Sweden shows Australia the way out

By Leith van Onselen

Sweden’s housing market shares a lot of simularities with Australia.

As was the case in Australia, Sweden’s financial system was deregulated in the mid-1980s, which led to a house price boom and then corrrection as the Swedish economy entered recession in the early-1990s. However, whereas Australia’s banking system was almost brought to its knees via widespread corporate losses, Sweden experienced a banking crisis in the early-1990s after house prices crashed, as well as the bail-out of Sweden’s banks by the government.

And like in Australia, Sweden also experienced a large house price boom that ran from 1996 to 2010, whereby prices rose by around 165% in real (inflation-adjusted) terms before falling by around -6% since peak (see next chart).

Swedish authorities also implemented a range of measures to stimulate the housing market and maintain the flow of mortgage credit during the onset of the Global Financial Crisis (GFC).

Whereas the Australian Government increased grants to First Home Buyers (FHBs), in Sweden tax breaks were implemented in 2008 for homeowners wishing to renovate newly purchased properties. Like in Australia, the government also stepped-up the provision of liquidity to the banking sector, guaranteeing the funding of the banks and mortgage institutions, as well as establishing a long-term stability fund to deal with any future solvency problems.

Arguably, the Swedish Government has accenuated the house price increases by operating policies that have stimulated substantial housing demand while also choking-off supply.

First and foremost, the Swedish tax system encourages house purchase over other investment options. In general, owner occupiers can deduct 30% of mortgage interest from their marginal rate of tax. Although there is also a capital gains tax of 30% on two-thirds of any price rises, this can be deferred as long as another owner occupied property is bought, and the rule applies to heirs as well.

A wealth tax was abolished in 2008 as was a national real estate tax, replaced by a lower municipal property fee, which helped to sustain the buoyancy of Swedish house prices.

Second, access to mortgage credit has been particularly loose in Sweden. In the years leading up to the GFC, loans were typically granted up to 95% of property value, although 100% plus loans were also available. Moreover, loan amortisation periods are particularly long in Sweden – at 100 years for houses and 200 years for tenant-owner apartments.

The Swedish planning system is also highly restrictive, resulting in homebuilding rates near the bottom of European countries. According to the RICS 2011 European Housing Review:

Housing construction costs are the highest in Europe, according to Eurostat, at around 55% above the EU average. The OECD attributes high house building costs to market structures that evolved in the era of high housing subsidies, limited competition, low levels of construction imports, and heavy regulations – all of which constrain competition and innovation.

Supply responsiveness is affected by land supply constraints. Land shortages occur for NIMBY reasons. Complex and lengthy processes of plan formulation and then appeals procedures generate considerable delay even where residential development is permitted. Furthermore, the structure of local authority finance discourages new development. Until the 2008 reforms, no local taxation was derived from property and municipalities still have large upfront costs, with little prospect of payback for many years to come, so the incentives still do not seem that positive.

The culmination of these drivers has driven Swedish mortgage debt to near the top of advanced economies, according to the IMF:

It has also had a pernicious effect on the young and disadvantaged, as explained by RICS:

The distribution of housing opportunities favours incumbent households over newly- or recently-formed ones and others wishing to move particularly into, and within, places where economic growth is strong. In other words, it is a system where lucky ‘insiders’ gain at the considerable expense of ‘outsiders’. This not only creates unintended social consequences but also imposes significant economic costs. Added to the cocktail is a political scene with recent closely fought elections, which have encouraged governments to cut property taxes and to put housing market reforms on the back burner.

Owner occupation has become the sole option for housing aspirations of many in a situation of constrained supply. This has encouraged a long trend of higher prices, which have generated wealth gains for some… and, so, has led to types of inequalities that the original interventions were supposed to smooth out.

It seems the Swedish authorities are tiring of the housing situation, and are looking to dampen demand by strengthening safeguards on excessive mortgage lending (but unfortunately not acting to free-up the supply-side).

In October 2010, Sweden’s financial regulator, the Financial Supervisory Authority (FSA), capped mortgage loan-to-value ratios (LVRs) at 85%, a move that helped slow annual mortgage growth from more than 10% between 2004 and 2008, to 4.5% in December 2012. However, this rate of mortgage growth remains too high for the FSA’s liking, and it is now seeking to impose further LVR limits as well as increase capital adequacy requirements on Swedish mortgage lenders. From Bloomberg:

Sweden’s financial regulator says it’s ready to tighten restrictions on mortgage lending to stop banks feeding household debt loads after a cap imposed during the crisis failed to stem credit growth…

The FSA is ready to enforce a cap limiting home loans relative to property values to less than the 85 percent allowed today, [FSA director general Martin Andersson] said. Banks may also be told to raise risk weights on mortgage assets higher than the regulator’s most recent proposal, he said. The watchdog has other measures up its sleeve should these two prove inadequate, he said.

As most of the rest of Europe grapples with austerity and recession, the region’s richer nations, including Sweden, Norway and Switzerland, have been battling credit-fueled housing booms…

Switzerland this month ordered its banks to hold 1 percent additional capital against risks posed by the country’s biggest property boom in two decades. Norway in December proposed tripling the risk weights banks must use on mortgage assets to 35 percent…

The regulator last year also proposed tripling the risk weights banks apply to mortgage assets to 15 percent. While the pace of credit growth has eased, household debt still reached a record 173 percent of disposable incomes last year, the central bank estimates.

That far exceeds the 135 percent peak reached at the height of Sweden’s banking crisis two decades ago. Back then, the state nationalized two of the country’s biggest banks after bad loans wiped out their equity…

So here we have another nation with a housing problem looking to implement curbs on mortgage lending via macroprudential tools. But that’s not the end of it. Sweden has a weakening economy, in part a result of an overvalued currency (though less so than ours). Nonetheless, the Riksbank, Sweden’s central bank, has also slashed interest rates by 75bps points to 1% in the last year and is forcing down the krona:

Regular readers will notice that this is the very prescription recommended at MB for the past 18 months. Install macroprudential tools, break the link between interest rates and the currency, slash rates and allow the currency to boost the tradabele sector without bursting or growing further overpriced assets.

Australian authorities need to look at Sweden.

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Comments

  1. But it’s too late for Macrotools. They should have been implemented 12 months ago at the very least, and accompanied interets rate slashing. Now we are faced with either a recovering global economy ( and that’s the end to interest rate cuts of any sort) or no recovery, and a scramble for what investment funds there are floating about the globe……a chance sadly wasted….

  2. APRA, the toothless tiger, doesn’t have the marbles to install macroprudential tools … yet. As the currency wars heat up, this will be revisited to allow the RBA more room to move in order to drop the AUD.

  3. “..this is the very prescription recommended at MB for the past 18 months. Install macroprudential tools..”

    Cannot help but notice that the key macroprudential tool being used by Sweden (lower LVR’s) serves directly to do what, exactly? Yep, limit how much the usurers’ can lend (thus, profit) on any given property.

    So I say again .. why waste time with mere bandaid solutions?

    I wonder if anyone has thought to calculate the $-value of the deadweight shackled to the ankles of the economy, that the sum of all mortgage usury repayments (of digital bookkeeping entries) represents?

    Ban Usury. Problem Solved.

