MainlanderMEMBER May 25, 2012 at 8:05 pm Anti-virus? thomickersMEMBER May 25, 2012 at 8:16 pm robbing virus to pay norton! monsieurbarso May 25, 2012 at 12:41 pm It has long been my hypothesis that Australians had reached peak ipad, plasma, pay TV, Pajero, private school, pony clubs and property ponzi, otherwise known as debt saturation, and were ready to start saving again (if only to activate their gag reflex for the next buffet of debt coated goodies on offer next decade). Good to see this hypothesis, which is mine, confirmed by the RBA, BCG and yourself, Leith. I await future vindication from the RBA, OECD, PIMCO and the Economist. Pfh007MEMBER May 25, 2012 at 12:47 pm A splendid hypothesis! Hmm – Ouch an apple just hit my head ! Goodness I have just had the most amazing insight. Has anyone every thought that possibly the apple is not falling to the earth but is attracted to it. Eureka! Karan May 25, 2012 at 2:53 pm The thing to remember about the theory of gravity is that the earth is also attracted to the apple, at least a tiny lil bit 🙂 Nathan Webb May 25, 2012 at 4:00 pm You mean, Hypothesis of Gravity Jono May 25, 2012 at 1:30 pm No way have we reached peak pony clubs ! Maybe thats the next bull market ? 0% interest rates should kick it off. monsieurbarso May 25, 2012 at 2:08 pm Go short ponies. Long goldfish. Serenco May 25, 2012 at 3:01 pm you can’t seriously claim that as your hypothesis!!1!1one that’s been round forever from heaps of other people 😛 jk of course Karori May 25, 2012 at 3:43 pm You are not allowed to say “my hypothesis” on this forum. It gets Aristophrenia very annoyed (see http://www.macrobusiness.com.au/2012/05/baby-boomers-create-stiff-headwinds-for-housing-market/) 😉 constant gardener May 25, 2012 at 4:47 pm But on the way to peak “stuff” that accumulated stuff will actually turn out to be a liability. Large homes need more energy and upkeep and interest money, large cars guzzle, all the gizmos suck up power and on and on… RickW-MB May 25, 2012 at 12:42 pm Lowering interest rates is a flag to most contemplating a house purchase that the economy is deteriorating – DON’t PANIC. In those circumstances house prices are bound to fall more so why rush in when it is still cheaper (by a long way considering potential capital loss) to rent. It is not yet the paradox of thrift but rather people behaving rationally. Bank deposits are still rising so the reduced activity in the housing sector has not yet hit savings. Deleveraging has to hit aggregate demand. The current situation in Australia is better than most other developed countries but then Australia has been the last one to start deleveraging so the economy is only in the early stages of decline. The crazies in charge of the asylum (RBA) will do exactly the same as all the other monetary authorities by taking interest rates to zero but for some reason expect a different outcome in Australia! Just crazy. flawse May 25, 2012 at 3:44 pm You are expecting a bit much of monetary policy. I doubt the RBA are as crazy as most here think although sure there are good reasons to believe there is a level of insanity there. They are just not as mad as Treasury et al. Fiscal policy is where the real problems lie and bad fiscal policy has meant that the whole society has gone in directions we would not have gone under better fiscal (and monetary) policy. Oiur problems are now ingrained in the very nature of our society and ourselves The answers lie back in time. Temjin May 25, 2012 at 12:45 pm They don’t get it, don’t they? They may be able to control the cost of money by pulling the interest rate level, but they will never be able to “force” people to borrow more because attitudes do not just change overnight. In fact, it’s all counter-productive if RBA decides to drop interest rate on the basis of “reduced growth forecast”!! That will give people the confidence to go into deeper debt. This is just like what’s going on in the US. Too much capital in the bank, too low interest rate, but everybody else are just paying down debt instead. Economists just don’t understand deleveraging. Janet May 25, 2012 at 12:52 pm On the other hand, people are getting the chance to deleverage, and not resorting to throwing themselves under a train because ‘they’ve lost it all’. Perhaps ‘they’ do know what they are doing, and are taking the best of a nasty set of options? I know it kills us savers, but in the grand scheme of things, that’s what savings are for; whether at the household level or the national level. Dr Watson May 25, 2012 at 12:57 pm So why is the patient not responding to the medication from Dr Stevens? He has administered a dosage of 100 basis points. But there we lie, listless and unresponsive. After checking our vital signs, Dr Stevens diagnosis may soon be that we have a condition known as Japanese Syndrome. Despite enormous medicine from the Bank of Japan, including Quantitative Easing, the patient has