Van Onselen vs Keen vs Cashmore on property

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With mainstream media attention focused on whether Australia is or isn’t in a real estate bubble, and the atmosphere around Sydney prices becoming rarefied, Gunnamatta spoke with Leith Van Onselen, Catherine Cashmore, and special guest, Professor Steve Keen, on the current real estate market, the supply and demand drivers articulated by that market, and the future economic implications for Australia.

In a wide ranging discussion which runs for nearly 90 minutes, and has been divided into 3 parts, the speakers look at: the motivations of buyers and investors;  the treatment of real estate by the taxation and planning systems;  negative gearing and the political and generational dead-end Australia finds itself in when trying to address real estate issues; logical responses from the government and RBA and comparisons with New Zealand’s politicians and central bankers; and industry responses.

 

 

 

Comments

    • Turnitup
      First I have not yet listened to this! I will.
      However……I have been around auctions in Buderim today and attempted to buy one house. There is not a doubt in the world the market here is up 18 to 20% in the last few months. All I can say is RP data & ABS etc stuff etc is BS or behind the times or something. In the words of a Real Estate friend this afternoon “It’s gone mad” She had earlier in the day auctioned a “fibro s..tbox” that should have gone for land value at under $400k even in what we thught was the present market. It got bid to over $500K. The house that I bid on for a friend went for a little more than 10% over any number that could be justified by any normally rational measure. That said it is the current market!

      Edit: ‘Note this thing is just getting started. This is just the first phase. Further the RBA is now planning a couple more interest rate cuts. Can nobody see what is happening before our eyes? Or is this just RBA policy. Sadly this seems to be the case. They said they would blow this bubble up out of control and they have. It’s policy. WTF?

      To anyone, including the idiot Stevens, this from a one-time admirer of sorts,who thinks this is more or less confined to Sydney YOU ARE WRONG!!!! The market is ablaze and it is burning the future of this nation’s young people, and those to follow, to powdery ashes that will be blown away by the winds of the future that are headed our way.

      Great thinking by all the morons who thought all we have to do is reduce interest rates. Am I angry and right out of my tree tonight? You bet! I can’t believe the stupidity and straight out corruption afoot in this land.
      I dunno. Who really gives a s..t? Is there anyone anywhere prepared to make tough and unpopular decisions? Is there anyone who is prepared to really go out and tell people what a mess we have made of our children’s future? Or is everyone following the mantra “I don’t care. If it costs one job I’m against it” Bloody hell! Current policy is costing the lives and welfare of our children. Doesn’t that matter at all?

      • Most of my group of 25/30 somethings would go to war with you on this – but we only hold muskets.

      • GunnamattaMEMBER

        The revolution has started….

        – no need for muskets and pitchforks yet.

        Was called by a mate who is a Real Estate agent in Geelong yesterday.

        Told me that the talk amongst Geelong RE types is that apparently someone is breaking into vacant houses (with big ‘for lease’ signs out the front) and defecating in inopportune locations.

        Just a single pile

        Has apparently happened (or been discovered in) about half a dozen houses this week

      • Sorry Gunna…I guess I’m too old! I can’t see this is progress towards a better society!
        Give strength to the blokes with the pitchforks who are really trying.

      • Resistance may take many forms ;). But the backlash may be coming and it may rightly be nasty.

        After all the viciousness of the treatment of the young has known no bounds.

      • My anecdote:

        Well known northern NSW holiday town. Market has been dead for 5-6 years. Nothing moving, prices stagnant. In the past few months its gone bonkers. Buyers from the cities and overseas have been making unsolicited offers 40% above sale prices from a few years ago. The mood amongst real estate agents I know can only be described as ecstatic.

        This is not just a Sydney phenomenon.

      • It absolutely matters fawse 🙂

        It’s so much more than just housing. But specifically on housing you may find this illuminating:
        http://www.taxpayers.net.au/federal-election/my-affordable-housing-vote-for-2013/

        The party that comes out on top is the one that looks at things far more holistically and has an end-to-end strategy and understanding of the underlying problem.

        Part of the problem is those who are concerned with the other side i.e. what happens if we stop deliberately growing our population through high levels of immigration. There is the concern that they are then committed to mortgages greater than the house value. A useful note from Dr Jane O’Sullivan (the Qld candidate for the party) on this:
        “It’s possible that prices would be reduced a bit, due to investors pulling out of the market. It’s unlikely that they’ll fall far, because of the backlog of people trying to get into home ownership, who will take up the slack on demand as soon as it gets a bit more affordable.
        Even if they did fall, the person who bought at the top of the market is not really worse off as a result – as long as they bought the house to live in, rather than for its asset value. It’s like if you buy something you like, and next week find that it’s on sale for 30% less. Your position hasn’t changed, just because someone else has options you didn’t have. You evidently thought the price was both affordable and worth it, or you wouldn’t have bought. Whatever home you might be thinking to move on to down the track will have also dropped in price, and the gap between your house and more expensive houses will have got smaller, making it more affordable to move up market. Even if you sell for less than you owe, and carry that debt on along side your new mortgage, the two together would be less than the debt you’d have had if both your existing house and the new up-market house had kept increasing in value.”

    • Considering the events we’ve all recently witnessed around the world, we should ask ourselves, do we really want to see what angry disenfranchised young australians are capable of?
      The still have access to boxes of matches and bricks.

      • Sorry dudes. There ain’t gunna be no insurrection. Other than a few random blog comments crying ‘pitchforks and muskets’ ‘viva la revolution’ seriously who has the time or inclination? Most that can’t afford to buy now are probably working their arses off just to pay the rent and put a bit aside for revolution day.

        Anyway the new iPhone is out soon and attentions will be diverted. May as well continue to pay attention to DC

        Don’t Buy Now

        And judging by the criticism directed toward mortgage mugs etc, most are probably pretty satisfied they’re not caught up in the game 😉

        Relax.

      • GunnamattaMEMBER

        3d1k! Good to see you here.

