Australian property and the economy we want

One of the key themes amongst a lot of the comments on any given real estate related piece here at MB is the discussion about how and when there is some form of correction (if we set aside the spruik of endlessly elevated, or foreign or investor demand into the stratosphere) in Australian real estate prices, about how this comes about, and about how the economy manages that.

At one point earlier this week I found myself chewing over the Australian economy with the Oz analyst of an investment bank (in the UK – we mulled it by skype) and in particular the experiences of the UK/Eire (he is Irish) and Australia now. I found myself generally agreeing with the idea that currently we have a body politic in Australia which not only doesn’t want to address real estate prices but which seemingly wants to bring about austerity (to some degree) and implement measures to try and boost domestic economic performance around a central idea of real estate prices not coming down from their elevated heights. It seems to me that mapping out my thoughts (as I do below) may be worthwhile for some people – even if they think what I write is rubbish, then at least thinking about why they think so is will help them, and if they add their thoughts then maybe all of us can flesh out the game plan.

At essence the question is fairly simple and has been put to me this week as …….

‘Can Australia craft a productive economy, and generate income with a competitive exposed sector, with house prices, and the debt to support those house prices, where they currently are?’

The answer to that is universally a ‘No’ – I haven’t seen anyone anywhere contend that Australia can, or should try to, create an economy revolving around endlessly high real estate prices.

So then the question becomes one of ‘Does Australia need a productive economy with an income generating competitive exposed sector?’ along with maybe How soon will it need one?

The answer to that is ‘depends’ – maybe it can get away without a competitive exposed sector if mining revenues hold up, or if the population ponzi continues to juice nominal GDP and there is no political fallout from cramming more people in to existing infrastructure. Maybe it can get away with just these in play for a while (which to me seems to be the line of both mainstream political parties). I don’t think anyone would think it can get away without a competitive sector per se, but if there is a plausible next boom on the horizon then maybe mining revenues and the population ponzi buy us the time to get there.

That then brings me to ‘Is there a next boom somewhere on the horizon? A year ago people were touting LNG. Anybody still doing that now probably needs to ease off on the magic mushrooms. So, at some point I tend to the view that….

1. Australia will need a competitive externally exposed sector in the domestic economy.
2. Australian politics will reflect this need in a way it currently doesn’t.

That said, there is a line of thinking suggesting that even the most competitive economy in the world is not going to be doing all that well at the moment as the global macro is basically stuffed. So that could well lend itself to not doing much and playing for time (as it were) and supporting real estate prices in that context may make sense.

From there I come back to the question of does Australia create a competitive globally exposed sector with house prices where they are – with mortgage debt to GDP where it is, with wages needing to support that debt, and with the external facing sector needing to accommodate those wages? For me the answer is no.

So from that point the next thought I come back to is How do Australian real estate prices (and the debt supporting them, and the wages required to make that debt supportable) get transitioned back to a level where that competitive external facing sector can develop?

The short sharp shock

One thesis posited often enough (including by me – not that I think it necessarily desirable, but rather where the narrative I am seeing is leading) is the short sharp shock or crash school. For mine this would involve real estate prices rising sharply, supported by credit (we have had these), with that credit becoming progressively less justifiable (do we have this?), with the finance market invariably overshooting (in terms of credit extension) and arriving at an ‘oh no’ moment from which some people attempt to exit, and which leads to other people becoming concerned, exiting, and prices potentially dropping sharply (how far off is this?). A lot of the discussion I see tends to revolve around whether interest rates should be allowed to go lower to sustain aggregate demand (or bring the lower AUD about) when all that seems to be happening is the feeding of property speculators, as opposed to the possibility of raising interest rates (with a view cathartically frying some over leveraged property speculators – but to my mind adding to the Dutch disease problem Australia already has and I would expect the utter traumatisation of the Australian financial system, and from there the wider economy [that isn’t to say I don’t agree in many ways with the desirability of giving property speculation and the banking sector the knee in the nuts it deserves, but that I think very few people espousing the view actually get the nuance of what it is that idea entails. There were comments in the press in the wake of the Financial System Inquiry to the effect that real estate prices arguably represent the major financial system risk to Australia, and I tend to agree with that.])

Given the linkages between the Australian banking system and the real estate sector (and one really must be aware that we really do have the only banking system in the world that lends 60% for mortgages and 40% for something productive, and that that banking system sources about 20-25% of what it lends in global wholesale capital markets because Australians don’t save enough) that line of thought brings me back to What are the implications of a decline in Australian real estate prices for Australian banks and the wider economy?

The first thing I think is that the mortgages the banks hold are ultimately assets against which they borrow. If Australian banks were to mark-to-market and reduce the implied value of the mortgages they hold then they would need to provide more assets as ‘collateral’ [and the process by which this occurs is far from straightforward – I would point to some of Deep T’s writings for more on the ins and outs] for their borrowings and probably face higher borrowing costs. From there that leads me to the view that a decline in Australian real estate prices may actually act in a similar way to an interest rate rise for Australian banks – insofar as it makes their cost of capital more expensive. In the current environment, with demand where it is, my guess would be that this presents major problems for the Australian economy – though if the minor portion of bank lending in Australia is for something productive then the impact may be muted (likewise if the bulk of lending is for real estate investors [as opposed to owners] – seen as exhibiting a lesser flow on effect in terms of spending – or not otherwise leading to a flow on effect through the economy sufficient to support aggregate demand) – with likely negative system feedback impacts though employment and spending.