    • Ban Usury. Problem Solved.

      usury
      1.The illegal action or practice of lending money at unreasonably high rates of interest.
      2.Interest at such rates.

      So then, what rate of interest is too high?

      • That is the “modern” definition.

        When I use the term usury, I’m referring to the classical definition – the lending of money at interest at all:

        “The most hated sort (of wealth getting) and with the greatest reason, is usury, which makes a gain out of money itself and not from the natural object of it. For money was intended to be used in exchange but not to increase at interest. And this term interest (tokos), which means the birth of money from money is applied to the breeding of money because the offspring resembles the parent. Wherefore of all modes of getting wealth, this is the most unnatural.” – Aristotle (1258b, POLITICS)

      • Except that in our modern society debt has a function, and to ban it would send the world back to the stone age.

        Why not try to think of some measures which are actually possible and won’t damage what we have instead of coming up with quite unworkable ideas.

        If you work in private industry, what would your employer do without an overdraft, how would he finance equipment to expand his business and employ more workers, how would he sell his product if buyers didn’t have access to finance assuming he makes big ticket items.

        So apart from trampling the lillies down in the fairies garden, what other suggestions do we have.

      • Oh seriously I don’t have to and anyway you are the one coming up with the fruity ideas – you support them.

      • I also suggest that you refer to your own definition of Usury.

        To ban the earning of interest on it would restrict supply by almost 100%.

        Please get serious…..

        Would you like a lesson on Islamic finance where interest is banned under Sharia law? It has meant a retarded economic growth for hundreds of years. What was good in the prophet Mohommad’s time is not necessarily effective today. Thankfully today the centres for finance in the middle east pay little more than lip service and high rentals are substituted for interest – net result is that little changes.

      • Whilst not endorsing the banning of ursury, this is more a debate on capital structure, so…

        To ban the earning of interest on it would restrict supply by almost 100%.

        How little you know. Why do you dispute you are amongst the least knowledgable here?

        Capital can be created into existence, it does not require forgone consumption to provide it.

        Please get serious…..

        Would you like a lesson on Islamic finance where interest is banned under Sharia law?

        Are you offering to provide your superior knowledge to us? What will this lesson entail?

        It has meant a retarded economic growth for hundreds of years.

        That was the sole factor was it?

        So nothing to do with a corrupt caliph, an anti-technology deoctrine or rampant beastiality?

        Or when the mughals ruled India, they were the richest country int he world?

        But you’re going to offer us a lesson are you?

        What was good in the prophet Mohommad’s time is not necessarily effective today.

        Do you actually know how Sharia financing works?

        Thankfully today the centres for finance in the middle east pay little more than lip service and high rentals are substituted for interest – net result is that little changes.

        That’s the way it has always been with Sharia financing.

        The rents are the utility cost, and the bank takes an effective equity stake. This way, with the stake being equity, and risk implicit, instead of nominal debt pricing, the bank is inclined to ensure price stability.

        The modern ponzi under and the capital provisions under Basell II , particuarly towards residential property, led to the the GFC because price stability was much less sought after.

      • Have you read what you linked to?

        The article (Hitler references aside) is about how Germany’s central banker managed to get some value back into the Deutchmark by ensuring that they became a net producer, it has nothing to do with inventing a society that doesn’t use finance.

        It confirms that a production based society cab function without a currency backed by gold.

        I suggest that you read it again.

      • Er … no. Perhaps you should read it again PF, rather than continuing to beclown yourself.

        The Germans took control of the money supply away from the banksters, and instead, created their own usury-free currency to finance the resurrection of their economy.

      • “sigh”

        A truly compelling riposte, PF.

        RP,

        “Capital can be created into existence, it does not require forgone consumption to provide it.”

        Exactly. It’s called ‘endogenous money’. c Steve Keen and many others. Oh yes, <and the Federal Reserve Bank –

        "The actual process of money creation takes place primarily in banks. As noted earlier, checkable liabilities of banks are money. These liabilities are customers’ accounts. They increase when customers deposit currency and checks and when the proceeds of loans made by the banks are credited to borrowers’ accounts.”

      • Opinion8Red – seriously I really do have a lot of work to do, but I will respond.

        I don’t give that reference a lot of credit because it is partly an anti-semitic piece, although I have no doubt that it wasn’t presented by you as such. However it really is about how a society who is a net producer will have a currency that is valued because other countries want to buy from them, and a country that doesn’t produce anything has a currency that has little or no value. The reason why the Weimar Republic failed an they had hyperinflation was due to political failure where production collapsed.

        It’s almost a perfect advertisement for the MMT crowd and it explains why gold is almost worthless apart from a few applications and jewellry, but lets leave that alone for the moment.

        More importantly I see that you are quite happy to create money by loaning it into existance, but you would like to ban usury.

        I’m very keen to learn how that would work – could you expand on that please?

      • PF,

        “[the referenced article] …really is about how a society who is a net producer will have a currency that is valued because other countries want to buy from them”

        Comprehension fail. Did you actually pause to think about the numerous aspects raised and inferred by the article Peter? ..

        “equipment and commodities were exchanged directly with other countries, circumventing the international banks”

        Clearly it is NOT an article about how being a net producer will cause your currency to be valued by other countries. It is primarily an article about how even a basket-case economy can be resurrected rapidly, by taking control of currency issuance away from the bankers – who issue it at usury to benefit themselves – and introducing a usury-free currency.

        The Weimar Republic came about as a direct consequence of the impossible burden of war reparations imposed on post-WW1 Germany.

        Regarding your final italicised comment, I am not necessarily in favour of loaning currency into existence either. Even without usury attached. If you re-read the article thoughtfully, and follow up on other historical examples referenced therein, you may see that it is not necessary for “currency” to be in the form of a “debt” at all.

      • You haven’t come to grips with the fact that Germany was printing money, and that money was backed by production not gold – they had no gold.

        I quote from your link –
        “for every mark that was issued we required the equivalent of a mark’s worth of work done or goods produced.”

        The changes to the banking system were made by one of your banksters – Hjalmar Schacht.
        http://en.wikipedia.org/wiki/Hjalmar_Schacht

        But getting back to your stance that we should ban usury. You still seem to be OK with credit creation – tell me how that would work if there is no interest or rent on the money loaned. Who would risk all of their cash in someone elses project if they received no commercial gain. Would you?

        I’m still waiting for your answer to this question. Who would put their money with a bank if that bank didn’t pay interest?

        Or will we just go back to a barter system where we buy our wives for 3 camels?

        I would appreciate a reply – if you take the credit out of the world what will you be left with, and do we really want what’s left?

        It’s actually a very important question that most people avoid because they don’t like their own answer.

  4. I would say Australia will go into recession. I watch the market I work in on seek to see how many jobs there are each day and it’s running at about half the normal amount of jobs. So it’s looking very bad.

    I find seek to be a good way to find the truth about what is going on in the job market, all you need to do is what your profession each day, just do a search for all jobs in your profession, then untick the top box to check out contractor jobs. From that you can see how healthy your sector is.

    When it comes to projects you can look at the Project Manager listings and also check out Analysis roles which often lead to projects. Everything is down, and when I say down I mean really down.