        Your point about all being too busy is all good and well. I actually agree. There are too many people working their keisters off to service insane mortgage debt.

        But the issue here is unemployment. And as I dare say you are aware should the non mining economy (competitive position currently in the same league as a bowl of ice cream left in the sun in Coober Pedy in mid january) start to heamorrhage gigs, then there may be a load of punters with plenty of time on their hands (have a geek at Ireland Greece or Spain). It would be about that point I would start looking at pitchforks. Until then I would have thought discontent would be limited to random spur of the moment acts of opportunity.

        But if the gigs dont hang on, then it could be quite a few bets off. How are those gigs going to hang on?

        Is Tony going to embark on a spending spree?
        Is there another mega batch of mining projects about to come into orbit?
        Is there going to be some means to get punters spending up in retail land from an average debt to household disposable income level of circa 150%?

      • Gunna I reckon the housing market will sort in time. I agree that a significant rise in unemployment could be the catalyst. Ideally this is not how the market undergoes a modest correction – rather changes in tax treatments, SMSFs criteria all announced with reasonable lead time in turn takes the heat off without unduly damaging investments ie longer term proposal.

        Frankly even if it all goes pear shaped I still don’t see insurrection – even Occupy dwindled partly from inertia and partly the drawing together of traditionally non aligned parties which failed to determine a unified agenda…something of a rabble!

      • GunnamattaMEMBER

        3d1k

        Whilst I am not up on where they hang out on the internet, I would suggest that you have a chat with any of your mining mates who have ever been to Russia.

        My experience is/was that most males (in particular) start gibbering after a couple of days about the damsels, and just how outrageously magnificent they all too often are.

        Indeed my farewell party from that world (which included a few subordinates who would boost circulation of any lads mag) was memorable for a drunken metals analyst coming up late in the evening and observing ‘You do realise that from here the totty is all downhill?’

        He was indeed right

  1. How the F can you negative gear a property in a Super trust?
    how is that an “arms length deal”

    there is no distinction between the trust and trustee/beneficiary then. so where does liability stop? this could get ugly,
    imagine a law suit. the trustee could be found liable for acts and debts.
    A good lawyer would pick this relationship to pieces and could set a precedent

      • Thanks, Fab Four. Another nip at the politico-housing complex that cannot see the gross damage done to the citizenry in the pursuit of narrow commercial interest under Australia’s flawed systems and rules.

        End this stupid postage stamp zoning that stifles construction.

        Reform tax to reduce the staggering burden carried by wages, in particular by taxing land.

        If government genuinely believes in headlong immigration, it must also believe in headlong infrastructure investment.

        Debt is a four letter word. It is about time people understood how expensive and risky it is.

        Prepare for the land price correction.

        Don’t Buy Now!

  2. Catherine Cashmore is refreshingly open of the property group and agree with her that education of the average person and young people of the banking system and Steve Keens work is essential.

    The amount of young people i bump into who have professions in other areas of work, separate to the property industry or banking so unaware, stressing that they should buy a home for an investment or they will miss.

    I tell my kids, not to waste your life on a mortgage, utilise your income to grow in other ways.

    The interview was excellent on this wet afternoon and recommend you guys do a weekly TV or online show and utilise your extensive resources and graphs you have behind you.

  3. With people (mostly investors) increasing mortgage borrowing, the result will be the RBA needing to keep rates low for a very long time. This benefits baby boomer investors now, but they will be the ones complaining in 10 years time when rates are low and they are unable to fund their retirements.

  4. Thanks people at MB for always lifting the bar on these most important issues.

    As a perhaps naive perspective I’d like to raise a simple principle that seems to underlie all of this talk about the housing “market”.
    When talking about the affects of increasing demand from various investor groups – SMSF, trusts, individuals, foreign – on constantly bidding prices up and FHB (or should that be more simply Owner Occupiers?) being shut out, why is the only talk around cutting the obvious tax rort(s)?
    If the general issue is too much speculation / investor activity, why isn’t anyone making explicit mention of restricting established housing purchases for non-owner occupiers, so that those wanting to own the house they live in aren’t thrust into a bidding war with those who apparently don’t need/want to live there? It seems to be what everyone wants to occur, via the varying means espoused, but no one talks about it specifically. Am I missing something, other than the fact that this would crash prices?

    Give housing back to those who are going to live in it. Investors can go “invest” in something productive, like new housing or infrastructure.
    Fat chance, I know…

    • As I had pointed out numerous times, a housing market is a pseudo market that lacks short selling mechanisms. Short selling is essential for proper functioning of a market to counter margin lending. Any market which allows one to borrow cash to exchange for an asset, but not the other way around, abandons the price discovery mechanisms that come with short selling; as simple as that. A market without price discovery mechanisms can fetch any number.

      I am not saying that it is easy to create short selling mechanisms for housing or it is likely to occur. If it is difficult to implement this, as it appears the case, the second best solution would be macro-prudential tools that cap the maximum amount one can borrow against a house (i.e., to restrict the amount of lending in a market in which there can only be zero short positions), to bring the housing pseudo market closer to symmetry.

      • By renting and not buying in, it is de facto short selling imho. But the problem is with the hot money from o/s which I think will continue to maintain or improve prices even if oz rates were giving rising signals. How big this bubble can go is anyone’s guess. Be safe everyone.

      • “By renting and not buying in, it is de facto short selling imho.”

        If only one can do that for more than one property……

    • +1 dumpling.

      @pirate There is nothing wrong with investing in housing except in situations like Oz. The system of NG etc here distorts the market towards one of capital gains vs income.

      The commercial property market is one that is more akin to how a investment property market should work (although it is distorted here as well, to a lesser extent).

    • Yeah NZ is real nice. Lots of places for cheap just outside the major towns.

      Haven’t been to the south island so don’t know about that.

  5. Young people who are priced out of the market should do a couple of degrees on HECS, go work overseas and save their money using appropriate company and trust structures, retire to Australia on the pension and with access to free healthcare, while also having access to the overseas accounts for regular holidays. Forget about buying property and make the most of it. Let the lemmings flip houses if they want.

