MB Radio: The Real Estate Lift-Off

liftoff

With auction clearance rates in Sydney and Melbourne climbing above 80% and with the RBA, APRA, the media and real estate groups increasingly talking about, warning about, or mulling whether Australia is facing a renewed real estate price bubble, Gunnamatta spoke with David Llewellyn Smith and Leith Van Onselen about whether we are in a boom, or facing one, what the implications are for the economy, and how regulatory bodies would view it.

Comments

  1. I am hoping that Adelaide auction rates will be affected by the news that ratings agency Fitch has downgraded South Australia’s credit rating, blaming the state’s deteriorating budget and debt position.

  2. Thanks fellas!

    I must say, unless you guys have a private conduit to Glen’s thinking, that the RBA shows no concern about inflating an already out of control housing bubble. They said they were going to and they are. It’s all good.
    In the face of that, if inflation is ‘benign’ late 2014 it’s difficult to see any apparent justification for higher interest rates. Higher house prices are just a sign of this country’s amazing prosperity and confirmation of the brilliant economic management of the RBA and Govt.

      • I am not wishing to side-track your excellent work. So I’m open to persuasion on this as time goes on but as far as I’ve read their statements….

        They DO want construction but they are trying to get it going by increasing the price of houses. They have recognised that is the only way they have of doing it. I believe they have stated as much. They don’t believe they have a bubble in Aus at the moment so inflating it doesn’t bother them one little bit.The individual speeches given by RBA staff are not renegade speeches but reflect the attitudes and policies of the RBA.

        I believe they will be caught in the conundrum you have talked about including runaway house prices and a faltering economy. Bill Evans et al will keep up their relentless pressure for lower rates.
        If the RBA would ‘look through’ accelerating inflation (and I think we agree they would)why won’t they look through accelerating house prices especially since they consider we have nothing like a bubble?

        I’m not trying to beat anyone with this. I’m just trying to interpret RBA behaviour.
        I think we’ll eventually get into an argument over whether the RBA are stupid or not. Have a look at our situation and the choices left to us and tell me whether they are stupid or not to let us get into this parlous state. Further as far as I’m concerned anyone who didn’t see the GFC coming is just plain stupid. The RBA didn’t have a clue and still don’t grasp what is really happening.

      • Not to mention the green light by none other than the PM and his Treasurer. Why would this RBA buck that mindset? I say THIS RBA because they’ve proven themselves to be nothing but a bunch of political puppets at best. I’m sure the only work being done by Government in this sphere is developing new statistical methods to hide the inevitable spike in inflation that will follow. Assuming the current mechanisms stop working of course.

      • That is what they have said.

        Come on! You take what the RBA says at face value????

        It is just a fig leaf that Darth Stevens made up on the fly to cover up financial repression… there is no statistical evidence that construction has boomed/will boom because the price of second hand homes have been ponzied up.

        Will the sale of new cars increase if I give interest free loans to buy second hand cars?

      • @HnH

        I am 99% confident that our bubble will achieve its full growth potential before its epic bust (because history says so!).

        What makes you think that “this time is different” in the dynamics of our bubble? Are you fighting a losing battle with the full knowledge that it will be lost? Would not it be more pragmatic to advise the readers with the ways to strengthen & fasten their seat belts instead?

      • While they’ve said they want more houses, I wonder if they’d actually be happier with just more renovation work on the existing housing stock. The ‘shortage’ has been so important for them in the bubble-denial business, they’d have to be terribly reluctant to see it disappear. It’s hard to believe there’s a genuine interest in increasing the housing stock.

        How does renovation activity stack up against new builds as an employment force?

      • Agreed. Gnashing of teeth over new construction is a red herring. They know that whilst money is cheap and buyers have a choice through debt, they’ll opt for existing stock in the inner or worst case middle ring suburbs. Maybe they ‘re hoping that existing stock rockets and the ripple effect causes marginal buyers to build on the fringes?

      • “How does renovation activity stack up against new builds as an employment force?”