remained unresponsive. To this day, there is no known cure for Japanese Syndrome. myne May 26, 2012 at 9:44 am There is a cure no one has ever tried. Leave the patient alone. Lister11 May 25, 2012 at 1:02 pm Thanks Leith. Informative as ever. I think you have discussed the slow melt theory in relation to real estate before but where i want to buy it seems glacial in it’s pace. Wanting to buy in the inner south of melbourne, I’m not seeing any dramatic reduction in prices or increase in stock. I could posit many theories including this being a wealthier area and less effected by the current economic woes or that people can simply afford to hold onto property and wait for better times. Any ideas on particualr areas of the housing market remaining resilient? wursht May 25, 2012 at 1:46 pm I am noticing a similar effect in metro and some regional areas within 1 to 1.5 hours of Brisbane. Plenty of stock on the market, but a barely noticeable lowering of prices. From my limited observations, this is the case for affluent and less affluent areas. So it seems that there are not that many desperate people around needing to sell their homes yet. It is possible that this is because employment rate is still high and people are able to cut down on the discretionaries to support mortgage repayments. The picture looks a bit different for a extreme end of the market i.e. those houses in the $1M plus bracket. Interesting times indeed. boyracerMEMBER May 25, 2012 at 2:38 pm I’d agree with that Wursht. Prices won’t increase as people are not getting more debt to trade up but neither are they forced to sell just yet so they don’t. Also, I think not being able to get their dream price will force many to just keep what they have – while they can afford it. psyke777 May 25, 2012 at 3:02 pm Or they can’t afford to sell at a lower price and are forced to wait for a hoped for buyer at the set price, possibly to pay out the loan. ro May 25, 2012 at 8:07 pm probably a bit of bith People are sitting on their wallets as there is zero confidence and therefore a wait see attitude They are also not wanting to drop price either as they dont need to sell A stalemate of sorts It will take more than lower interest rates to stimulate the market It will take real rising prices before there is activity It will be a slow few years McPaddyMEMBER May 26, 2012 at 3:19 pm Irish residential property bumped along the top of its values for around 18 months before vendors finally blinked. Prisoners’ dilemma. tsport100MEMBER May 25, 2012 at 1:18 pm Lets hope this continuous press bleating about RBA interest rates, by commercial interests who live in denial that property prices are in-fact going DOWN, will now peter-out! Of more interest is how state governments adapt to the huge drop is stamp duty revenue (which previously made up 50% of their budgets). The NSW state budget is due June 12th. Lets hope Landcom ACTUALLY release a meaningful amount of new land @ NEW prices (much less than the standard $350k per 1/8th acre that hasn’t changed in the last 10 years) to stimulate their own tax revenue. Charles Ponzi May 25, 2012 at 1:26 pm The only thing that will stimulate my demand real estate will be lower house prices. Jono May 25, 2012 at 1:26 pm I can’t believe there are still Keynesian fanatics who believe in this “Paradox of thrift” crap. Keynes believed that once prices start falling, nobody will buy nothing, not even bread or housing or education or medicine. He was completely blind to the idea that not all spending is value adding. There is no such thing as a deflationary spiral. What the heck is so bad about falling prices anyway ? Pfh007MEMBER May 25, 2012 at 2:30 pm +10 Could not agree more. The Paradox Thrift is an over-hyped scare campaign and simply means people stopping buying overpriced junk and assets. It doesn’t mean we all sit at the bottom of the pool refusing to breathe. Even if prices are falling I still need to eat and drink, stay warm, pay my rent, buy my train ticket and my single origin organic espresso. Much of what we spend our money on we will continue spending money on and that places a floor under the price of things that matter. Things don’t matter may fall a long way but as you say Jono “What the heck” Tarric May 25, 2012 at 2:46 pm Too true 007. Some people seem to think it will be the end of the world, sure things will be hard for some people but things will remain more or less the same for the vast majority of the population. It will be a truly supply/demand economy, one not influenced by the easily supply of credit. This is an opportunity to create an economy where people have more money in their pockets in the long run (due to affordable housing), hopefully contributing to greater prosperity for everyone. Jumping jack flash May 28, 2012 at 7:44 am precisely 007, that is why the utilities and essentials are being gouged for all they are worth. They are the last frontier. The