    I can see a lot of contractors moving to permanent roles as it gets worse and the permanents fighting over what is left. It also means that many high salary working professionals may lose that high salary further impacting the economy.

    • That’s all right bskerr2 – lots of part time, casual and contract jobs being created to fill in the void and create the illusion of full employment.

      We are looking onto the abyss and our two alternate political parties are incapable of implementing policies that can stop us going over.

      There is a decade of neglect and lack of political vision coupled with short term fixes and debt based binges to contend with.

      Our GFC is just around the corner.

  5. My sister in law just got restructured, she commented that a lot of the employees are doing unpaid overtime as well.
    Rising unemployment is on its way

  6. Hi Leith,

    Can you confirm if the “MB position” is that the current (obscene) price of housing is somehow ok/desirable? Same applies to Australia.

    Until that first chart falls back to under 70 I see nothing to admire, plus I cannot see how 85% LVR’s and 1% interest rates can achieve this desired outcome.

    Thanks.

    • Changing the LVR is a means of rationing the supply of credit, it would certainly reduce access to finance even if it didn’t reduce demand.

      Changing the cost might increase demand, but that won’t matter if supply is limited.

      Not that I’m advocating either, but that’s the explanation.

      The two questions that come to mind for me is:-

      1. What might the finance industry do to overcome this obstacle to their business growth?

      2. Do we want to place restrictions on people who want to provide a place of shelter for their family, and what spin off effect would that have – eg too many houses in the hands of investors – distribution of wealth for future generations to correct.

      • Thanks Peter.

        With #2 I would love to see ownership policy changed from the current investor/speculator-biased to owner-occupier/PPR-biased for the very reason you cite… a stable place to raise our families.

        For example & discussion:
        – Quarantine NG/deductions against the relevant property only
        – Significantly higher stamp duty and/or land tax for non-PPR
        – Decent minimum standards for rental property (new carpet every 5 years, new paint every 2 years, new kitchen/bathroom every 10 years, etc) with heavy fines for non-compliance
        – Allow NG/deductions for PPR
        – Non-PPR purchases must pay +20% compared to the nearest PPR offer
        – Enforcement of sale by the FIRB for a departing foreign student
        – Reduce immigration significantly (both invited & uninvited)
        – Drastically improve supply of affordable, well-located family homes

        I know I’m dreaming but things *really* need to change.

      • PF, your question 1. is precisely why I argue that so-called macroprudential tools such as those suggested are little more than bandaid (non)solutions. Inevitably, in due time the banksters would have any such bandaids ripped off.

        You have to take away their core ability to profit from lending digital bookkeeping entries at usury. Otherwise you are wasting your time.

    • The only way to prevent bubbles is to regulate banking sector

      What prevented a bubble forming in plasma TV’s when Harvey Norman had all those interest free periods?

      • No, they aren’t the other words.

        There was also an adequate supply of tulips, and we know how that turned out.

      • Well the last time I checked the price of tulips they seemed quite reasonable.

        I believe there was once a shortage.

      • RP & PF are correct. Vital difference in a “plasmas” vs “houses” (or tulips) analogy, is that noone expects the price of their second-hand plasma to go up.

      • Now I notice there are many tulip experts here.

        OK then, in the Dutch Tulip bubble. How long did it take supply to overcome demand and pop the bubble?

      • No the Claw is correct – tulips can be propogated very quickly, but houses can’t breed, they have to be built so supply response is usually slow.

      • The tulip bubble didn’t pop due to a change in the supply.

        It changed due to a collapse in the credit market enabling the high prices.

        There doesn’t sem to be evidence that tulips, bar a few species, were in short supply, and that prices went up because of herding behaviour.

        Everyone expected the prices to go up, so everyone put their prices up.

        Buyers accepted it because their simple mortgage brokers mindsets couldn’t see this pattern changing, and banks were only too willing to provide credit.

      • Onya Pete… reliable as always

        No the Claw is correct – tulips can be propogated very quickly,

        “Normally it takes 7–12 years to grow a flowering bulb from seed”

        http://en.wikipedia.org/wiki/Tulip_mania

        but houses can’t breed, they have to be built so supply response is usually slow.

        Houses are a manufactured item, then can be brought to market pretty quickly… if behaviour dictates so.

      • In the Dutch tulip mania there were NOT enough tulips to meet demand at the old price. Hence price rose. This is one of the classic manias of history.

        Plasma TV’s had enough supply to meet demand at the normal price and no mania was possible.

        The market for fringe houses should be designed so that they behave more like Plasma TV’s and less like tulips.

      • In the Dutch tulip mania there were NOT enough tulips to meet demand at the old price. Hence price rose. This is one of the classic manias of history

        As I asked Peter, I would like this ‘shortage of tulips’ claim to be qualified.

        Most studies I have read indicate there doesn’t seem to be a shortage at all, and it does more to validate the claim that you see high prices as only being a shortage, and you can’t conceive any other factor, which is why you are consistently wrong with your assertions of a nationwide housing shortage.

        “For tulip mania to have qualified as an economic bubble, the price of tulip bulbs would need to have become unhinged from the intrinsic value of the bulbs.”

        http://en.wikipedia.org/wiki/Tulip_mania

        The price being set of Tulips being imported was down to futures being bought and sold up to 10 times a day of ever increasing prices. it had nothing to do witht he demand of tulips, or the utility they offered. The price was being set with no party being in possession of the tulip.

        What was being traded was a financial insutrment of “commodity x”, and it was irrelevant was “commodity x” actually was.

        Now again as you’ve been told, but failed to learn, vastly increasing the suply does solve the problem, as it solves an undersupply problem.

        It involves a broken pricing mechanism, not a shortage.

      • your assertions of a nationwide housing shortage

        Why would I make such a nonsense assertion?

        You and I should both know that a retirement unit in Perth is not interchangeable with a family home in Sydney. I can’t even define a nationwide shortage. Can you?

      • @ Peter

        “No the Claw is correct – tulips can be propogated very quickly, but houses can’t breed, they have to be built so supply response is usually slow.”

        Bubbles have little to do with supply response. It’s speculative behaviour and advisability of money that makes people paying more than what is worth because they expect price to go up. It doesn’t matter how much you are paying if you are sure you will sell for more.

        For example, Arizona housing construction sky-rocketed almost two years before house prices started rising.

      • Tip toeing into this debate….

        I read recently that the tulip mania lasted only a few months during winter when tulips are hibernating and occurred about 70 odd years after tulips were first introduced to Holland from the middle east. So shortage of supply seems unlikely.

        I think the article said almost the entire mania was a futures trade and few if any tulip bulbs actually changed hands before it was over.

        A bit of winter nuttiness in Amsterdam.

      • @UE

        I didn’t failed to mention population growth. Population growth in Arizona didn’t suddenly jump in first half of 2000s. Population growth in 2000s was the second lowest growth on record. Population growth peak was lower than the peak in 1995 when prices were low while construction was low.

        http://research.stlouisfed.org/fredgraph.png?g=fI1

        I’m not sure whether data for 2000 is wrong (is looks like error or data adjustment after the census), but even if that data is OK your logic is still not working. Population peaked in 2000, than construction sky-rocketed and peaked in 2004 and after all of these events prices sky-rocketed in 2005.