    • Seems many are also following this path. our emigration is trending up and hitting historical highs.

      Thanks guys for the podcast.

      Paul.

    • If I had my time over Monkey, that’s exactly what I’d do. I’m aging now and think I’ll do that in reverse. Take the ridiculous wages on offer here and retire OS, maybe even buy somewhere OS now if I can think of where. The political risk worries me. Anyone got any ideas of OS locations with good weather, reasonable politics, cheapish housing?

      I’d love to see an article re places to buy now and retire OS…..

      While others are thanking you MB, I’d like to also. I read every day but don’t always write…..A great read. Most comments are great too…. Thanks.

      • GunnamattaMEMBER

        Take a look at Spain and Portugal, I am a big fan of North Cyprus, I have friends who have staked out chunks of Belize, friends who have purchased their rancho in Patagonia, and others in Southern Chile (plus a good mate who tells me the best dope and women in South America is in Uruguay).

        Depends what you are looking for. Once my Mrs gets and Australian passport I may join them.

      • Thanks so much Gunnamatta. Really appreciate it. I’ve considered those except Uruguay and Cyprus (I’ll check them out). I love the idea of Portugal, but South America has special qualities you’ve mentioned. From what I can see, Chile is already quite expensive, I think with a big US influence. My GF’s keen to do it with me. It’s great being Australian and having options.

      • If retiring overseas is your game, then you should do some research to see whether Australia has a social security agreement with your destination. You might be able to receive an Australian pension in the country you decide to live in. Chile and Cyprus are on the list.

      • @Monkey.

        No fking way…….

        Can this option get any better?

        @MichaelGuy……

        Creo que es mejor empezar de inmediato.

      • GunnamattaMEMBER

        Actually this has exercised my mind while having a feed

        You would have to look at NZ (basically the same country only cheaper)

        If you could swing an Oz pension through Cyprus then living in the parallel universe of North Cyprus has lots of upside.

        Turkey would be pretty good (I would look at Black sea coast, but the far hotter south coast would appeal to the tourist resort set. Istanbul is a magnificent city but it is pretty expensive)

        I have a mate in Bulgaria (who does nothing but trade US equities) who reckons it is great (on the sea over near Varna)

        If you like colder then have a look at Latvia (20 minutes drive from Riga you can get some very nice places, and even inside the city they are not expensive for apartments) Colder again is Finland where you can pick up a place by a lake (Finland has millions of them) for peanuts.

        Spain and Portugal are giving away residence visas if you shell out more than a set amount (I know in Spain it is 160K EUR – and you can buy a decent place for that)

        Parts of the US would have to be worth looking at (apart from the regularly mentioned Houston, have a look at Milwaukee – where I have a mate who reckons living there is great)

        South America (Argentina, Chile, Uruguay, Peru) can be cheap if you can handle intermittent political volatility.

        I havent been there but am told Belize (what was once British Honduras) is really good, but gets the odd hurricane.

      • @Gunnamatta….Yep. I love NZ. Been there half a dozen times over twenty years.

        “Spain and Portugal are giving away residence visas”…That’s a great option. I like the US too, if you follow the sun over there, it’s one of the best places on the planet.

        I haven’t been to Milwaukee but have memories of “Happy Days”, the Fonze…… and snow?????? The US and NZ have the huge benefits (to me) of speaking English.

        Then there’s all of Asia (though I struggle in the heat)..Perhaps I could move around for some years, following the good weather, living cheaply and eventually settle where it suits.

        Anyway I’m getting excited about researching it. I’ll give it lots of thought and make some concrete decisions with my GF. Fking exciting life.

      • Been living in Milwaukee for the past 2.5 years. Great place to bring up your kids, plenty of open spaces ( parks, lakes, etc) and most of the amenities of a ” big” city

        Just bought a house a year ago, almost at the bottom of the market and for 450k was able to buy a second to none house in one of the best suburbs north to the city (15 km). Lake Michigan is just couple of minutes away, I’m surrounded by pines and nature but yet a 2-5min drive from shops , restaurants, etc

        Winter can be harsh (not really) but it’s better than having constant heat & humidity. Chicago is just an hour south in case we feel like we’re missing our previous life in Melbourne

  6. As depressing as it is to see this madness, it is also encouraging. We are getting closer to the whole thing sorting itself out in the most painful, destructive way.

  7. Thankyou for this interview and for all the great work you all do every day. This website is important.

  8. As always a great podcast.

    One thing that would be really good to make them just that tiny bit more professional is to have a proper ending. So far each of the podcasts that have been posted ends very abruptly.

    • GunnamattaMEMBER

      Sorry chief, I just trim them up and load.

      You are probably right about putting a frontpiece and backing on, but with that one it was nearly a 2 hour chat with a trimmed to circa 85 minutes (and that took a long long time) and once it was done I just wanted it out of my hair (so I could go play with my kids etc)

      • Doesn’t have to be much…just a “thanks for listening this is XXX from Macrobusiness.com please visit the blog for more XXX related news” would be enough.

  9. boomengineeringMEMBER

    I came late so I skipped the story and blogs to say that I went to an auction at Manly beach yesterday , a tiny terrace with no parking.
    Very few people there, one boomer lady asked how much it would rent for and the agent replied $1200/wk. She walked out and the auction starting time passed by. I think there were no bidders so we left.
    Properties like that have been selling for about 2M, so the returns must be pathetic.This makes me think the turning point must be close if the users of the asset won’t buy and now the speculators are starting to question viability.
    What a lot of the bloggers on this site don’t realize is that no amount of gov’t intervention will stop the crash because the shear volume would be overwhelming.
    As I’ve said previously sandcastles won’t stop the tide.
    The quantitative programs in USA have the same problem, a token questure when total debt = 130T

    • I lovvvvvvvvvvve reading that….Anyone got more?