        It has short term and long term aspects. There’s the DIY splurging at Bunnings which employs more people in green aprons in the short term

        Then there’s the long term aspect, extra medical professionals needed to deal with waves of mesothelioma victims after idiot DIYers cluelessly hack into asbestos.

  3. Episode 8

    Not so long ago in a galaxy not so far away…..

    Bank CFO: This scheme of yours has failed, Lord Bernanke. Our capital is exhausted. We dare not go against the short sellers.

    Darth Bernanke: CEO, I don’t want this stunted slime in my sight again!

    – Late 2014 –

    Darth Stevens: Australia is sparsely populated. If the APRA is correct, I will find the failing banks quickly, my Master.

    Darth Bernanke: Move against the short sellers first. You will then have no difficulty in taking the indebted sitting ducks back to the Wall Street to sign the treaty.

    Darth Stevens: At last we will reveal ourselves to the short sellers. At last we will have revenge for the Bank of England.

    Darth Bernanke: You have been well trained for QE my young apprentice. They will be no match for you…..

    • Darth Stevens: At last we will reveal ourselves to the short sellers. At last we will have revenge for the Bank of England.

      Classic … Jedi Master Soros will not sit back and let this pass nor will the his paduan Peter Schiff.

      • Hehe, I was first posting the episodes without numbers, but then lost track of it (my memory is limited you know), so I started putting a number to each episode (I think it was after #6).

      • Thank you for the link. We will find out if the Force is with him or not tomorrow, won’t we?

        30/9/2013 on ABC TV after Nick McKenzie’s report at the beginning of the program

        Kerry O’Brien: Do you want to provide some possible explanations for all these serious allegations?

        Darth Stevens: You don’t want to hear about all these allegations.

        Kerry O’Brien: Ah, I don’t want to hear about all these allegations.

        Darth Stevens: You want to go home and rethink your life.

        Kerry O’Brien: I want to go home and rethink my life.

  4. New housing construction is clearly the objective.

    Not only will it provide general stimulation but also employment that will absorb the post mining workforce.

    Mr Abbott and Mr Hockey’s comments suggesting that low rates, rising prices and the wealth effect will be enough are delusional.

    Relying on the RBA low rates, with or without MP is not the solution.

    What is needed is a national new housing construction summit driven by the Federal Government that has specific objectives in terms of the amount of new housing construction and where.

    In practical terms that means getting low cost land into the hands of FHBs who can then engage builders, trades, architects, landscape gardeners, interior designers, retailers etc.

    SImply focusing national attention on the supply issues will be huge step foward.

    If the states, as is likely, fret about the cost of infrastructure the Federal Govt can offer funds in the form of MUD style bonds that are repaid from rates on the property over 30 years.

    States balance sheets remain free of debt and as the MUD bonds are commercial they stay off the Fed balance sheet.

    The states then only have to push through the required zoning changes and laws regarding rates.

    SMSF might be very interested in MUD bonds as a way of getting exposure to a secure infrastructure investment.

    Reducing the CGT and other ‘milking the cow’ taxes on new housing development could also be on the agenda.

    Ultimately, the Fed Govt has to get involved in driving housing construction and having a summit will drive the debate.

    Come on Joe – You can do better than rubbing the worn out ‘wealth effect’ magic lamp. Not only does it depend on rising house prices, rising debt and decreasing financial system instability but it puts upward pressure on the $ AUS.

    New housing at low cost will dampen the prices of existing houses eventually but the wealth effect mojo was burnt out by papa Howard through overuse.

    • getting low cost land into the hands of FHBs

      I’m living in a small rural hamlet, and you cannot get an empty 1000sqm block here for less than $250k (no sewer, water or other services supplied). One acre blocks (unserviced except for garbage collection) will set you back $400k!

      I am surrounded by thousands of hectares of empty land, and farmers who would love to be able to subdivide and sell blocks, but they cannot get permission. 👿

      This is an entirely artificial constraint on the market, and a deliberate attempt to keep stamp duty revenue high by boosting prices.