        If increased demand was the reason for bubble, prices would sky-rocket in early 2000s. If supply was non-responsive, construction would rise only after price rises (if ever), but surely not before.

      • No, the construction surge came a few years after the population surge, as clearly shown in my FRED charts – a classic case of unresponsive supply. That’s what would have got the “shortgage” claims going and people piling into housing, aided of course by cheap and easy credit.

      • Insightful quote of the day award goes to “Claw”:

        “….The market for fringe houses should be designed so that they behave more like Plasma TV’s and less like tulips…..”

        Exactly. The biggest issue is making the supply of land for developers to build on, as free of “quota-ing” as the raw materials for TV manufacturers.

        And re Arizona, (mostly Phoenix anyway), Leith Van O did an excellent posting a while ago showing government-department land ownership and other supply restrictions.

      • @ UE

        “No, the construction surge came a few years after the population surge, as clearly shown in my FRED charts – a classic case of unresponsive supply.”

        What “unresponsive supply”? Supply increased and peaked before house prices started run-up? Supply was very responsive, it kicked in before bubble started inflating prices.

        Prices took-off a year after supply side responded with record high construction and 4 years after population growth fell to below long term average.

        Classic case is: demand up, prices up, no significant supply increase. Arizona case is the opposite of that and it proves you are wrong.

        Supply couldn’t be more responsive unless you think that “invisible hand of free market” is able to predict future demand and respond before demand even changes.

      • It is obvious to me how we can explain Raveswei’s description of the RE market in Phoenix, Arizona, if this description is accurate.

        Initially, there were no expectations of price increases because Phoenix had always had elastic housing supply. Hence speculators did not get involved and prices did not bubble even as population growth seemed to run ahead of supply (what was the existing rate of occupation of dwellings, etc, before this?). But as construction responded and the fringe expanded, it hit land constraints that had not previously been a problem, particularly government-department land holdings.

        Then the prices blew out, starting with the cost of land for development (which is where the problem always does start), which previously had been normal rural values.

        Note that in Portland, 4 years after a “20 year urban growth boundary” was established, the prices of land started to inflate. They had been stable for decades prior to that. And Portland did not have growth anything like Phoenix.

      • It’s hard to imagine price of second hand TVs going up over time.

        Speculation and easy money are the only reasons for bubbles. Well positioned land is naturally limited so speculation that price might go up will always be present.
        The only way to prevent bubbles is to limit easy money with banking regulations and/or to prevent speculation with high speculative taxes.

        If these two causes are stopped, bubbles will never happen. Prices might go up, sometimes even significantly if supply is limited by nature or regulation. In that case price will stay elevated – so no bubbles – no volatility.

      • Raveswei’s comment is actually quite intelligent.

        Land such as beachfront or riverside or mountainview, etc is NATURALLY limited and can boom or bust for reasons of crowd behaviour.

        Fringe dwellings can be made artificially scarce such as in Australia and then can boom or bust similarly to the naturally scarce land.

        However in my opinion govt should free-up fringe dwelling rules so that they will not boom and bust. Supply will prevent this.

        Should easy money be limited by regulation? That is another question. Perhaps following the Australia constitution (yes Australian) which specifies that gold should be used as money would be sufficient.

      • If rule based artificial fringe land scarcity is the reason for bubbles, why prices fall if regulation is still in place?

        California, Arizona, Ireland, UK, … not in single place government relaxed land regulation but prices fell. How is that possible?

      • If rule based artificial fringe land scarcity is the reason for bubbles, why prices fall if regulation is still in place?

        Spare me. Why aren’t tulip prices still high? What about Internet stocks?

      • because all those bubbles were based on speculation and easy money not on scarcity. That just proves my point. Scarcity is not an issue – speculation and easy money are.

      • Look Raveswei, you have to admit that it must make a difference to the price of fringe housing if anyone, including developers, could buy farmland anywhere and build houses on it. The economic land rent curve in an undistorted urban land market is a smooth curve representing accurately the cost of transport capitalising into land values. There is NO REASON for a mammoth step up in the values at one point, other than regulatory or monopolistic distortions.

        If there is no step up, then the price of fringe housing is dictated by the cost of farmland, plus cost of development, plus a profit. Same as the cost of TV’s when manufacturers are genuinely competing with each other, is the cost of raw materials, plus costs of manufacturing, plus a profit.

        Of course there can be a bubble in shares and stocks because they are not backed up by supply of natural resources that can be allocated to best use by markets.

        Some “markets” can become more like a “game” played with pieces of paper; however the market for TV’s does not behave this way; and neither does the market for fringe housing and development unless there are interferences.

        And when there is a gradual, uninterrupted slope in the urban land rent curve, the prices EVERYWHERE in the entire city are much lower than where there is an interruption at the fringe. This is true in real life and also recognised in land-economic theory (except by people with vested interests in denying the racket).

      • I agree that land restrictions push land prices up. What I disagree is that these restrictions create bubbles.

        Land restrictions will permanently and slowly (because under normal conditions demand changes slowly) lift home prices. In situations like this, there is plenty of time for opportunity cost to make people consider other options. There is nothing wrong or expensive to redevelop some of the existing areas inside development zones. Population density is quite low in most of Anglo sphere cities, while prices are mostly higher compared to other, even more land restricted, cities in the West.

        Sydney, for example could accommodate 10 million people at reasonable cost without allowing any new land developments. There are so many ex industrial or old ruined suburbs with good infrastructure and convenience of close proximity to the city that scream for redevelopment. Large house on a large block might be desirable for many but should not be option for everyone. Units with good infrastructure, close social and community environment and short commuting time provide quite good lifestyle for all and with low cost of redevelopment its realistic option for poor and unfortunate. If land prices are not inflated by credit bubbles, redevelopment is cheaper (per sq of living space) than fringe city development that provides lower quality life style for higher price because of poor and expensive infrastructure.

      • Well positioned land is naturally limited so speculation

        Yes, but that’s an outlier, not the average.

        Whilst desirable to many, they are not competing for Sydney Harbour views. They are competing for Austral, Narellan, Wyong.. and still paying for exorbitant prices.

        Conversley, the prime land, or even closer to the city land, doesn’t have to contain the floor space for one dwelling.

        Land shortage in Canberra and Darwin… that says all that needs to be said about the constructs affecting our housing dilemma.

      • I’m not talking about prime land but any land in or around the city where population is growing. Well positioned is even land in outskirts of big growing cities.

        Even land in Wyong is naturally limited and without any regulation it might became scarce if population continues growth.

        That’s why is easy to create speculative thinking about property and not about TVs or cars.

        The reason why people are paying exorbitant prices is not shortage of land or permits, it’s because easy credit enabled too many people to speculate on future prices.

      • The reason why people are paying exorbitant prices is not shortage of land or permits, it’s because easy credit enabled too many people to speculate on future prices.

        You need to study a course on logic. You are obsessed with finding one single cause. You need to study events with multiple causes.

        Have you ever watched Air Crash Investigation?

      • You are getting your “logic education” on reality TV?

        Other factors like supply restrictions will affect the size and/or timing of a bubble but easy money and speculative thinking are the most important causes of bubbles. There was no single housing bubble that didn’t involve speculative behaviour and relaxation of credit rules. On the other hand many bubbles existed although no supply restrictions were in place.