      It definitely feels like there’s a change coming. The tone is shifting. I really hope so. It’s criminal the remarks by the RBA and gov re how great it is that prices are rising. I feel for some. Like my friend who recently bought off the plan, she’s going to buy another WHEN this one goes up. She said she’s done her sums, I asked what if wages don’t go up….She said “that can’t happen, the RE said China’s growing at 7%)”…..OMFG.

      • thomickersMEMBER

        I got one for you.

        As I work in the financial planning industry I get to see many people’s balance sheets and most aren’t pretty….

        scenario: Early 60s pre-retiree having been a property accumulator for 30 years. Hasn’t done much to super ($200,000).

        8-12 Houses around Melbourne = $6,000,000 using council valuations.
        Current Debt = $2,000,000

        Is he positively geared or negatively geared assuming today’s interest rates? (tip: it’s a trick question)

      • There are heaps and heaps of such anecdotes. So many people have no fric**n idea of economics or even simple maths/accounting. But I guess that it is the easiest way to get leverage.

        BTW what were her sums?

      • Interesting.

        People can lie but numbers don’t. So, whenever people and numbers disagree, I choose numbers.

        Of course, some second-hand numbers could be fudged by liars (I am talking about you, Arthur Andersen), so one needs to be extra vigilant when relying on second-hand numbers. That is why you would only ever want to invest in businesses in which their management shoot straight. I have no doubt that this is what Buffett was referring to in one of his annual letter when he had stated “in the end, class shows”.

      • @thomickers

        I have been trying to get my head around your conundrum, without success. Did I get this right? $6m asset of which 1/3 is debt (i.e., 33% LVR).

        How can it be negatively geared at the current historically low interest rate? Is he land banking without renting the properties out?

      • thomickersMEMBER

        Here are the approximate numbers:

        FY13/14 (cashflow modelling)
        Expected Rent received: $130,000
        Insurance/Council rates 10 x $1,800: – $18,000
        Maintenance(Annual avg over last 3 years): – $6,000
        Interest cost @ 5.5%pa : – $110,000.

        Net operating income received (estimated FY13/14) = -$4,000

        Last financial year his tax return reported a property income loss of -$35,000

        And it is not an accounting trick (not on purpose). The guy needed income!! current income $70,000.

      • @thomickers That sir is the post of the year on property. Illustrates everything and anything that is wrong with the Australian property market.

        Thanks for sharing.

        I hope that he sells up before there is a correction.

      • @thomickers I hope you don’t mind by I have book marked that post will be quoting it liberally whenever the issue of sums comes up (there are a few posts from a few stubborn people always).

      • That’s a fair dinkum joke Thomickers. With those cash flow issues, he wouldn’t be the first to go to a Salvos and ask for a handout too. That’s why I don’t contribute to those types. $70K per annum holding a $6m portfolio is staggering.

        I’m getting tired of these kinds of stories. Here’s part of one that was recently in our local.
        http://www.theaustralian.com.au/news/melbournes-outer-suburbs-hit-as-financial-institutions-reclaim-houses-from-struggling-homeowners/story-e6frg6n6-1226758142311

        The hardcopy went into specific detail on this lady’s circumstances i.e. house repo’d, facing living in a motel etc etc. But she cited the reason for losing her home was that her tenants weren’t paying on her investment properties and cashflow was a problem. She sold one in Pascoe Vale but it wasn’t enough to save her house. What riled me was she’s now living in her holiday home on the Mornington Peninsula, which ‘wasn’t right because that was for holiday rentals and enjoyment rather than full time living’ or words to that effect. I bet she’s angling for public housing next.

      • @jimbo A little digging shows that the lady in question runs a holiday home management business and mini-real estate business as well.

        Chances are they over levered themselves thinking all days will be just as good.

        Sorry but I feel no remorse for such people.

      • So…… let me get this straight.

        (1) Property investors buy up as many properties as possible by overpaying to such an extent that the properties generate negative cash flows.
        (2) The local banks repossess properties from the overextended property investors who have cash flow problems.
        (3) The local banks have their own cash flow problems as their expected cash flows from the overextended property investors dry up.
        (4) The local banks sell their loan books and asset books to well capitalized foreign banks in an attempt to repair their balance sheets.
        (5) The well capitalized foreign banks choose not to sell their assets at a loss, and instead rent them out.
        (6) We pay rents to foreigners so that they will kindly allow us to live on our own land.

        Well done, Australia! Well done!!

        Even my dad could not have written this script – George Orwell Jr

      • dumb_non_economist

        Thomickers,

        Why the dismal return in rent (2.2% gross)??

        Btw, would council valuation be lower than actual market?

      • thomickersMEMBER

        DNE

        1) it’s probably poorly managed split between property manager (well managed) & land lord (poorly managed). Some properties haven’t had a review for 5 years. And the properties are widely dispersed around Melbourne. I’m guessing the maintenance in the older places were not addressed until recently (ie 30-year investment with no capex or maintenance in the first 20 years then one spends up big in the last 10 years for all the cost cutting one has done).

        2) yes. however if you have an older property with little improvements or repairs it’s the land which drives up the council valuation. The rental price is mainly driven by the stateliness/condition of the home.

    • dumb_non_economist

      I get about three emails p/w from RE.com and a fair number when I compare it to Oldlistings.com usually are at a discount to the old price.

      Yesterday it was a place priced at $685K,(first time offered!) oldlistings had it at $760K Aug08 & Jan09. Don’t know what it last sold for or when, but I do know I take the figures coming out from RP etc with some degree of skepticism.