The question for the banks of course is their profitability at this point, or (in the worst case) their underlying viability (if we assume that their mortgage lending is such a significant proportion of their operations, that a correction could be significant, that their deposits are such that they have considerable reliance on wholesale funding). Raising funding is not an issue in a circumstance where the rest of the world is printing money, where yields here are significantly higher than those on offer elsewhere, and where they benefit from the government deposit guarantee and where they are fairly overtly backed by the federal government which has (and provides them) a AAA rating. But once the government loses the AAA (which backstops the banks two ratings points: est) – presumably in a worsening economy and/or global macro event – it is not inconceivable this could occur when international credit to the banks becomes more problematic, which again represents a dangerous feedback loop – bearing in mind that this [post 2008] economic cycle is rapidly approaching the sort of end-of-cycle moment traditionally accompanied by major volatility and market collapse. That feedback loop gains even more substance in the shape of risk provisioning and NPLs likely to be encountered in a deteriorating economy. I assume too that anything large enough to disconcert the financial system will be communicated to and felt within wider society (though with the Australian commercial business media one could not be sure) with concurrent negative impacts on sentiment and spending.

Essentially the short sharp shock would be likely to be exceptionally painful in an economy which has not experienced a significant downturn in a generation.

The slow melt

The alternative real estate transition mechanism to a level supporting a globally competitive sector of the economy is what is generally referred to as the slow melt thesis. This appears to be the model which the RBA holds to, and which most regulatory agencies commentators and politicians (insofar as they comment on house prices at all). It revolves around the idea that house prices can continue growing, but that the level of growth being experienced decreases over time to a level less than wider economic growth and that the underlying house prices to [rental] yield, and house prices to credit [and thence to wages] ratios come back over time.

For mine, the risks to this theory are all too apparent.

It relies on house price growth being contained. Currently there is minimal scope for house price growth being contained because that section of society with access to debt sees key features about housing (when it looks at housing as an asset class) which make it the one sure fire speculative position to have exposure to if the economy is to go into recession (or near recession) but also if there is to be any economic growth going forward because:

  • There is widespread belief there is a housing shortage.
  • It is generally recognised that post 2008 immigration (running at more than 300 thousand per annum, against a 30 year average of approximately 70 thousand per annum) is generating immediate need for considerably more housing.
  • The demand by foreign (predominantly Chinese) investors in Australian real estate (Estimated by Treasury at approximately AUD$25 Billion in the first 9 months of 2014, cf circa AUD$13 Billion for the whole of 2013) is expected to continue and to continue being encouraged by Australia (recognising that increased immigration supports aggregate demand, and that real estate purchases are seen as supportive of immigration rights, and that Australian real estate purchases by foreign national are barely monitored or regulated in any way by Australian regulatory authorities, with this situation expected to continue).
  • Real estate ‘investment’ is actively encouraged by the taxation system (Negative Gearing, Capital Gains Tax concessions, Superannuation Concessions for high net wealth individuals [more inclined to invest in real estate] greater scope for investment vehicles to borrow for wealthier individuals [SMSFs]).
  • Real estate investment is the single most heavily promoted form of investment in the media.
  • Real estate is the most extensively encouraged investment class by the banking system (investing in almost anything else is far more difficult – indeed investment in productive endeavours such as small business is often dependent on real estate ownership).
  • Real estate (the PPR) is the only asset class excluded from asset calculations leading to social welfare support mechanisms.

Beyond this there is..….

  • Widespread awareness that it is effectively policy that the Australian government and RBA is cultivating an environment where housing construction is the mainstay of demand support while the investment phase of the commodity boom declines from about 7.5% of GDP to its long term average of about 1.8% of GDP in the absence of other plausible demand supports (i.e. a competitive externally exposed sector of the economy).

And beyond that again there would be some awareness that preventing real estate price falls and prompting real estate inflation has been the strategy pursued in the United Kingdom to generate an economic turnaround of sorts, as well as the experience of places like Eire which have been socially catastrophic in many ways.

When all is said and done these factors make real estate the preeminent ‘investment’ class for most Australians. It is the investment they seek first and in the largest numbers, with the most regulatory and institutional support. In this it, more than any other investment class, would be representative of the national sentiment. The only way I could see it growing by less than the national economy would be if it was realistically replaced by something else as an asset class attraction, but this would require such an asset class in existence together with considerable cultural expectation change.

With mortgage debt at approximately 90% of GDP, the only limit to exposure of many people to real estate is the limit to the amounts they can borrow to expose themselves to real estate or concern about their employment being supportive of their continuing to support their exposure – in circumstances where mortgage lending is what the banks do mostly, where the banks make the largest margins, which banks see as being least risk, and with banks having most accurate and reliable historical data. At a certain level neither the banks nor the borrowers can help themselves, the same as state governments are effectively addicted to real estate stamp duties and local councils to developer charges. Expecting Australians to ease back and into something more productive would be broadly akin to expecting wildebeest on the Serengeti to hold back on the grass while it grows a bit.