last way to make money from people who don’t want to buy anything. Everyone’s all but stopped buying trinkets, the proof of that is abundant. What’s left? Food, telecoms, electricity, petrol, water, council rates, insurance; all the essential and compulsory expenses are going up in price by giant leaps. What’s next? Tax the air, or better yet, your ethereal “carbon footprint”… GB May 25, 2012 at 3:02 pm What the heck is so bad about falling prices anyway ? If you are talking about just house prices falling there is nothing wrong. If you are talking about price deflation across the economy then that is bad. Anyone who supports price deflation should also be the first to support lower wages for themselves. most people want lower prices but they dont want lower wages but you cant have it both ways. thats why its usually a painful adjustment down. prices fall, wages fall, living standards fall. thats why its bad Deo May 25, 2012 at 3:08 pm prices fall, wages fall, living standards fall. thats why its bad I think this needs to be qualified. I don’t mind lower wages as long as the real wages (adjusted to inflation) is still the same or ahead. So, in theory deflation is not bad because your incomes get lowered but cost of living also get lowered and as long as your real income is maintained or get better then no problem. Same with with inflation i.e. as long as your real-income is still maintained or gets better, then no much problem. The problem is usually when the rate of inflation or deflation gets too high then it creates not so healthy expectation in the society i.e. people will expect prices to keep getting higher / lower in long-term and create chaotic economic situation. GB May 25, 2012 at 3:38 pm ok, so you dont mind lower wages to go with the lower prices which is good. if you are lucky enough to still have a job that is as many businesses fold under the shrinking margins like whats happening to retailers now. next, do you or people you know have alot of debt? if not the lower prices and lower wages will work for you. If you have a lot of debt, which is most people unfortunately, the debts dont reduce like wages and prices do. the debt remains the same but people now have lower wages and business has lower revenue (due to the lower prices) in which to service that debt so in real terms your debts actually get bigger. people and business who are already struggling with current debt loads obviously go broke as their reduced incomes makes it impossible to stay afloat. more business go broke, more unemployed, more asset write downs, lower wages, lower living standards. “There is no such thing as a deflationary spiral”. i guarantee you there is and it has already started here. you can see it everywhere if you know where to look. Deo May 25, 2012 at 3:48 pm ok, so you dont mind lower wages to go with the lower prices which is good. if you are lucky enough to still have a job that is as many businesses fold under the shrinking margins like whats happening to retailers now.next, do you or people you know have alot of debt? if not the lower prices and lower wages will work for you. Well if you’re talking about losing your job then it is another matter technically because even in normal or high inflationary situation you can also lose your job for various reasons. But I thought we only talked about the fact that lower price is always bad and I said that not the case and I qualified further by saying that the one to worry is the quantum of inflationary / deflationary pressure which usually has bad effect on people’s expectation in the long-term. In regards to debt, then it is not fair to blame deflation because in inflation time, the debt-holders get lucky at the expense of savers so it will be fair if in the opposite deflation time, the savers will be in better position at the cost of the debt-holders ? Don’t you think so ? Mav May 25, 2012 at 3:55 pm +10. Lost count of number of businesses going under.. but Austerians tend to ignore empirical evidence and stick to what is written in their neo-classical economics textbook. GB May 25, 2012 at 4:23 pm agree on what you said. and persoanlly as a saver with no debt im happy inflation has and continues to fall. but the original comment was What the heck is so bad about falling prices anyway ? i was just providing an example of how it works and why it can get bad if it gets out of control. flawse May 25, 2012 at 3:51 pm What actually happens is that those with privileged power continue to have higher incomes. Lawyers, politicians, Public Servants, Executives of large companies with market power, Unions with monopolistic power…all at least maintain their nominal wages in a deflationary environment. The weight falls on the few which is mainly small businesses and those who work in them. It’s always been thus and it is the REAL problem. Deo May 25, 2012 at 4:00 pm What actually happens is that those with privileged power continue to have higher incomes. Lawyers, politicians, Public Servants, Executives of large companies with market power, Unions with monopolistic power…all at least maintain their nominal wages in a deflationary environment. True, but it is always like that, right ? 