    • dumb_non_economist

      I think anyone expecting housing to absorb a substantial number of mining jobs will be disappointed. Few trades are housing related. Most of the steel construction is meccano style assembly of prefabbed steel components (conveyor belt modules, Train Load Out facilities, Crushing Buildings etc). Most of this work is more akin to warehouse construction and the concrete form work to highrise building. Living and office quarters are prefabbed and trucked up to site. You’ll find very limited numbers of housing trades like plasters, painters, brickies, roofing carpenters, roof tilers etc. Maybe some plumbers, but mainly electricians, and even then housing electrical work is different to industrial.

      • Fair enough – correct that to read ‘some of the post mining work force.’

        Having said that my impression was that some of the people doing those mining specific tasks often had backgrounds in trades that were not mining related.

        So it may a case of people returning to their pre-existing occupations after the hay making season draws to a close.

  5. Hi Guys,

    Longtime reader first time poster. Judging by the comments from the macrobusiness guys, would it be remiss of me to read that by inference they would be short the Aussie banking sector on a medium term basis given their views on housing prices and the slowing economy? I am in the predicament of being a first homebuyer needing to upgrade to something larger, and face the choice of continuing to rent but get something bigger or taking the plunge and buying. My partner and I are on good incomes, can put down at least 20% deposit but will end up taking on a mortgage of circa $700k if we bought where we wanted to live. We have previously put in a couple of offers but were pipped at the post by overseas mainland Chinese investors on both occasions. Very frustrating but if rates are at or near these levels this time next yr I have little doubt house prices could be another 10-15% higher still. Very frustrating indeed…

    • Scoobs, I sympathise. The way things are going, prices will be higher. But anything can happen before then or even after then. On one hand government policies will dictate high prices. But what if interest rates have to rise due to circumstances beyond their control? Rising interest rates would have a dampening effect on prices. If something unforeseen happened, and the bubble burst despite the government’s best efforts to keep it inflated, you could find you paid far too much, meaning your equity is lost. In a worst-case scenario you could find yourself in negative equity.

      Obviously it’s up to you, but taking on a mortgage of $700,000 is definitely going to be stressful. You’re buying at the peak in a bubble situation. But that doesn’t mean the bubble won’t get bigger. In a worst-case scenario the other way, the bubble will just keep growing, but remember, it’s all artificially propped up.

      Just keep in mind the saying by economist Irving Fisher just days before the 1929 Wall St crash: “Stock prices have reached what looks like a permanently high plateau.”

      There’s no way prices would be where they are now if they were based on fundamentals. They are way out of whack with incomes and rents. It’s a Ponzi scheme, and eventually the last ones in will have egg on their faces. “Food” for thought!

      • Good point. The other thing to remember in all this is David’s point about ‘when the banks run out of money’ (vis APRA essentially requiring them to lend out what they are getting in, not fund it through wholesale markets) as that point you would imagine there would be quite a few alarm bells ringing.

        Almost no matter what, short of a genuine crash – which for mine would reflect some sort of black swan event – I think that both sides of politics and the FIRE lobby will ensure there is no substantial downturn in nominal values.

        I have sort of drifted to the view that they will not care too much about the weight this imposes on the rest of the economy – if they can run migration taps that much harder, or open up RE to super funds or whatever they will probably do it.

        But I do too suspect that as the investment downturn becomes more overt, and the underlying uncompetitiveness of the Australian economy is exposed then having non AUD assets able to benefit from a sharp decline in the currency may be the way to go – I tend to be in the camp of the longer it holds up now the more carnage is likely to be evident later on (although when later on is anyones guess). Any point where Australian banks are borrowing offshore to fund mortgages onshore would have some significant implications for anyone thinking of trying to short Australian banks too.

      • +1 md

        +1 Gunnamatta

        I have zero exposure to banks / RE and long positions in energy stocks that have zero local exposure; WPL, ERA, PDN (plus ORG which has local exposure).

      • @Gunnamatta I agree that this is what the RBA and the government is thinking and trying to active. However I don’t think that they will be successful or at least as successful as they might think.