  10. What an interesting and timely discussion – unfortunately few seem to be listening. Over the past 2 months I have been attending auctions in Sydney’s inner west and have been astounded by the rapid ramping of housing prices. Case in point: 2 br 1bth no parking 90 y.o weatherboard cottage in reasonable condition, bordered on both sides by blocks of flats – first week of marketing quoted at 750 – 800k – 2nd week 830k+ – at auction this weekend sold for 940k!!! The purchasers were a young couple (20’s) who had considerable parental assistance. Anecdotal I know but there seems to be a collective mania regarding houses in this city. Apparently you can’t loose – just get on the band wagon!! Australia is different apparently – property prices will never fall substantially. Ironically Steve Keen is the poster boy for this attitude. Despite his predictions of a 40% drop during the GFC prices have held up well. There seems to be an understanding that the government will do ANYTHING to sustain and/or levitate house prices and little understanding of the perils of huge leverage to support huge prices. Buyers “know” that their asset will appreciate. I have opted to stay out of this market though I feel it has at least a couple years of bubble left in it . . . and I am tempted.

  11. Man is given energy to use.

    Organising an economy so as to waste as much energy of others as possible in paying off shelter is not intelligent. I have been watching the FIRE sector financialize shelter since about 2000 with the help of govts & MSM. It is open misere – the rules are openly skewed to investors, no pretence of fairness.

    These groups are trapped in a lower energy cloud of narrow & irrational thinking that is at best, intent on making a kind of stagnant life pool of co-dependent creditors/debtors who play the roles of jailor and jailed. Life is evolutionary and will not assist that interplay long term.

    One telling video by an insider followed by one good webpage is all it will take to shake the sandcastle of financial deceits. Intellectual materialism has served its purpose and will be replaced by the next phase of evolution as hinted at by Peter Russell in his book ‘White Hole in Time’.

    Enough thinking for the hour, time to enjoy some nature.

  12. Thanks to all for that great conversation. Did some genealogy a year ago and confirmed an old myth that a great-grandfather had been one of just 3 bank managers in Melbourne that opened for business after the 1893 crash. The Victorian gvt wanted them closed but he insisted. I wonder what he would make of this enthusiasm and the capacity to be greedy and stupid again.

  13. All singing the same song – not that I disagree.

    I do disagree with the comment Catherine made about Harry Dent. His main problem is that he is quantitatively wrong. The same way Steve Keen was quantitatively wrong with Australian house prices. Anyone relying solely on these people for investment advice are in trouble but their insights are certainly worth taking into account.

    There is no doubt demographics is a powerful undercurrent of economic activity. Steve Keen sees the current boom running another 5 years now. There is potential for it to run longer based on the underlying demographics – China is still growing and Australia is riding that wave.

    One more point that needs considering. When interest rates are zero the 4% return on the property investment made in 2010 (even 2013) will be attractive alongside TDs. The proviso is that rentals and occupancies hold up.

    • How can interest rates go to zero when government interest rates are non-zero? Oz isn’t a reserve currency …

      • Like many other developed economies Australia is heading for a savings glut. Savings increased rapidly after the first stage of the GFC but the good old investment property has stalled the increased savings. When property investment loses its lustre again the savings rate will go back up and Australia’s banks will have less reliance on offshore funding. In fact offshore liabilities of the banks have flatlined since 2008. A further increase in savings rate will take them down.

        A savings glut means that interest rates have to fall to zero or close to it to encourage people to take on debt – the flip side of savings. The alternative is for the Government to take on more debt to suck up the savings – as seen in Japan for decades now and USA in the last few years.

        Demographics indicate Australia will reach a peak in private debt around 2019. After that there will be deflationary pressure as savings accrue faster than private debt increases.

        Anyone reaching 65yo without AUD1M in savings (or similarly liquid/ income producing investment) will be reliant on a government pension. If we say the 8M people then aged 50 to 80 average half what the 65yo needs then the savings will be AUD4tr. That exceeds all current bank assets by a large margin. So it is not possible that all retirees can only use savings as means to fund retirement. Banks will not pay interest on money they cannot lend out. Individuals have to also consider investments like shares or houses.

        My personal strategy has been to invest in things I can control reasonably well. I got in early with solar panels and they provide an IRR of 10% – I make a small profit on my household energy production. I bought a diesel car that uses half the fuel per km of the car it replaced. There are many others worthwhile investments that reduce consumption costs.

        If house prices do take a hit then an investment property at the right price will be good buying.

      • @Rick-WB Thanks. A plausible scenario. RE the foreign borrowing, I think this is because APRA has stopped or reduced banks reliance on foreign borrowing after the GFC.

        RE:Savings rate,

        http://www.macrobusiness.com.au/2013/11/is-australias-high-household-savings-rate-an-illusion/

        whether you believe this analysis or not, the real savings rate in Oz is definitely below what is reported.

        Agree with you re peak debt and peak savings (if you want to see it that way).

        Like you investment strategies.

  14. I just wonder why there isn’t an affordable housing party?

    If the shooters can get a couple of senate seats, surely an affordable housing party would get at least one!

    • yes, I believe many people would vote for affordable housing and anti gambling party if there is one ..

    • I’d far prefer someone to set up a Housing Investors Party, get elected to the senate for six years on the back of support from real estate agents and negative gearers, and then turn around and use their senate vote to abolish negative gearing, push for land releases and generally shaft the lot of them. Vengeance would be sweet.

    • Because an “affordable housing party” would also be a “let’s crash the economy party”. I think most of us agree that the fair price is half or even 60-70% off?

      I’d vote for them too. But you’d be torn to shreds by the property parasites(who run ALL the media including the ABC and SBS) and it would take a very gutsy person to do it imo. You’d probably also need to have a very clean history in your life so the media wouldn’t be able to muck rake against you.

      Also there’s the meh factor. There’s this idea amongst the people that “I like that party but I won’t vote for them because they won’t get in”. They can’t see that it’s a moronic self fulfilling prophecy.

      It costs something like $2k-$6k in government fees just for each person in the party to run. So you’d have to pony up your own money or scab it off donors. Not to mention any costs for printing leaflets and stuff like that and a website.

      How very democratic democracy is in practice. Not.

    • Well they will also need a policy on how to nationalise the banks etc etc etc.