      • Rave said: “California, Arizona, Ireland, UK, … not in single place government relaxed land regulation but prices fell. How is that possible?”

        Rave clearly does not have a grasp of basic economics. When the supply curve is steepened (becomes “inelastic” or “unresponsive”) changes in demand lead to bigger changes in prices rather than quantities produced. Hence, supply-restricted markets experience a bigger run-up in house prices during booms and then bigger falls during busts.

        This is why easy credit, poor tax policies, high population growth, etc are especially dangerous in markets where supply has been strangled via regulation.

        This ain’t rocket science. There are two sides to the housing equation – demand and supply. To completely ignore the supply-side, as Rave continually does, is as effective as trying to eat Chinese with only one chop stick.

      • “Rave clearly does not have a grasp of basic economics. When the supply curve is steepened (becomes “inelastic” or “unresponsive”) changes in demand lead to bigger changes in prices rather than quantities produced. Hence, supply-restricted markets experience a bigger run-up in house prices during booms and then bigger falls during busts.”

        You are right about curves, but the most important question is why demand changed so suddenly?
        What you don’t understand is that speculative behaviour creates huge demand change. This additional demand will create large price change even if supply curve is not very steep.

        Places where population is falling (like some cities in UK) should not have recorded any demand change but for some reason they did.

        I agree that bubbles would be smaller if supply was more elastic but there would not be any bubbles (regardless of supply) if speculative demand didn’t increase.

        What you are confusing is cause and consequence. Sudden change in speculative demand causes bubbles, restrictions in supply makes them bigger.

      • Great, so after arguing with you for about a year, it turns out that we more or less agree after all – that both demand (credit) and supply restrictions create bubbles. This is exactly what I have been arguing since day one.

      • what we disagree on is what is the best way to prevent bubbles.

        You argue that land restrictions should be lifted to avoid large bubbles (elastic supply cannot prevent bubble creation it can only help make them smaller).

        I, on the other side, think that we should control speculative demand to prevent bubbles all together. Bank regulations (liquidity and reserve requirements, LVR requirements) and tax code (very high speculative property tax, NG abolition, …) changes would quickly stop all speculative behaviour.

        Lifting land restrictions may have large negative effects: overbuilding and increased infrastructure cost, deterioration of urban environment, negative effects on quality of life…

      • “Lifting land restrictions may have large negative effects”.

        Do you agree that keeping land restrictions also has negative effects, e.g. by making housing less affordable, by increasing traffic congestion and localised pollution, causing ‘leapfrog’ development in far flung places as people search for more affordable housing, making infrastructure investment more expensive due to higher land costs, or reducing productivity via higher rents?

      • So Raveswei has no problem with one cohort of humanity continually locked out of home ownership; whether they are unable to ever save enough for a home, or unable to obtain credit.

        And Wyoming will run out of land if population growth continues?

        Mate, is the earth 1% urbanised yet? What matters, is what population level and what urban dispersal results in a “balance” between farmland and urban land, so that the price of food and the price of farmland means that it is no longer economically workable to convert rural land to urban land.

        We are nowhere near that point, and the trend has been running in the opposite direction for decades. In fact the real cost of rural land relative to urban incomes has fallen by a factor of about 4, so it is more economically worthwhile than ever to convert it to urban use. I pick the tipping point would come when available farmland is only about 15 times as much as urban coverage. But all sorts of breakthroughs could occur to change this.

        If you want to conserve land use for the sake of it, tax land. If you want to conserve resources, tax or price resource use. If you want to reduce traffic congestion, price congestion.

        Urban growth containment is nothing more than a racket justified by false pretexts.

      • @ UE

        “Do you agree that keeping land restrictions also has negative effects, e.g. by making housing less affordable, by increasing traffic congestion and localised pollution, causing ‘leapfrog’ development in far flung places as people search for more affordable housing, making infrastructure investment more expensive due to higher land costs, or reducing productivity via higher rents?”

        Land restrictions, do not make housing more expensive. these restrictions make big houses on big block more expensive but not all housing. Redevelopment is cheaper than new land development, it uses existing infrastructure, it reduces congestions and reduces costs of commuting, increases productivity, …

        People may prefer big house on big block but living in big city has price tag on that life-style. Living in city units can be cheaper but better, more convenient and less money and energy wasting than the “old dream of country house”.

        @PhilBest

        I have no problem of locking out of home ownership people who are unable to ever save enough for a home, or unable to obtain credit. These people can rent and if they are poor and unfortunate, should be given decent public housing or financial help from government to be able to afford to rent decent place in decent suburb. Home ownership is largely overrated. I think that renting in decent city suburb with all the conveniences, provides much better life-style opportunities than large house with poor infrastructure in the middle of nowhere.

      • “Speculation and easy money at usury are the only reasons for bubbles.”

        Fixed that for you.

        In the absence of the usury motive prompting banksters to create “easy money”, the incidence of speculative bubbles would be hugely diminished, if not eliminated altogether.

        Ban Usury. Problem Solved.

      • Alex, see above – the classical definition.

        PF, replace the existing banking (ie, money-creation) system with any one of multiple possible alternatives.

        Personally, I favour a system whereby the total money supply is regulated, not by the greed of private bankers, but according to the number of working age citizens. Government (if you really must have one) can be authorised (via Direct Democracy referendums) to inject additional “capital” – created usury and debt-free by the Treasury – into the economy only for public works and services that the public want and vote for.

        And before anyone is tempted to shriek that I want “Big Government”, as a core view I would prefer to see the development of a maximally decentralised “currency” system, whereby the actual quantum of the base money supply (ie, the “per working age citizen” component) is determined by introducing a P2P payments system in which every citizen essentially becomes their own central banker – equally empowered to create interest-free “credit” for themselves. The checks and balances on such a system being that creation of a “credit” also automatically creates a “debit”, and both credit and debit balances are automatically linked to an “Honour” rating for that individual, which is displayed to every other user pre-transaction. “Money” (credits) received for wages or selling something are automatically credited against the user’s debit balance first (ie, you are forced to first pay down your “debt” rather than accumulate more credits to spend). The individual’s Honour rating is determined at any time by whichever is the greater of the two balances, thus creating an incentive to maintain a zero bank balance in order to have a 100% Honour rating.

        Critique away. At least I am actually thinking about alternatives to global debt slavery PF.

      • Op8red,

        I totally agree with your views. I don’t know why it is so hard for people to get their head around the concept of full public banking, with interest (if charged at all) accruing to the taxpayer and reinvested in the wealth of the nation, instead of lining the pockets of the filthy and undeserving .01%. Further, the government funds its only activities directly in this process.

        It is not the natural state of things that private banking is required in this world. Only corporate propaganda seeks to reinforce this false world view.

        BTW, another complimentary option to be considered Op8red is the concept of a citizen’s dividend:

        https://libertyrevival.wordpress.com/2011/09/30/milton-friedman-supported-the-citizen-dividend/

        “The citizen dividend is a way of admitting that economic injustice exists and will persist. It is the mother of all class action law suits. It is the most universal, uniform, and most effective social program. It is the most flat, uniform, and universal tax exemption. It is also justified compensation for the numerous acts of injustice in the world, helping those most who suffer the most injustice. MLK also supported the citizen dividend in his last book along the same lines. Thomas Paine supported a citizen dividend in “Agrarian Justice.” When I start to doubt myself, it is always nice to find out that I have good company in my beliefs.”