        Back of the envelope calculations suggest the dollar needs to be somewhere in 0.45-0.65 for this to work. Doing so in an orderly manner I think is almost impossible.

        I can picture the hedge funds already plotting …

  6. I know money is fleeing China. And I am quite sure a (VERY) significant amount of that money is going to the US, New Zealand & Australia.

    And those chinese are not the poor refugees that aren’t allowed into Australia. These are generally rich people which are welcomed with open arms.

    • Don’t be fooled by the Chinese (or the SMSF) propaganda. Numbers simply do not add up. If you are too lazy to check the original numbers yourself, you can look what I posted in the last few days.

  7. Speculation in consumables whipped up by securitizers and then fed back to the feed lot consumers via a cornucopia of multi grain investments.

    skippy… Brought to you by synthetic brand LLC.

  8. What is really annoying is that during the previous boom – it wasn’t really like they were that good a time for anyone? Getting trades people was impossible and seriously expensive, getting anything done was actually quite hard.

    Sure the corporates were busy building a billion sh&t boxes for anyone that could spell the word debt so some people were busy but it didn’t really make things that much better imho or life more liveable. Everyone was just mad flat out in the rat race trying to grab their slice of asset glory.

    Booms and recessions actually suck equally for different reasons.

    • +1

      If you can somehow find a way to defer some of the overheated demands during boom times to the subsequent recession periods, then everything would become far more efficient (i.e., could realize the efficient market theory). But booms are just like rabies in my view; genetically engineered homo sapiens would be required for that to become reality I am afraid.

      Unfortunately, we are powerless in stopping mad fools from piling onto each other during boom times or preventing the hangover that is made even more painful because of the above knowledge.

      The best I can do with a runaway bus I cannot control is to fasten my strengthened seat belt and hope that is enough….

      • No you don’t need genetically engineered homo sapiens to achieve this goal. All you need is “a few good men” (pun intended) of slightly above intelligence who are willing to act and learn from the mistakes of others and the past.

        This is not something new, boom and bust cycles have happened all the time. What we have instead is supposed Rhodes scholars who probably can’t even explain why they think it is good for the economy that house prices go up.

      • But that is not possible in democracy in my view. The dark side is too seductive.

        I am sure Stalin would have never allowed this kind of idiocy to occur (or his USSR would have become a sitting duck) and he had the necessary power to prevent it from happening…..

      • Exactly – until the RBA went and rooted it up on some glory quest to get to get our dollar down by wow a whole 10% using cash rates (gee that makes up for the 1000 fold manufacturing cost difference with people earning 10 bucks a day in countries with huge markets) things were actually starting to slowly get back to some semblance of normal – you know where the plumber or electrician might even call you back despite the fact you weren’t paying with corporate mega-debt dollars.

        Seriously David and Leith couldn’t be more right – we have a party duopoly (stacked with cronies and nepotists) that has totally handed over housing (and hence the economy) to the RBA, who has then headed out to modern warfare with the equivalent of a blunderbuss.

        What a total f&cking mess.

      • Just once or twice in your life you want to have cash when nobody else has any!
        By definition that requires a lot of prudence and, indeed, wisdom.

        I think it gets harder every year with CB’s operating to destroy both characteristics. Stupidity and myopia rule.

        Still yes agree with aj re RBA and blunderbus. Your own Machine Gunner is likely to get killed by the friendly fire of the blunderbus.

    • @dumpling Agreed but one can dream …

      “A democracy cannot exist as a permanent form of government. It can only exist until the majority discovers it can vote itself largess out of the public treasury. After that, the majority always votes for the candidate promising the most benefits with the result the democracy collapses because of the loose fiscal policy ensuing, always to be followed by a dictatorship, then a monarchy.

      — AF Tytler

  9. Home buyers are now taking interest only loans, putting the money into the offset account.

    Then when they want to upgrade, they pull all the money out of the offset, purchase a new home, then negative gear the original property.

    • Illegal to claim the deduction in those circumstances as the original home was not purchased for an investment purpose