      Sorry but this beast is already to big to slay in an orderly manner…

    • Yep, I’ve been thinking that too. There is a new “Arts” party trying to get up and running at the moment, no doubt inspired by the “Motorists” getting up. I think a Ban Negative Gearing party might well get up, it would at the very least educate many about how it operates (which sadly is not very well understood in the younger demographic).

  15. Wow, there’s some comments bordering on the fanatical in this thread!

    It’s not often I agree with what’s written in mainstream media, but I’d have to say that I agree with the sentiment of this article http://theage.domain.com.au/real-estate-news/melbourne-real-estate-redhot-demand-for-bluechip-properties-20131116-2xnub.html

    I’d say there will be some softening next year and prices will creep along, roughly in line with wages growth. I’m talking from a Melbourne perspective; Sydney seems to be a unique beast

      • muskets, pitchforks, people breaking in and defacating (this is mental illness in action, not a political point), the most extreme anecdoctal stories of people offering 40% about market value….. do I need to go on? Anyone can find evidence to suit their position, but really, I don’t think the sky is going to fall in. Not for a while yet anyway.

      • I would have thought someone that thinks it’s reasonable to generate passive income (or tax losses) at the expense of their fellow citizens might be considered a bit fanatical?

  16. One other thing….. why doesn’t anyone on this site ever mention credit-card debt? That is far more vicious than a mortgage (depending on the amount racked up of course). I know (and so will you) people on reasonable coin who owe 10’s of thousands and have done since their 20’s (I’m 34). I wonder how many potential FHB’s are hampered by their CC debt? I reckon the Dont Buy Now! slogan would better serve young Australia’s if were changed to the following….

    Chop Up Your Credit Card Now!

    There must be thousands of Aussies who, if they combined the amount they spent on rent and the amount they spend on CC interest, could afford to buy. That holiday to Majorca is definitely a good thing kids, but only if you can afford it!

    • Probably because credit card debt seems to be falling.

      Anyway there is a much easier way to get all those credit card lovers who dont know how to save and splurge at Butlins and Majorca (?) into new homes.

      Build a lot more of them and finance the lot development costs using MUD style bonds or even just the public balance sheet with higher rates.

      Cheap new housing will keep everyone happy – builders, real estate agents, bankers, finance types, tradies, retailers.

      Oh ! A few over extended types might be a bit glum that their rapid capital growth strategy is a sagging but we can’t keep everyone happy and also make Australia a better place.

    • I’ve often mused about that, especially considering you can jump bank-bank and get the 0% on balance transfers for a year. In fact why not finance property this way. :-/

    • Yes – convert that credit card debt into mortgage debt. Go young guys go…

      There’s some awesome rat boxes in the provinces or in multi story towers that they might want.

    • There must be thousands of Aussies who, if they combined the amount they spent on rent and the amount they spend on CC interest, could afford to buy.
      Well, let’s get an old envelope out and see.

      Median unit price in Australia is around $375k. So 80% of that is $300k.

      Median income is around $55k – about $800/wk after tax.

      A $300k mortgage @ 5.5% will be repayments of about $450/wk.

      So even in ideal conditions of zero debt, the typical punter would need to be sacrificing an oppressive 50% of their income to buy the typical unit. And that’s assuming they’ve got the $85-odd grand in the bank already to cover a 20% deposit and other sundry costs (which at a comically optimistic savings rate of 20% of after-tax income, would take approximately ten years to accrue).

      • drsmithy, Firstly, I made no reference to people on a household income of 55k. If this is the median household income then I’m Joe Cocker.

        Second, no-one is paying 5.5% interest. Try south of 5. You do realise that no-one pays the advertised rate, don’t you? The banks leave themselves some wriggle room.

        Third, you have exaggerated (even at 5.5% which is ridiculous) the $450 a week repayments. It is closer to $400.

        And finally, how much do you think their rent costs them anyway? Add some credit card interest and you can see where I’m coming from.

        And sure, if they really are on 55k a year and don’t have a deposit, no, they should not be buying property.

        Chop Up Your Credit Card Now!

        EDIT: I just checked the ABS site and found this http://www.abs.gov.au/ausstats/[email protected]/Products/6302.0~May+2013~Main+Features~Key+Figures?OpenDocument

        What am I missing? Looks like the average wage is more like 74k. I know that’s different to the median.

        This article suggests likewise http://mattcowgill.wordpress.com/2013/05/13/what-is-the-typical-australians-income-in-2013/

        Turnitup drsmithy! Never let the facts get in the way of a good yarn.

        Chop Up Your Credit Card Now!

      • Firstly, I made no reference to people on a household income of 55k. If this is the median household income then I’m Joe Cocker.
        You made reference to people who don’t already own homes. That strongly implies low to average income earners.

        $55k is the individual median income. I believe the household median is about $70k. Of course, if you’re being prudent, you wouldn’t want to sacrifice much more than around 30% of your household income, or half of the lowest earner’s income.

        Second, no-one is paying 5.5% interest. Try south of 5. You do realise that no-one pays the advertised rate, don’t you? The banks leave themselves some wriggle room.
        Actually lots of people are paying 5.5% or even more. Plus, a mortgage lasts for thirty years. How irresponsible would you be assuming record low interest rates will not increase ?

        Third, you have exaggerated (even at 5.5% which is ridiculous) the $450 a week repayments. It is closer to $400.
        CBA calculator says $429/wk. Which is closer to $450 than $400 (and still more than a third of the after-tax median income). And, again, prudent and responsible people are conservative with these sorts of things.

        And finally, how much do you think their rent costs them anyway?
        A lot less than that. I rent a house “worth” over a million for less than $600/wk. Just the _interest_ on an $800k mortgage @ 5% is over $700.

        And sure, if they really are on 55k a year and don’t have a deposit, no, they should not be buying property.
        So you would argue that half the workers in Australia “shouldn’t” be buying property ? And you don’t see a problem with that ?

        Thirty-odd years ago an (inflation adjusted, obviously) income like that would let you pay off a house in ten years, if not less.