Beyond that there is the underlying economy, which needs to grow faster than real estate prices for the slow melt to occur (supporting real wages growing faster). It is dependent on real estate prices rising currently, and other drivers are not on the radar.

This brings me to the point that the reason they are not on the radar is because of real estate prices having been pushed to where they are. Where they are represents …..

  • Mortgage debt to GDP having been pushed towards (beyond) its reasonable limit (90% of GDP).
  • The expansion of credit availability in the period since the early 1990s to the point where debt to disposable income in Australia has never really declined from about 150% in 2008.
  • A mining boom since the mid 2000s which has provided a century high in terms of trade, incomes (therefore borrowing capacity), and sentiment (and spending sentiment).
  • A period post 2008 where the rest of the world has had ultra loose monetary policy (if not straight out money printing) which has flooded to Australia seeking a yield and AAA rating (a lot of which has made its way into house prices), which has in turn pushed the AUD far higher than it might otherwise have been and enabled considerably greater spending power by Australians for a long period of time.

This situation has led to a current economic position where a potential investor in some form of productive endeavour in Australia would see:

  • Future domestic demand crimped by a need to repay existing debts.
  • Potential employees needing to maximise their labour costs to support mortgage repayments.
  • A current AUD held higher than it may otherwise be via the banks accessing large volumes of capital from international wholesale markets (issuing bonds providing greater access for international capital to access AUD) – diminishing any potential competitive position.
  • A government fiscal policy stance not conducive to supporting business (approaching and threatening austerity).
  • Land costs being a significant factor for any business.
  • A general labour cost which sees quite menial functions in Australia currently paid more than more specialised functions in other developed economies.

For these reasons (and others just not coming to mind as I sit here and type) I don’t really see any form of slow melt actually happening. What I do tend to see as happening is that real estate prices will be held in place by any means available for as long as possible, and that ultimately the objective of preventing real estate price falls will only be let go of at the point where the objective is no longer sustainable.

Until that point I tend to see the political and economic imperative as being to support real estate prices at their elevated levels, maybe even to push them higher, and to try something, or anything else, which may conceivably position the nation better for economic growth. Indeed I would argue that currently the imperative to support real estate prices (amongst those in power – who have been demonstrated to have real estate portfolios worth millions, and for which they are personally responsible) has greater primacy than even economic performance (which can easily be blamed elsewhere when it doesn’t happen, and is easy to countenance when the individual circumstances have been looked after).

Given the large volume of support already lent to real estate prices by factors above (population ponzi, planning and development restrictions, credit extension, taxation concessions, the government backing of the banking system’s credit rating etc) it is difficult (for me) to see what else could be done to prop up real estate prices – allowing superannuation to be used for a deposit for younger home buyers would be one, but it would only be an effective transfer from one generation to another [given the preponderance of the 55+ cohort in property investing] and would doubtlessly undermine the effective functioning of the superannuation system (which may have its own unknown unknown financial system impacts), or maybe the reverse mortgage of entire investment property portfolios by the government for real estate ‘investors’ by a government prepared to hold and manage those portfolios with a portfolio specific profit maximisation strategy.

The radar

The macroeconomic outlook is pretty ugly. Australia has a heavily indebted, expensive labour force without a discernible competitive economic sector apart from natural resources (for which we are past the once in a century boom) and reliant on selling off national economic assets to fund a generations worth of current account deficits (in addition to agricultural land sales equal to double the landmass of Victoria – presumably all higher quality agricultural land – there has been a long period of corporate asset sales and takeovers – particularly noticeable in sectors which are either heavily influenced by natural monopolies [eg airlines, telecoms] or represent choke points on potentially competitive economic sectors [particularly agriculture, port facilities, electricity]. The mining investment boom is waning, Australia has offloaded manufacturers, and it is waving goodbye to car manufacturing (a significant employer in VIC/SA) over the next 18 months. The government (at all levels) is looking to pare outlays, there is no macro driver in place to support Australian demand. The workforce to retiree tipping point has passed and the bulk of the baby boomer retirement phenomena is ahead of us. If I put a tinfoil hat on we are due a major drought.

The scope for continuing to support real estate prices

In that environment, as others (notably HnH and UE) have written the lack of a competitive sector and the sharp fall in national incomes is now transforming into an incomes shock, which will go some way to bringing about an extended period of economic under performance if not a technical recession (almost impossible with immigration running at the levels it currently is). Current policy is to stimulate housing construction to offset this, and it is a widespread sine qua non, that existing real estate supports could not be touched while this unstated policy is in play (without questioning whether the same outcome – more house building – could be far more cheaply and effectively be stimulated by other policy means – easing development restrictions, limiting capital gains and negative gearing to new construction only etc).

Currently the budget is running at circa 21% of GDP – very low by international standards – justifying an AAA rating for the sovereign. Historical precedent (admittedly now old) suggests that in the event of a downturn the automatic stabilisers (increased social welfare, etc) will push that beyond 30% of GDP (as HnH points out regularly). At that point (or at the point where the balanced budget over the budget cycle is no longer plausible) the AAA rating goes for the sovereign, which means that the ratings support it lends to the banks balance sheets goes, which means their ratings go and which means their funding costs rise.