        Even Friedman raised this issue in the form of a ‘negative income tax’:

        https://www.nytimes.com/2006/11/23/business/23scene.html?_r=3&amp;

        “Market forces can accomplish wonderful things, he realized, but they cannot ensure a distribution of income that enables all citizens to meet basic economic needs. His proposal, which he called the negative income tax, was to replace the multiplicity of existing welfare programs with a single cash transfer — say, $6,000 — to every citizen. A family of four with no market income would thus receive an annual payment from the I.R.S. of $24,000. For each dollar the family then earned, this payment would be reduced by some fraction — perhaps 50 percent. A family of four earning $12,000 a year, for example, would receive a net supplement of $18,000 (the initial $24,000 less the $6,000 tax on its earnings).”

      • O8, thanks for the reply. Your alternative to the current banking and finance system is certainly innovative. I foresee a lot of transitional difficulties unless it is implemented in the wake of a total societal collapse.

      • Roger Douglas suggested even larger “reverse income taxes”, and the government getting out of providing services “free”. He calculated that a solo mother with 2 kids getting “given the money” instead of the benefit, the housing, the health services, the education, the public transport etc; could live like the top 15% under the status quo, paying her own way in free markets for health, education, etc.

      • Alex,

        Thanks for that. Alas, I tend to agree with your concerns. However, I also think it is possible that such a system could be introduced at a grassroots level as a complementary currency system, and in time result in a gradual transition away from the existing system. I think one of the strongest attributes of my idea is that its very method of operation serves to educate people on how the current “money” creation system really works (& with the obvious inference that it is to the benefit of private bankers), and that such does not need to be the case. As more people cottoned onto this understanding, more would begin to make the transition. If I had any cryptography/programming skills, such a system would already be freely available to humanity.

      • Beautiful – so you want to ban usury and replace it 22 million Australian each being their own little bank.

        Opinion8Red – there isn’t enough red wine in the world to convince me to support that idea.

        Perhaps that one needs some more work.

        Cheers

      • Opinion8Red – there isn’t enough red wine in the world to convince me to support that idea.

        Not enough trailing commission ehh?

      • And before anyone is tempted to shriek that I want “Big Government”, as a core view I would prefer to see the development of a maximally decentralised “currency” system, whereby the actual quantum of the base money supply (ie, the “per working age citizen” component) is determined by introducing a P2P payments system in which every citizen essentially becomes their own central banker – equally empowered to create interest-free “credit” for themselves.

        My concern with your idea is that it would allow the young and foolish (or not so young) to dig themselves into rather massive holes rather quickly.

        I am reasonably good at managing money today. I could not say the same of my 18 year old self.

      • Roger Douglas suggested even larger “reverse income taxes”, and the government getting out of providing services “free”. He calculated that a solo mother with 2 kids getting “given the money” instead of the benefit, the housing, the health services, the education, the public transport etc; could live like the top 15% under the status quo, paying her own way in free markets for health, education, etc.

        The problem with this system is that there are inevitably going to be a) people that waste all the money they are given and b) people for whom it is not enough (eg: unusually expensive medical, lifestyle, or educational requirements).

      • DrSmithy,

        “My concern with your idea is that it would allow the young and foolish (or not so young) to dig themselves into rather massive holes rather quickly.”

        That’s one of the beauties of the built-in, automated Honour rating system. Society would learn to self-regulate .. parents would teach their kids that creating more credit than you need at this moment is (a) unnecessary, and (b) only harms your public Honour rating, and means it will take longer to earn your way back to 100%. Anyone who abused the system by continually creating excessive credit for themselves would eventually find themselves becoming ostracised in the marketplace.

      • Well positioned land is naturally limited so speculation that price might go up will always be present.

        What about poorly positioned land ?
        It’s not just North Shore harbour-view houses that are grossly overpriced, it’s pretty much *everywhere*.

      • I’m not talking about prime land but “well positioned land” which includes all the land close to coastal areas, cities and towns that might grow in near future.

        poorly positioned land in Australia is extremely cheep, ~$1k per ha

      • But the “option” of “inland” land at $10,000 per acre instead of racketeered at $500,000 per acre, would also affect the price of the well positioned land. Well positioned land commands a “premium” over the price of the bulk of ordinary land; it does not “set its own price” completely independently of “options” for potential residents.

      • “…..poorly positioned land in Australia is extremely cheep, ~$1k per ha….”

        But Raveswei, how far beyond the regulated urban growth zone is such land sited?

        The crucial point is that there is a massive supply of perfectly adequate land within minutes drive of every city fringe, at only around $10,000 per acre, yet no-one is allowed to build housing on it.

      • I’m not talking about prime land but “well positioned land” which includes all the land close to coastal areas, cities and towns that might grow in near future.

        You could put every single person in the country on a quarter-acre block within 100km of the middle of Canberra (with plenty of space left over).

        Why are we even entertaining the suggestion of any sort of “shortage” of “well positioned land” ? It’s ridiculous on its face.

  7. Diogenes the CynicMEMBER

    Yes banking regulation or you could opt for a total free for all and not back banks but the state would have to own the transfer payments system.

    LVRs need to be much lower than 85%. Canada is moving in this direction, we should too. LVRs of 40% make for a stable sector, plenty of equity buffer.

    • LVR rules are important but as much as bank liquidity and reserve rules. Even with relatively high LVR requirements banks that don’t need to fight for deposits can offer cheap loans (low rates) to fund speculation.

      When banks are allowed to create a lot of money from thin air, that’s when speculations takes off.
      Tough liquidity and reserve rules are much more important than LVR of individual loans.

  8. Doesn’t sound like the Swedes are doing much other than trying to shut the debt door after the horse has bolted.

    Much simpler approach is required down under.

    1. Be clear as to the population growth rate we want.

    2. Allow the market for land/housing to operate as freely as possible to allow that population growth to be accommodated in the manner the population wants and in the locations they choose.

    3. Adopt/impose limits on our reliance on the savings habits of foreigners and adopt limits for the overall level of debt in the economy.

    4. Accept the interest rates that result from 3 and are required having regard to our propensity/preference to save versus our desire to borrow.

    5. Smooth the adjustment with fiscal policy that produces assets of lasting value to the community.

    Steps 1 – 5 will result in the resolution of the problem.

    And yes – it will not be all smooth sailing.

    And yes – you will never hear a debt industry cheerleader support it.

  9. Dropping interest rates is going to do jack shit aside from re-inflate the housing bubble. Which seems to the the spruik here at MB

    However, limiting LVR and increasing deposit requirements will help.

    Can we all please stop the calls for lower interest rates, they have not worked and will not work to fix the lack of competitiveness that is rife in this country due to high cost of real estate.

    Fix the cause, high cost of real estate, not the result, un-competitive industry and high input costs.

    • I think perhaps you may have missed MB’s oft-repeated rationale for the combination of measures called for. Dropping interest rates will (eventually, hopefully) weaken the AUD, helping industry competitiveness. “Macroprudential tools” (ie giving regulators power to enforce lower LVR’s) will (a) mitigate impact of lower interest rates, and (b) prevent more bubble blowing in RE.