        What am I missing? Looks like the average wage is more like 74k. I know that’s different to the median.
        The median income is the point where half the earners are on one side and half are on the other.

        The average is the mean. It is skewed upwards by the astronomical salaries orders of magnitude higher than normal. Ie: the mean income is not representative of what the “typical” person earns, but quite a bit higher.

        What you are missing is that “cutting up the credit cards” won’t help people for whom the cost of buying a house could only barely be called affordable under the most ridiculously optimistic and unrealistic assumptions.

      • @Turnitup

        Never let the facts get in the way of a good yarn.

        Look who’s talking. Please check your facts. The link you provide as evidence to teh contrary gives you a detailed breakdown of the median income of the typical worker.

        Median wage is ~$57 K and drops to ~ $47 K once you include part time workers.

        At 4.5% interest rate, you’re paying $280 in interest per week! Add to that strata and maintenance and your at 300-320 a week which gets you pretty much on par with what you would expect to pay in rent I reckon.

    • drsmithy, I appreciate your measured response. But it hasn’t done much to sway me. My initial comment was “There must be thousands of Aussies who, if they combined the amount they spent on rent and the amount they spend on CC interest, could afford to buy”. I’m absolutely sticking to that. I said thousands. Not millions.

      You wrote “if you’re being prudent, you wouldn’t want to sacrifice much more than around 30% of your household income, or half of the lowest earner’s income”. (how can I itallicise sections of text?) No you wouldn’t, but if was close to what you’re paying in rent, and you anticipate rents to keep rising, then you might consider it. Depends on the liklihood of future wage increases too.

      Of course rates will rise.

      Not sure which calculator you’re using. Oh you may have been using a 30 year mortgage. I used 25. Don’t know who takes on a 30 year mortgage but yep, I’m sure some do.

      Who are these people paying more than 5.5%? That can’t be true. Here http://www.cua.com.au/forms-and-calculators/interest-rates you can get a 5 year fixed loan with a comparison rate under 5.5%. Five bloody years! That’s 20% of the life of the loan! I’d be having 5 pay rises in that time!

      No I’m not saying that half of Australia’s workers should not be able to buy property. It bloody well stinks, we all know it does. But they’re not going to be given a property on a platter (unless of course they inherit one!) and sadly, many of them will be broke and paying rent after they’ve retired. Baked beans anyone? That’s not being flippant, that’s the cold hard reality.

      Chop Up Your Credit Card Now!

      • But they’re not going to be given a property on a platter (unless of course they inherit one!) and sadly, many of them will be broke and paying rent after they’ve retired. Baked beans anyone?

        And there is nothing wrong with this?

        A lot less than that. I rent a house “worth” over a million for less than $600/wk. Just the _interest_ on an $800k mortgage @ 5% is over $700.

        This does not strike you as odd?

        http://www.macrobusiness.com.au/2013/11/van-onselen-vs-keen-vs-cashmore-on-property/#comment-297991

        Not odd either?

        Yes chop up all credit cards and DON’T BUY NOW!

      • My initial comment was “There must be thousands of Aussies who, if they combined the amount they spent on rent and the amount they spend on CC interest, could afford to buy”. I’m absolutely sticking to that. I said thousands. Not millions.
        Well “thousands” of people out of Australia’s ~12m workers is about half of one percent.

        So in a technical sense you’re probably right.

        But your underlying argument is that there’s no housing cost problem, and these people should would be better off buying a house than renting. The credit card interest line is just an irrelevant distraction. And that argument is comically wrong.

        No you wouldn’t, but if was close to what you’re paying in rent, and you anticipate rents to keep rising, then you might consider it.
        But wages aren’t rising, so rents aren’t going to rise either.

        You would struggle to find many places in Australia where the cost of renting a property is more than 3/4 the cost of buying it. So that’s an extra 25% of your after-tax income you could be saving or investing in something that actually produces returns.

        Don’t know who takes on a 30 year mortgage but yep, I’m sure some do.
        I’d be willing to best most people take on 30 year mortgages these days. It’s the only way to bring the payments down to a vaguely acceptable percentage of income on those monstrously large mortgages.

        Who are these people paying more than 5.5%? That can’t be true. Here http://www.cua.com.au/forms-and-calculators/interest-rates you can get a 5 year fixed loan with a comparison rate under 5.5%. Five bloody years! That’s 20% of the life of the loan! I’d be having 5 pay rises in that time!
        I know of at least 3 people still on fixed-rate mortgages in excess of 6%.
        The big four banks all have standard variable rates >5.5%.

        But they’re not going to be given a property on a platter (unless of course they inherit one!) and sadly, many of them will be broke and paying rent after they’ve retired.
        Actually at the moment they’re more likely to be broke and still paying off a mortgage.
        The renters will be sitting on a pile of money they’ve saved from which they will be able to pay their rent.

        Renting is currently 1/2 to 3/4 the price of buying, and that’s only a simple comparison of rent vs mortgage payments. Throw in the other costs of buying/owning like rates, body corp fees, maintenance, and the equation sways even further towards renting.

        Chop Up Your Credit Card Now!
        Why would I ? I pay my bill in full each month and benefit from thousands of dollars in value from them every year.

    • @ff, “At 4.5% interest rate, you’re paying $280 in interest per week! Add to that strata and maintenance and your at 300-320 a week which gets you pretty much on par with what you would expect to pay in rent I reckon”

      Doesn’t that pretty much support my point? Add the credit card interest and you’re close to par?

      Chop Up Your Credit Card Now!

      • So yeah you can afford to pay the interest on the lowest interest rates in history with a 300K mortgage. OK if you want to call that affordable.

      • @ff, if that’s not affordable then neither is paying rent as they’re similar amounts, which is my point. Remember I just linked to a site where you can fix your rate for 5 years at under 5.5%. Of course if you choose to rent somwhere for $600/week then you’ll likely never own your place. There’s no worries with that so long as you are incredibly prudent with your savings.

        Chop Up Your Credit Card Now!