😉 To be fair though, those elites with power will also be fine in inflationary time because they always maintain their real incomes by getting higher increase compared to the rest of economy. So no matter of deflation or inflation…they’re always ahead. Kinda feeling sorry for lawyers though… a bit unfair, why people never mention doctors or miners when talking about “privileged incomes” ? 😉 Mav May 25, 2012 at 3:02 pm Oh dear, It does not take much to rile up the Austerian/Austrian hordes. Does the current observable reality count for nothing flawse May 25, 2012 at 3:53 pm You mean we must all observe reality as you do? Why can’yt you just discuss things like everyone else instead of spraying your venom all over the place? Mav May 25, 2012 at 4:54 pm The answer lies back in time and has something to do with our CAD. :p Pfh007MEMBER May 25, 2012 at 5:13 pm I don’t see a connection between pointing out the limits of the so called problems presented by the Paradox of Thrift and Austrian Theory. Deflation in the prices of speculative assets is not pleasant for those who have secured debts with those assets and can no longer meet the repayments but the impact on others is much more limited apart from a reduced ‘wealth effect’. If you are under water on a loan but can still keep making payments you may feel unhappy but that is about it. And if you own your place outright you just lost paper. Prices will fall until the speculative element evaporates. Buyers will not wait for prices to fall to zero as they will fear missing an opportunity. The paradox of thrift offers no reason not to allow speculative asset prices to fall if they cannot be maintained with modest interest rates. thomickersMEMBER May 25, 2012 at 7:39 pm I love Austrians! thomickersMEMBER May 25, 2012 at 7:41 pm I love Austrians! They are certainly not hordes! 😛 wtf May 26, 2012 at 11:00 am I love them too! They’re hilarious! BubbleyMEMBER May 25, 2012 at 1:28 pm Its not a thrift paradox, its a pricing conundrum. The public is expected to pay too much for property and the government is expected to encourage or bribe them to do so, for the benefit of a few. That’s the conundrum. reusachtigeMEMBER May 25, 2012 at 2:26 pm Exactly! AxelF May 25, 2012 at 1:57 pm While cheap credit has been a significant factor in boosting demand for property and property prices this century, I think an even more important factor has been that consumer sentiment had been set to 11. The demand axis was pushed to the right (permanently some claimed) but maybe the demand line on the supply & demand chart is drifted back to a less fervent level on the left. If that is the case then rate cuts are still a factor, but not as important as the sentiment to max out mortgage repayments is depreciated greatly. Property prices have been flat/falling for over a year now – it’s unlikely to be a coincidence that the need to rush into the property market at any cost has faded. boyracerMEMBER May 25, 2012 at 2:41 pm +1 and mainly for the Spinal Tap reference 🙂 wtf May 26, 2012 at 11:02 am +11 GB May 25, 2012 at 2:50 pm “As shown by Houses and Holes yesterday, the RBA is now limited in its ability to lower mortgage rates, with the prospect of sub-5% mortgages appearing increasingly unlikely” i disagreed with H&H on this yesterday and am even more confident today that sub 5% mortgage rates are a certainty. CBA just slashed their 2 yr fixed by 40 bps to 5.79%! just 79 basis points to go for mortgage rates against what will likely be 150 – 200 bps cuts in the OCR?Mortgage rates sub 5% is a case of when not if: “SYDNEY (Dow Jones)–Commonwealth Bank of Australia (CBA.AU) has cut interest rates on some of its fixed-rate home loans by up to 40 basis points, the bank said in a statement Friday. New interest rates on two-, four- and five-year home loans from Australia’s biggest bank by market value will be reduced from May 25 for customers with borrowings of more than 150,000 Australian dollars. The biggest reduction will see the interest on two-year loans reduced to 5.79% a year from 6.19% currently. Four- and five-year loans will both see rates reduced by 35 basis points to 6.29% and 6.39% a year respectively, the statement said.” Pfh007MEMBER May 25, 2012 at 3:04 pm Yes – the govt and the RBA and the Merchants of Debt are not going to surrender to deleveraging without a serious shake of the ZIRP stick. thomickersMEMBER May 25, 2012 at 7:20 pm GB the real rate for that loan is 6.73%. Also a good “investor mind” should be indifferent between fixed and variable rate. Alex Heyworth May 25, 2012 at 7:24 pm Depends on what they think interest rates will do over the period of the fixed rate loan. And what