In the pursuit of retaining that AAA rating the government will try to reduce outlays, and the revenue projections experienced this year can be expected to be typical of those to come with declining commodity prices likely to undershoot projections on which the federal budgets are made (though the experience of the West Australian state budget this year is illuminating also) and lending an imperative to reduce outlays beyond that known to be required.

The experience of the 2014 budget (which has still not passed the Senate) in trying to impose greater fiscal austerity on the provision of pensions and social welfare support (and has politically failed) is likely to lead to pressure to curtail budget outlays in other areas, as well as reduce taxation concessions. Superannuation concessions and negative gearing of existing residential real estate [as opposed to new construction], in their current forms, may be difficult to ignore in this context, as well as a range of other phenomena which support real estate sentiment (including the exclusion of the PPR for pension access purposes, access to superannuation lump sums etc) . I tend to assume that removing any of these will be pretty tough politically, with impetus to do so only shaping when the national economic agenda moves from trying to preserve that we (as a nation) currently have (as opposed to who has it) back to (as pre-late 1990s) creating that which we want.

My guess would be that we will approach something of an inflection point as more people realise the costs preserving the economic ‘now’ imposes on the creation of the economy we want, with (I would have thought) something of a first mover reward for whichever mainstream political party identifies that the economic future facing demographic is more politically rewarding than the economic past, but that any political narrative moving too soon could be punished by the ‘now’ demographic if it moves too early.

The wild cards

There are some major potential risks even to that sort of transition which I would guess would have major implications for either the unemployment, the budget, the bank lending etc narratives.

The most obvious to me is the possibility of an end of market cycle breakdown globally. It isn’t altogether clear to me that this isn’t in play globally, and my suspicion is that some of the crude price breakdown reflects this (particularly when seen alongside the breakdowns of other major commodities – particularly those important to Australia, iron ore, gold, coal, and LNG). I find myself wondering how the world responds to a major downturn in expectation about the economic future – at the moment I have Japan gone, Europe gone, China looking very much like slowing more than anticipated, emerging markets gone, and only the US enjoying anything like buoyancy [and how sustainable is this if the crude price knocks out the alternative oil gain which has partly driven the US rebound – strong enough to drive a global upswing?].

In 2009 and 2010 Australia was one of the refuges of global capital because the mining boom and China stimulus made Australia a sure bet. It wouldn’t be this time around, and may effectively suck capital from Australia, pushing the banks to increase rates for lending (at precisely the time they wouldn’t be wanted) and reinforce the local impact.

The other wild card for mine is the political narrative. At the moment neither of the two major political parties will mention housing (particularly housing affordability) because they know the risks this entails of a political backlash from those who ‘own’ the houses. But continuing this position isn’t risk free and is opening up scope for another political outlet (independent?) for sentiment seeking to ask questions directly about housing, but also about other ‘no-go’ areas in national policy, including immigration, education and (plausibly) the economic narrative.

The longer they remain no go areas for current mainstream politicians the more substance they provide alternative politicians when they do get raised. In the current situation of a government becoming more profoundly unpopular by the day, facing an opposition which was equally reviled not 18 months ago (and with leadership which is viewed with a fair bit of suspicion) and has not sought to establish policy primacy anywhere, coming to an election within 2 years, anything which can seize a piece of the national limelight may conceivably get political influence out of all proportion to the actual number of votes involved, but may also conceivably get a surprising number of votes.

The disturbing degree of youth unemployment (we are now starting to look like Club Med) and the overt superiority of other nations for education (compare the costs in Europe with those here) and opportunities for those with good educations may be another source of social change driving a political imperative.

Preparing for the future

So I suppose from all this I see Australia and its management of real estate and the wider economy bumbling on as is until the point where doing so is no longer plausible – electorally or economically. I don’t see the slow melt happening. I don’t see the will to address the core issues until crisis has shaped the need to do so. So logic pretty much tells me that I wouldn’t expect anyone to invest in a venture in a globally exposed sector of Australia’s economy while that series of interlinked factors is frozen in play.

Ultimately as the parent of two kids I am pretty firmly of the view I will be taking them overseas for the sake of their careers and lives at some point, so I educate them with that thought in mind. The price of Australian real estate now will require long term repayments, and I don’t think these will prevent the correction of Australian real estate to levels required to sustain an effective economy over the longer term.

Indeed, I tend to the view that Australian real estate is right up there with about the worst long term investments one can make if one is going into debt to make that investment. Some young families are locking themselves into paying mega mortgages for a generation in the speculative hope the place will go up in value and they will be able to sell it for a gain. For the nation, Australia has locked itself into the current high real estate prices shaping its economy for some time to come (in the direction of becoming the holiday resort or retirement scene that parts of the Mediterranean have become rather than something productive? – and even in those places housing is cheap). For me it is a simple matter of when it realises this is the ‘investment’ it has made and the economic costs this entails.

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Comments

  1. Gunna
    We don’t have a free ride from commodities and agricultural products any longer
    Everything hinges on the ability of the punter to repay the debt.
    Income for a punter is invariably a job.
    We have already, this week, been advised on the effect of technology on most jobs, ie they will be replaced by software, and for a fair proportion in a manufacturing sector the robots are coming. Moore’s law and all it entails.
    Bringing in migrants only makes jobs thinner on the ground for all.
    Migration has to cease as of 1 Jan 2105.
    Fiji brought in rules on ownership of dwellings by foreigners and we have to follow that path.