      • Those suggested measures appear to target sustaining the ridiculously high prices of today whilst also doing nothing to reduce them. I guess the only hope is market forces in a black swan event.

      • I was going to post that by definition a black swan event was something that no-one could have predicted and that an Australian house price crash was certainly not that.

        But then I looked up Wikipedia’s definition and found it wasn’t quite what I thought. The key is “to the observer”…so a house-price crash could well be a black swan event for many in our country even if those on MB generally wouldn’t be surprised.

        “The black swan theory or theory of black swan events is a metaphor that describes an event that is a surprise (to the observer), has a major effect, and after the fact is often inappropriately rationalized with the benefit of hindsight.”

      • “Dropping interest rates will (eventually, hopefully) weaken the AUD”

        That sentence says it all with the emphasis being on “HOPEFULLY”

        I hate to say but it will not help, Australians are so addicted to housing that any sign of lower interest rates just starts the rush back to the market and stops the government / councils / vested interests doing anything useful to fix the economy

        We need to raise rates, reduce LVR, increase deposit requirements for real estate.

        Cut red tape for small business, reduce interest on business loans to SME’s and look at urban decentralization.

      • Put a levy on mortgages.

        Cash rate at 2.25% to help business.

        Add 100bp for owner-occupier mortgages

        Add 450bp for investment loans.

      • Interesting proposal RP. Quite the opposite of the current situation! Sensible….so no chance of getting up!

  10. So MB suggest leaving house values up 160%?

    Macroprudential tools are already in voluntary use, especially with FHBs.

    Housing prices need to re-set, and the FHBers strike (caused in part by the un-willingness of banks to lend) is already helping that along.

    • Macroprudential tools are already in voluntary use, especially with FHBs.

      Word.

      Let people suffer the consequences of their actions, not implement tools that inhibit them.

      Let the stupid know they are stupid, don’t try to prevent stupidity because they have greater patience.

  11. Interest is the time-value of money. Rabbiting on about usury just misses the point. Lenders are entitled to expect borrowers to repay more than is loaned out – were it otherwise, there would be no reason to lend, and no impediment to borrowing as much as possible.

    • “Lenders are entitled to expect borrowers to repay more than is loaned out”

      Why?

      What they are lending, is electronic digits created from nothing.

      Why should any individual or entity/s be granted exclusive powers to create the “money” supply (digits), and loan it out for profit?

      “Money” creation in a modern context is directly analogous to the ancient fantasy of alchemy. The exclusive, god-like power of the ‘masters’ to create “value” from nothing.

      • Fail. Banks are in no way constrained in their lending by reserves and money is endogenously created when loans are made.

        This is why mainstream economics deserves to be pilloried for its inability to produce theories based on clear empirical data: because urban myths are formed and repeated by mortgage brokers and others with an agenda.

        Please educate yourself here on why the money multiplier theory is patently false:

        http://www.debtdeflation.com/blogs/2009/01/31/therovingcavaliersofcredit/

        “Thus rather than credit money being created with a lag after government money, the data shows that credit money is created first, up to a year before there are changes in base money. This contradicts the money multiplier model of how credit and debt are created: rather than fiat money being needed to “seed” the credit creation process, credit is created first and then after that, base money changes.

        ..

        The conclusions are that bank income is bigger:

        -If the rate of money creation is higher (this is by far the most important factor);
        -If the rate of circulation of unlent reserves is higher; and
        -If the rate of debt repayment is lower—which is why, in “normal” financial circumstances, banks are quite happy not to have debt repaid.

        However, in the real world, they do control the creation of credit. Given their proclivity to lend as much as is possible, the only real constraint on bank lending is the public’s willingness to go into debt. In the model economy shown here, that willingness directly relates to the perceived possibilities for profitable investment—and since these are limited, so also is the uptake of debt.

        Ain’t data which blows neoliberalshite out of the water a b**tch PF?

      • As long as you ignore the FACT of a Current Account Deficit, Risks to our currency there-in contained and the future problem of financing the said CAD under increased consumption brought about by the policies proposed.

      • Flawse,

        Please help me out here, as I’m not strong on the CAD component. In an alternate currency system scenario (such as the one I’ve outlined above), wouldn’t it be the case that consumption of imported goods would necessarily fall, if for no other reason than that, as argued by others, “printing” a debt- and usury-free currency would render it undesirable to others vis-a-vis international trade? And so, per the national socialist German era post-WW1, we would be forced (by the international banking cartel) to attempt to trade/barter directly with other nations for the imported goods we wanted? Thus, the only way to obtain all the imported goods the public may want, would be to (over time) internally develop the (agricultural & manufacturing) capacity to produce said goods ourselves?

        If so, that sounds like just the sort of long-term productive “austerity” measure I could vote for.

      • I’ve read up of Schacht’s work.

        Germany did implement a system resembling something similar to MMT when the MCA.. oops.. Nazi party was elected. They did suffer a big external account problem as they were stockpiling for war.

        This was solved by expunging away their remaining gold, then Austria’s after Anschluss, then what they could get out of Prague.

        One of the things that ensured germany was on a quick timeframe for expansion was it’s need to settle the external account.

        Germany did get an economic kick-on via the Rinehart way after 1933, but they didn’t do it in a manner that optimised their wealth.

        They were creating stuff that would be consumed by war.. in other words, wealth destruction. Post WWII, when prohibited from engaging in the makings of war, they did build up from rubble to an exporting powerhouse…. and I think that’s what OP8’d is endorsing via capital being created into existence.

      • Opinion8Red – yes the consumption of imported good would fall because almost no-one would be able to afford them.

        Neither would we export anything when you reduce commercial investment to a few dollars here and there.

      • Rusty – Germany was rebuilt when the USA and the United Nations finally adopted the Marshall Plan. Germany was assisted by the banning of military spending – she could put everything into her new factories, that enabled her to earn export dollars.

      • Ohh jeez.

        Opinion8Red – yes the consumption of imported good would fall because almost no-one would be able to afford them.

        If capital is used to create something productive, i.e. not the stuff you peddle, and more wealth is created, how does other product become less affordable?

        Creating access to capital that enahnces the nations productive stock does not make the dollar fall in the lng run

        Neither would we export anything when you reduce commercial investment to a few dollars here and there.

        You completely misunderstand, which is of no surprise. Creating capital has the ability to free ones self from the demands of the ursury sought out from ‘investors’.

      • PF,

        “yes the consumption of imported good would fall because almost no-one would be able to afford them.”

        Oh dear! EPIC comprehension fail. Either that, or you are just being deliberately obtuse. The reason consumption of imported goods would fall is because foreign sellers would be discouraged from trading with us. There would never, ever be a shortage of currency under the system I propose (or that of MMTers, for that matter).

        “Neither would we export anything when you reduce commercial investment to a few dollars here and there.”

        Again, epic comprehension fail. See previous comment – never a shortage of currency for commercial investment. It is merely created usury-free, and spent. Result = plentiful commercial investment, without the burden of repayment of usury to the Merchants of Debt.

      • Yep I gathered that Opinion8Red – we would all just print what we wanted.