available cash flow they have to service the loan. thomickersMEMBER May 25, 2012 at 7:30 pm http://www.commbank.com.au/personal/home-loans/fixed-rate/rates-fees/default.aspx place the “comparison rates” on spreadsheet. You will get your solution. SvetlanaBabe May 25, 2012 at 2:57 pm I’ve been to quite few dinner parties over the past year, and nobody talks about “property” anymore. For a whole decade it was nothing but property, property, property, property, property. Now people talk about their favourite antidepressants. That’s gotta tell you something! Nathan Webb May 25, 2012 at 4:14 pm …that you go to some pretty sad parties? littleguy May 25, 2012 at 5:06 pm 🙂 VirusMEMBER May 25, 2012 at 5:07 pm HAHA briefly May 25, 2012 at 4:24 pm Household demand for credit has basically been static for several years now. Considering that interest rates can just as easily go up as down – and households know how painful high rates can be – it is not surprising that the recent cuts have failed to stimulate new demand for finance. Households also know that the savings permitted by transient cuts in rates will not offset permanent capital losses if property prices continue to slide. It is not a secret that property has been over-priced; nor is it a secret that loans, once taken out, have to be repaid in full, no matter what happens to incomes, interest rates, inflation and the economy in general. The property market is correcting. This will take a long time, regardless of rate changes that may come and go. The Prince May 25, 2012 at 5:06 pm +42 Merk May 25, 2012 at 7:43 pm +43 for carrying a towel, Prince. constant gardener May 25, 2012 at 4:36 pm I have good friends that had maxed out their credit cards, overspent on renovations and overseas trips and then got a big tax bill. Both are working full time but the combined earnings are apparently not sufficient for the outgoings. So they refinanced their house and upped their mortgage by probably 80k or so. I think this may be representative for the amount of refinancing that is going on still – credit is contracting but “equity mate” seems to still work to get people through cash flow issues. thomickersMEMBER May 25, 2012 at 7:36 pm lol “equity mate” phrase puts me on the floor laughing every time. deflation in the things you own. inflation in the things you need. inflation in the things you owe??? Jumping jack flash May 28, 2012 at 8:00 am Certainly! Equitymate is the lifeblood of many indebted. Friends of mine basically lived on equitymate because their income went to debt repayment and essentials. They were renovating so they would preiodically withdraw equitymate to pay large bills and generally live the high life. Car needs repairs, or need a new car? Equitymate. New 3DTV? Equitymate. New gadgets and trinkets? Equitymate. Unexpectedly large electricity bill? Equitymate. Pay the council rates? Equitymate. I swear, renovaters must be a bank’s wet dream. Walk into one of the big four 5 years ago and say that you want to buy a dump for 300K and renovate it, and they wouldn’t be able to get the paper in front of you to sign fast enough. TheRedEconomistMEMBER May 26, 2012 at 11:13 am From the Fairfax press… http://smh.domain.com.au/real-estate-news/recent-home-buyers-to-find-equity-magic-has-vanished-20120525-1za40.html I reckon a few recent homeowners on 90%+ LVR …..will be getting that sinking feeling when reading that headline. All the skimping and saving to pay that massive mortgage… for a big fat nothing. Over the last 2 years… it has clearly made economic sense to rent and save residual cash….Which I have done. Plus I have enjoyed a beer and bet most saturday arvo’s. Much more fun than your mortgage holder whom is slaving away on a casual shift at the local Bunnings… Just to keep the dream alive (nightmare) and the debt collectors at bay. Anyone got a tip this arvo at any of metro meetings… ;>) RodZone May 26, 2012 at 9:04 pm A house I was interested in a couple of years ago sold for $450k. It’s back on the market for 400 asking price in a dead market. Add in transaction costs and even a cash buyer will realise a loss, although has avoided paying rent, I guess. It’s probably a mortgaged property and some real financial suffering is taking place. I think it’s likely to be a FHB who bought in the Vendor boost period. greebly24 May 28, 2012 at 3:29 pm I agree with SvetlanaBabe. No more property talk at dinner parties. But even though the conversations are far more interesting, it doesn’t bode well for the economy. The Wealth Effect of rising home prices has gone, perhaps for a decade. Combine that with a constant stream of news of big business closures (including Hastie today) and associated job losses, and increasing media coverage of rising costs and struggling “working families”, and China’s slowdown and Europe’s breakdown (etc etc etc) and it is no surprise that the Thrift Effect is now in full force. Deflation here we come!