    Your overnight thoughts are wrapped in macroeconomic limitations, what is needed is structural reforms to immediately address the ability of the punters to retain jobs and hence repayments.
    Should property prices collapse, as God highlights, those who suffer will be best able to manage it.
    There will be collateral damage, and that is just how it goes.
    You coming from Geelong, will know first hand how this nation was established, or you should know, and you will also have witnessed the closure of factories which signal the new environment.
    Additionally the place is built out almost to Torquay, we just have too many people for the place to support. Realise that and you are mostly on the track to finding the detail of an answer. WW

    • “Fiji brought in rules on ownership of dwellings by foreigners and we have to follow that path”

      We have rules on ownership of dwellings by foreigners.
      We choose not to enforce them.

      • but they have a different business model based on different issues

        Australia and others like NZ have discovered the infinite growth business model

        it’s quite simple really – as long as there are billions of people in the world there will be millions of millionaires

        it ebbs and flows but it’s simple numbers

        any country with a small population can grow for a long time before it really turns to shit

        though of course it means daily there are more and more current inhabitants who will find it does look like shit

        as long as we keep importing rich middle class types camouflaged behind such things as skills and family links

        prices will go up for a very long time

        because of who it is we favour as new Australians it also means that voting steadily moves right and those disempowered in the model become poorer and poorer relative to the rest

        eventually we’ll have a captive population of poor who can service the needs of the rest

        that’s the model and i do not ever seeing it end unless sufficiently large numbers of middle class people start suffering and identify with those they currently look down upon

        p


      • it’s quite simple really – as long as there are billions of people in the world there will be millions of millionairesit ebbs and flows but it’s simple numbersany country with a small population can grow for a long time before it really turns to shit

        If your country’s population grows at a much faster rate than the countries supplying you with millionaires, that will tend to bring the ‘turning to shit date’ forward.

    • And I presume to repost my comment from the first thread too:

      Tops, Gunna.

      I too have been reflecting about sector revival. A significantly weaker $A restores the competitiveness of import-competing manufactures. Before the magpie chorus starts up, there is still remnant manufacturing around. It has had a long hard kicking and lies bleeding in the gutter, but there it is.

      Your point above about workers being obliged to ruthlessly pursue highest wages/wage share or starve because of land costs is well made. But this is not true of the young mobile underemployed renters in mindless retail or pulling lattes in suburban strips for the statutory minimum.

      Manufacturing can be surprisingly capital-lite. Industrial rents are cheap and so are tools.I am not suggesting manufacturing will seamlessly fill the gaping chasm of mining investment, but there is potential for this sector to put on a burst of speed with the aid of astute industrial policy. I know the jeerers and sneerers are having conniptions now, but stay shut up a bit longer.

      Industrial policy builds on education, cleap land, cheap power, access to markets, fair taxes, competitive currency, good transport and a culture of innovation.

      We are at fail grades on too many of these to ignore. They are the domain of government, not the private sector – which is why I speak of industrial policy. I have no confidence the Abbott government would even begin to address this – to our great cost. But the ALP might. Or the Phoenix rise of a third party many MB’ers call for.

      Another area of unseen strength is the food bowl. The National Party uses this is code for land price gains in Northern Australia, but I mean something quite different.

      We have a niche in quality food products that could grow exponentially – over decades, not years – nuts, olives, wine, cheese, you name it. South East Australia has plentiful land at any conjunction you want of climate, soil and water currently growing cows or wheat. It is as underemployed as our baristas.

      The policy settings agriculture needs are the same as for industrial.

      This modest political agenda also has something missing from our political narrative for a very long time: integrity.

      • GunnamattaMEMBER

        Good points DC,

        I think the whole narrative of doing away with the ability to make things in favour of selling things off to buy them from elsewhere needs to be looked at.

        I know people see it as code for splashing money about wastefully but I do think industry policy will be coming back onto the national agenda in the coming years.

        And I tend to agree on the politics/3rd party theory (though am not necessarily wedded to it)

      • Actually, I think our agriculture still receives a degree of industrial protection that manufacturing does not, in the form of Australia’s strict quarrantine regulations.

        I’m actually in favour of this – opening the floodgates to cheap imported agricultural produce that will almost certainly be contaminated with pathogenic organisms that will inevitably spread to our farms is pure madness. But there is constant pressure to do so nonetheless.

    • GunnamattaMEMBER

      Sorry chief, I wrote it up last night in a bout of mulling things over, and loaded it up to the ASX close post and another where people were chewing over the economy.

      This morning I threw it into the Gotti post because there wasnt much chance for anyone interested to chew it over last night. Some punters suggested I load it as a post (I take that as a compliment). I got in touch with LvO and DLS to throw it up as a post if it was a quiet afternoon. Thats how it got up that many times. It wasnt planned as a ‘post’ as such – but was mainly a brain fart through the narrative as i see it.

    • Lorax mate, where were we when we could be making motza?

      SAN FRANCISCO – A company founder focused on helping Americans nurture the growth and evolution of their biggest asset – their homes – has been named USA TODAY’s Entrepreneur of the Year.