        Won’t that be fun.

        Pretty soon we will be paying $1,897,12,581,211,515,151,115,223,555.00 just to have the tyres pumped up on our bicycles.

      • Yep I gathered that Opinion8Red – we would all just print what we wanted.

        {more tosh}

        we will be paying $1,897,12,581,211,515,151,115,223,555.00 …

        OK, but as someone informed you before, and you parrotted without understanding, what is the other side of the ledger?

        If there isn’t adequate value on the other side, then it’s coming out of your equity.

      • Again PF, a truly compelling riposte, and epic comprehension fail.

        Your parrotting the “printing-automatically-equals-hyperinflation” myth suggests that you either did not read in full, or more likely, did not understand, the article originally linked.

        Question. Central banks have “printed” literally Trillions in extra “money” post-GFC. Where’s the hyperinflation?

      • Your parrotting the “printing-automatically-equals-hyperinflation” myth suggests that you either did not read in full, or more likely, did not understand, the article originally linked.

        Lock in ‘B’ thanks Eddie.

      • Bobby – what I said is correct – I’m happy to explain it if you like. Banks create a loan and an equal deposits, they are not net money creators, each balances out.

        I gave you the accounting procedure, I mentioned nothing about constraints. That was your assumption.

      • Bobby – what I said is correct – I’m happy to explain it if you like.

        Actually, please do…

        After you say this…

        Banks create a loan and an equal deposits, they are not net money creators, each balances out.

        I’m real intrigued to have you part with us your knowledge now.

      • The more that I read of you Rusty the less likely I have become to even pass the time of day with you.

        I have self censored the rest of this post.

      • Im not surprised.

        As someone who is in the business of allocating capital, yet increasingly is shown to be ignorant of what capital is, you would avoid queries of such nature.

        You know noting of the nature capital, that’s fine. it is what it is, admit it and we will move on.

      • Rusty – you are just an amazingly stupid man.

        Sorry Chris, I could help myself – feel free to delete.

      • I would like to borrow some money from you, O…. As much as you like, since you seem to be able to conjure it from nothing….a talent that I do not possess. And since you place no value on your own time or the opportunity to use the money in some other way, I’ll be delighted not to pay any interest either.

  12. Wouldn’t dropping LVR to 70-85% really bust put those baby boomers and those who have already benefitted from the high capital growth in a better position to outbid those ftb who are going to struggle to come up with the higher deposit. The way I see, and plz correct me if I’m wrong but all a 75% LVR is going to play into those existing speculators due to their equity and on increased wealth????

    • No the life in the market is determined by new buyers, i.e. you can not just keep selling houses to each other and expect growth in prices, as the current owners will steadily decrease, death / downsizing etc, which will drop the prices

      • But Wont these people that die or whatever leave their houses to their extended family ? Adding to their wealth and buying power??? So although there isn’t a steady stream of new buyers the wealth of some is just being added to therefore leaving them in a much better position than the ftb ????? I don’t claim to know …. Just thinking out loud ! Let me know what I’m missing?

      • What you are missing is that reductions in demand lead to lower prices. If you impose a 75% LVR a lot of people who are currently prospective buyers would be unable to buy until they have saved a lot more. Hence reduced demand.

      • My gut feeling is that what happens, is demand is reduced in a one-off hit, until the savings of the “least worst off” potential FHB cohort catch up to the point where they CAN “buy in”, and prices resume rising from there, slightly faster than MOST of the potential FHB cohort can save money. Locking roughly the same cohort out of home ownership.

        This then would lead to more political demand-side tinkering. I think it is impractical to expect demand-side constraints to remain a political option indefinitely. Just going by experience.

        Of course this never solves anything; it never changes much for the cohort that is locked out of ownership, unless it sets them up for a foolish over-extension of their mortgage servicing capabilities, followed eventually by bankruptcy.

        But supply-side liberalisation is a different story; everyone wins EXCEPT the rentier classes (property investors, land owning oligopolies, and the finance sector).

  13. And a belated HUGE acknowledgement to Leith Van O for adding Sweden to his already large repertoire of housing bubble commentary. I do not yet know of the like of Leith Van O anywhere else in the world.

  14. Sweden would have very different outcomes to lowering interest rates than would Australia.
    Please note

    “Sweden recorded a Current Account surplus of 66.09 Billion SEK in the third quarter of 2012.”

    UE said
    “Regular readers will notice that this is the very prescription recommended at MB for the past 18 months. Install macroprudential tools, break the link between interest rates and the currency, slash rates and allow the currency to boost the tradabele sector without bursting or growing further overpriced assets.”

    The fact that we run a serious and chronic Current Account DEFICIT, as opposed to a surplus, is the very reason that the simple prescription so favoured by MacroBusiness will not work.

    When will anyone start to think through this problem and what it means in terms of what you can do with policy. We cannot just adopt other recipes. We are starting at a very different place as compared to Sweden.

  15. An interesting article, thanks. Like someone above said, the horse has bolted in Sweden too.
    I’ve heard Swedish banks have signed off even 60-125 year mortgages. Good stuff… (Google translate will help you out.)
    http://yle.fi/uutiset/ruotsissa_otetaan_asuntolaina_jopa_125_vuodeksi/6324563
    For those interested, here is some further reading:
    A good summary about Swedish mortgage lending with some great graphs showing other nations as well.
    Swe_Mortgage_Lending_and_Covered_Bonds_16_11_2012

    Credit is getting tighter in Finland also I hear. My friends all have mortgages negotiated some years back with a 0.4-0.6 % margin and variable 3 month euribor rates (about 0.2%) hence paying off their loans rapidly. In the past 12 months or so the bank margins have been rising steeply (5-fold increase in the last 4 years, with an average margin of 1.4%-1.7% now). I’m not sure what is happening with the LVO’s but they may get tighter too.
    http://yle.fi/uutiset/working_group_recommends_limit_on_mortgage_ltv_ratios/6365994

    As for tax deductions, Finland like Sweden allows tax deductions for interest payments of the primary residence with zero deduction for investment properties. Owners are expemt of CGT after haivng lived in the residence for 2 years.
    Stamp duty is 4% for houses and 2% for apartments.
    Finland gives tax deductions for home renovations, IT installations and help within the home -for the work costs only, not for travel costs or equipment of the provider.

  16. Fuelling speculative demand with more supply is not the answer. Rather, the speculative demand should be curbed. Ireland, Spain and even China have plenty of “white elephants” to show for this approach. It is the effect of supplying development into a speculative bubble with no “real” market need: http://www.bbc.co.uk/news/magazine-19049254

  17. For those interested in ‘scoialist’ Sweden (its not) theres a good paper (bout 20pages long) called

    The Swedish Model Reassessed:
    AFFLUENCE DESPITE THE WELFARE STATE

    by Nima Sanandaji

  18. What a ridiculous suggestion as a way out. Housing demand doesn’t dampen with macro-prudential, investment demand does. Sydney increases in population by 50000 per year (for various reasons), meaning there is a permanent need for 25000 new dwellings. Suppressing demand will do nothing to solve this.

    If you don’t address supply constraints, and instead focus only on regulating demand, the housing market will continue to operate as a bubble with all the endless speculative consequences that bubbles come with.