        @ff, that comment you linked to is another example of a post on MB that just seems to be skewed so far to the extreme. So that guy has 5 IP’s. Who cares if he drowns in debt? That’s his gamble. Most people do not own 5 IP’s. Too much hype and extremeism on MB (the posters, not the bloggers) which is why I chose my moniker.

      • @turnitup

        You’re using examples on the edge to support your hypothesis and thereby discounting what many of the poster’s are arguing about.

        Again it is the affordability argument vs the price argument. Just because you can afford to pay the interest on a mega mortgage today doesn’t mean that housing is not expensive and that it is not proving to be a big drag on the economy.

        The median unit is 6.5 times the median gross salary.

        So that guy has 5 IP’s. Who cares if he drowns in debt? That’s his gamble. Most people do not own 5 IP’s. Too much hype and extremeism on MB (the posters, not the bloggers)

        No it illustrates the absurd nature of the housing market here. His gamble is impacting everyone else. If you don’t want to see it, that’s your problem. What you take as extremism is in many cases just the facts.

        Of course if you choose to rent somewhere for $600/week then you’ll likely never own your place.
        This is just a stupid argument. I chose to rent a place at 500/week. I can go buy the place I live in outright (or almost, Asian foreigners aren’t the only ones with a large inheritance!) but even now it is cheaper for me to rent. I save and invest my money wisely.

        DON’T BUY NOW

    • “You’re using examples on the edge to support your hypothesis and thereby discounting what many of the poster’s are arguing about.”…… I didn’t think I was, and in fact think that’s what others are doing. I can dig up plenty of examples. One chap earlier today suggested that if an offer is made for a home within the stated price range, then it must be accepted!

      “…..housing is not expensive and that it is not proving to be a big drag on the economy. ….” No argument from me there ff.

      “No it illustrates the absurd nature of the housing market here. His gamble is impacting everyone else. If you don’t want to see it, that’s your problem. What you take as extremism is in many cases just the facts”. I still say let him drown. It’s his choice.

      “This is just a stupid argument. I chose to rent a place at 500/week. I can go buy the place I live in outright (or almost, Asian foreigners aren’t the only ones with a large inheritance!) but even now it is cheaper for me to rent. I save and invest my money wisely.”

      You are in the minority my friend. We both know that. It sounds like it’s working for you and I only wish you well.

      Am I the only one who sees the irony in people paying 15% (or whetever it is) interest on their credit cards but not being able to afford housing? Why do CC’s get away scott free? Talking about dead money, that is dead money if I ever saw it. What about the drag it puts on the economy (kills discretionary spending). No uproar. Interesting.

      Chop Up Your Credit Card Now!

      Here’s our credit card debt https://www.moneysmart.gov.au/borrowing-and-credit/credit-cards/credit-card-debt-clock

      • @Turnitup The only difference between housing and CC is housing is a necessity. No one is making you get a CC and spend money.

        Moreover no one is making you pay an interest on CC
        by not paying the full amount every month. In my opinion people that pay ridiculous rates on CC have it coming. The problem isn’t the 15%, the problem is giving then the credit in the first place.

        This all comes back to the availability of credit and how the banks operate.

        Give people cheap money and they will spend it and push prices higher. Like they do with housing.

      • Many use credit cards as a way of accumulating reward points and earning a little more interest on their savings account. If you pay off a credit card on time, then you don’t have any additional interest repayments.

        Those who don’t have the discipline to do this will have to deal with high interest rates and probably shouldn’t have a credit card or be approved for a mortgage at all. It doesn’t follow that people should “Chop Up” their cards at all.

        Good job on sidetracking the discussion, though!

      • Am I the only one who sees the irony in people paying 15% (or whetever it is) interest on their credit cards but not being able to afford housing? Why do CC’s get away scott free?
        Racking up huge credit card debt is (for most) an easily avoided choice.

        Paying through the nose for shelter is not.

  17. No matter what, at some stage Adam Smith invisible hand will come into play.
    Timing is hard, the outcome easy.
    No government has ever been able to manipulate the market forever.

    I guess, when the miming/construction boom ends in 2015/16, immigration will slow. Even if the govnuts continue to push for higher immigration, people won’t come if there are not enough jobs. Especially if there are not enough high paying jobs where people can actually pay for the high cost of housing, That is for both, owning and renting.

    I although think that the government should restrict negative gearing for empty properties. After all, if you purchase a negative geared investment with no intend to generate an income, why should you be able to negative gear.

    • @lucaszoe – re your last point: “if you purchase a negative geared investment with no intend to generate an income, why should you be able to negative gear”, it is already the case that you are not allowed to do this, and never have been able to.

      To negative gear (and claim the deductions), you must have invested in an income producing asset / property. And in the case of property it must be available to rent at all times (if you want to claim 100%, or else you have to pro-rata). And when rented it must be achieving a “fair market rate” – so no renting on the cheap to your brother-in-law etc and claiming mega-deductions.

  18. Cashmore nails the issue why change is not on the horizon, and that is because very few people buy a house to live in anymore, it seen as some sort of fantastic personal investment strategy.

    Even those without a house are aspirational – the moment they even get close to that mortgage they have gold rush stars in their eyes and they don’t see the life of debt slavery they have signed up for.

    It is striking how all the bears have started to capitulate. And rightly so, there is almost no place that political Australia will not go to keep this game running. We will sell every asset, we will grow our population at epic rates far beyond infrastructure capacity, we will manipulate the cost of debt, we will give away free money if we have too, we will ignore capital controls.

    Australia is one big get rich quick housing basket case and it aint stopping any time soon.

    This interview was great. It was also a turning point for me. This is well past the point where an individual can do anything about it. I have no debt, I own my own home and i no longer care.

    Greed is the winner, and i can no longer give a fuck.

  19. Thank you to all for the very magnificent discussion of all about Australia real estate and economy.

    The interviews like this should have more prominence.

    Gunnamatta, you should come in from the cold