      Porch connects homeowners with vetted contractors. But beyond that, the site serves as a platform for homeowners to “tell the story of their houses,” says Ehrlichman, much the way LinkedIn spells out the details of a career.

      http://www.usatoday.com/story/tech/2014/12/11/porchcom-usa-today-entrepreneur-of-the-year/20203863/

      • +1 mig – top link 🙂

        it makes me reflect on the one external factor no1 has mentioned. The collapse of (waay) overpriced social media stock, as the ultimate ‘pin’ of the global macro bubble.

  2. Ultimately as the parent of two kids I am pretty firmly of the view I will be taking them overseas for the sake of their careers and lives at some point, so I educate them with that thought in mind. The price of Australian real estate now will require long term repayments, and I don’t think these will prevent the correction of Australian real estate to levels required to sustain an effective economy over the longer term.

    My sentiment exactly. Australia doesn’t have the economy to support the kind of education and career options you get elsewhere, even during boom times. I’m really struggling with the fact that options seem to be minimal and I want my kids to have the options available overseas.

    Whether a housing correction happens or not… I’m over the question actually. Don’t really care anymore, no longer relevant for my personal situation.

    @Lorax, how come you became such a grumpy commenter? I remember you being quite insightful and constructive a couple of years ago? (Not bashing, just an observation)

    • if kids are close to uni age than Europe seems to be an obvious way to go, but if kids are younger the idea may not be so good for few reasons:

      – Australian housing will crash soon (within few years) and it will crash quickly
      – crush will be of epic proportions (nominal prices will fall 50-70%, in some rural coastal areas even more)
      – within 10 years economy will recover from the crash to some realistic level (level that enable middle class to live within middle class means – as they did before boom – no more 3 month trips around the world, fancy restaurants, vine tasting tours, expensive furniture, art, no new fancy cars, …)
      – situation everywhere else will get much worse (especially in Europe)
      – high probability of wider conflicts

      • “within 10 years economy will recover from the crash to some realistic level (level that enable middle class to live within middle class means – as they did before boom”

        As they did before the boom? They didn’t! Australia hasn’t lived within its means for nearly 60 years – well 55 anyway.
        Many here write of the vicious circle we are now in. The education system is all screwed because of the stupid economic policies over two generations.We’re turning out people to fill the economy we have which is unsustainable. However even if your children choose a career that would normally kit them for careers in a sustainable economy we no longer have such jobs available.

        On the ‘industrial’ face we have closed down industry everywhere – not to make room for mining but for building offices, shops and houses, and for working in ‘prestige’ jobs like Banks, Govt offices, lawyers etc etc etc. As China Bob has talked about so often to get industry going you need a whole ‘collection’ of industry thjat supplies and provides the sort of support goods and services that are needed. How the hell do we do that?

        Lastly we have an anti-industry philosophy current in the country. Before anyone will think about starting something that has to be fixed. How?

        These problems have been developing for nearly three generations. I can’t see, even if we were willing to start immediately, how it will take much less than that to fix. The problems will be magnified if/when we have to fight a war or two during that time.

      • I find it much harder to tell when you are kidding. Reusachtige is a classic example of someone I can always tell is kidding – which is most of the time, which leads some who came to MB late to think he is sincere and an idiot.

    • “Australia doesn’t have the economy to support the kind of education and career options you get elsewhere, even during boom times.”

      thats so true…

      I assume that would be one of the main reasons young people leave Australia. Even if house prices were normal, theres not enough industries here for young people to develop a career they want imo. Australia’s too boring and isolated.

    • I said exactly the same sentence to my boomer parent this afternoon, as parents to young children, there isn’t much to keep us here once they don’t need much grandparent support.
      Fantastic article. I’ve been trying to tie it altogether recently so appreciate your insights.
      If the AUD does go down, what happens to the 300k net migrations? I suspect the UK and EU people might feel like they get a better deal elsewhere..

      • If the AUD goes down Australia will seem affordable again for migrants who have not yet made the move. Australian Real Estate seemed cheap when I was still living in Europe, although this was also before the insane price increases since 2009.

        If the Aussie economy goes down the skilled migrant flow will drop I reckon. Skilled migrants have options and they do not come here to escape persecution nor to find better (economic) chances. They come over for a lifestyle idea.

        I will go home when the economy goes down, although to be fair that will merely decide the “when” as the “if” has already been decided on.

        Telling perhaps is that a migrant colleague of mine did ask me recently: “so, you reckon we’ll have to move soon?”, when it came to the economy. We have both seen the current downturn coming for quite some time…

        I think her question is very likely going to be asked in many migrant families.

        • GunnamattaMEMBER

          Its already being asked by plenty. I know first hand migrants who are in the process of upping stumps for North America, or who have gone.

          There are a few who are waiting for passports etc. I was at a do yesterday where the subject was chewed over quite openly, and the consensus was hang around while the going is OK workwise, and while there are kids involved, but be prepared to move afterward.

      • Gunna, if your buddies are moving to Canada they may be going from the fry pan into the fire.

        I’ve been going to Britsh Columbia for six weeks a year for four of the last five years and have seen a dramatic change in the work opportunities and real estate prices.

        People are doing it tough there and the Canadian economic situation is very similar to Australia’s. The only differences is we are a couple of years behind them.

  3. Failed Baby BoomerMEMBER

    Gunna, congratulations on your post. Your housing scenarios of sharp-shock, slow-melt and support-at-all-costs are well presented and debated.
    Will the future reveal a single scenario or an evolution and combination of two or three?
    We live in interesting times!

  4. With the depreciation of the dollar, the cost of housing finance will probably increase since overseas lenders won’t want to take a cut, nor will bank shareholders, and local depositors aren’t playing, given the low returns. Those left standing, and least able to resist taking pain are mortgagees.

    Cuts by the RBA won’t help those mortgagees.

    That might be the precipitating factor for a slow melt.

    And if existing finance is unhedged, then a rather faster melt.

    • “Those left standing, and least able to resist taking pain are mortgagees.”

      I can’t agree on this as most mortgages were taken out at higher interest rates and since then principle has been repaid. On the whole, mortgagees are the most able to to “take the pain” (away from savers) and most fairly too.

      • The point I made was that mortgagees are least able to resist taking pain. By that I meant they have the worst bargaining power compared to the foreign banks, local bank shareholders and depositors.

        As you say, it may well be that they can pay…depending on how much it is they get squeezed.

  5. “slow melt” scenario is impossible because Australians are completely delusional about housing!

    wake up will be so painful – unbearable for many – suicide rates will skyrocket

  6. Excellent analysis. I would ask only one question more:

    Don’t you think that if there is the same malaise around the world, maybe it is serious systemic failure and relying on politicians to make fundamental structural changes is maybe utopian?

  7. Nice work Gunna but it’s quite evident that the whole thing has got you a bit ‘down’, which is perfectly understandable and we’d all be telling mistruths if we never accepted how hard this all seems.

    And I do believe that developing a plan for the younger generation is a smart thing to be contemplating and I’m examining the OS options too for the kiddos but let’s think about what about when they may return?

    And I suspect that right now, you’d just prefer to be left alone and doze as you’re feeling pretty tired, and rest your head on that bar top, but I’m pulling back and just about to let go on the elastic of your suspenders as I want to be sure you’re alert when you hear this.

    We all see it and its going to happen. Why the hell the Transport department put that level crossing at the bottom of the mountain, I’ll never know, but, we’re out of air for the brakes, and the solenoid on the Jake brake has let go and we’re moving so fast we can’t do anything but stay between the ditches, and unless that freight train ahead decouples the last 100 cars, we’re going to twist and reshape alot of steel and trade some paint.

    Point being, after that moment, while the dust is still in the air and all those still breathing are taking stock, that’s the time to begin the classes in the ‘School of Hard Knocks’ and I’m suggesting that you be the Dean of the campus. There’s going to be the need for alot of ‘re-education’ as to what’s needed for the future and there are many (many) looking for an individual who has the capacity, resolve and drive to step up and do what needs to be done.

    For too long, too many of the noble sons and daughters of this land who really cared about and respected what the original vision represented all those years ago, have been bound and gagged by the ‘beast’ and all one has to do is look at the contemporary cabinets in Canberra or the capital cities to see just how far things have devolved.

    Back to the mission of reshaping the ‘belief systems’ of the people, they are not ready, yet. But they can all ‘feel’ that something is happening, something is developing and something is approaching.

    Their visceral and instinctive motivators are sending messages that they cannot ignore. They are slowly but surely realizing that the end of the great Aussie ‘Debt-o-cene’ period is closing fast.

    While they are certainly concerned about their personal and family’s safety in a storm of this magnitude, you’ll also see a concern for their neighbour that is always evident during other epic natural disasters-quakes, fires, tornados, and cyclones; that’s the fabric of the people and they want that back in a handshake that can be trusted; as they are sick of the counterfeit version that the FIRE industry has tried as a replacement.

    There is no doubt you have the spirit. There’s no doubt you have the ability to craft phrases which inspire and give hope and there’s no reason the list of willing protégés would be not be lengthy.

    The time for action approaches and the enemy is not those who have ‘created’ this monster, but those who have allowed it to continue to exist for so long. Us.

    The ‘complaints and observations’ semester is nearly complete. Looking forward to the next one and your upcoming syllabus on rescue and rebuilding!

    • One of the depressing things I have read recently, and found quite convincing, is Phillip J. Anderson “The Secret History of Real Estate and Banking”.
      The problem is that these property price boom cycles can go on for so long, and a downturn that should have been an actual crash could have been averted by government playing dirty tricks (eg in NZ and Australia in 2008) – that the likelihood is a HUGE crash later instead of a medium one earlier, so much further down the track that everyone will have resigned themselves to it never coming!

      This might not be till 2023-2026 in NZ and Australia.
      One of the biggest problems is that women regard their men as “losers” if they don’t “own” and it is very, very hard to hold out against that for as long as is necessary to finally be proved right. So when the real big crash comes, it really does take down the maximum number of victims you can envisage in your worst mightmares.

      Not only will speculating maniacs have been gearing up with more and more overpriced additions to their portfolios for more and more years up to the bitter end, but numerous first home buyers will have been enticed into the market with “innovative” solutions, not just involving finance, but involving disgraceful sacrifices in housing space and quality. Expect large numbers of deeply distressed “owners” or PART owners of tiny shoe-box type “homes” for which they will be mortgaged to the extent of 6 to 10 times their annual incomes, in which they will end up massively in negative equity.

      The Irish could end up looking lucky that their housing markets crashed early and taking the powers that be by surprise, with the median multiples doing the following:
      2007:
      Cork 4.7
      Dublin 5.4
      Galway 4.6
      Limerick 3.5
      Waterford 4.1

      2008:
      Cork 5.4
      Dublin 6.0
      Galway 5.6
      Limerick 4.3
      Waterford 4.9

      2009:
      Cork 3.6
      Dublin 4.7
      Galway 3.2
      Limerick 4.2
      Waterford 3.7

      Get that – their HIGHEST median multiple was 6.0 – in Dublin.

    • I have attempted to reply to this and it has been blocked by the spam filter. I will attempt to post the comment in 2 parts at the bottom of this thread.

  8. I would place this entire debate in the context of the “New Eilte Consensus” and suggest that the outcome will (in the absence of concerted popular action discussed below) be population ponzi continued and expanded as required to protect Elite interests.

    The New Elite Consensus is the program of abolishing the ideals of the Modern Era – the ideals of egalitarianism, popular democracy and self-determination – and reinstating the traditional Rule of Privilege with:

    a) entrenched wealth;

    b) corrupt politics; and

    c) supra-national relationships which transcend community (and even national) self-determination.

    Out with the Century of the Common Man. In with the restored Rule of Privilege.

    In the field of wealth, Thomas Piketty has done a good job of documenting the return to concentrated private wealth.

    In the field of politics, the Elite have learned how to effectively subvert the corrupt system of elective government through a combination of:

    a) campaign finance;

    b) the promise of lucrative jobs for obedient politicians on retirement;, and

    c) the transfer of strategic monopolies and tax farms into the hands of private controllers, making politicians ever more dependent on the goodwill of the private financiers.

    In the field of self-determination, local (and even national) self-determination is being abolished in favour of opaque and unaccountable supranational institutions (the EU, the web of so-called “free-trade” agreements) which can be used to impose Elite interests against any aberrant national government.

    How does this impact on the current debate?

    One of the unintended consequences of this program (a consequence of reinstating the traditional inequalities of wealth) has been the difficulty of growing aggregate demand in developed countries, and therefore of growing profits in developed countries. If the incomes of most of the population have stagnated (because the returns from economic growth are now going almost entirely to the rich) then it is all but impossible to increase aggregate demand.

    For some time developed country elites managed to maintain demand through loose monetary policy: encouraging people to become indebted in order to keep up their spending. But the Global Financial Crisis and its aftermath showed the limits to this approach.

    Some extra demand may be accessed by firms selling into export markets. But for many developed-country businesses this also is limited. Many are uncompetitive, relying for their domestic “success” on favours from political Mates, a competitive advantage which cannot be readily translated to export markets. Others are simply in non-tradable sectors tied to the domestic market.

    If domestic per capita incomes have stagnated, and if the borrowing binge is exhausted, and if export markets are not accessible, there is only one variable left to play with: the number of “capitas”.

    If demand and profits are to grow then the population must be increased.

    This is not just an Australian problem. It is a problem which affects Elite interests in all developed countries.

    Hence the campaign by Elite mouthpieces to allow uncontrolled population growth through migration. It is the only way in which the profits of the wealthy can be made to grow even further.

    Of course, they don’t put it in so many words! Like Elites throughout history, they seek to weave a cloak of virtue to conceal the nakedness of their self-interest. But putting aside the tortured justifications, that is the reality of what is going on here.

    Such a policy is not without its costs in terms of overcrowding, declining services, and the destruction of a sense of local and national community.

    But the Elites who are pushing these policies are generally not the ones who will bear those costs. They will retreat to their mansions, their gated communities, and their country estates. They will not suffer the horrors of inadequate infrastructure and services. Their kiddies will have privileged access to the best schools, and to the expensive Elite universities and high-paying professions. They will not need to fight to find a decent job to pay off their crushing debts.

    And as for a sense of community, their community transcends national boundaries anyway. Like the interlocking royal dynasties of old, they think in supranational terms.

    At the risk of being boring, the root of this problem is the lack of genuinely democratic government. Corrupt government and Elite power go hand-in-hand. When small businessmen face economic difficulties they go bankrupt. When Elite businessmen face economic difficulties, they telephone their friends in government and have the rules of the game changed.

    Wealth -> Power -> More Wealth -> More Power.

    Population growth is simply part of the process by which Elite interests call upon their political agents to change the rules for their to benefit.

    If you care for your children and your grandchildren, look to the system which is destroying their future: the corrupt system of elective government.

    The only remedy is Democracy – genuine Democracy. That is the battle which needs to be fought.

    If Democracy can be won, all else will follow.

    If Democracy cannot be won, any other victories will be short-lived at best, falling eventually to the relentless power of Elite rent-seeking.

    Fight the battle worth fighting.

    It’s the only hope there is.

    • Agree entirely. Convince independents in seats across the country to go with low population and weaken these two fw parties.

      It’s a matter of getting the word out there.

    • Stephen Morris:

      I knew as soon as Piketty was being promoted all over the planet, that THIS would be the cause:

      http://www.voxeu.org/article/housing-capital-and-piketty-s-analysis

      Capital is not back: A comment on Thomas Piketty’s ‘Capital in the 21st Century’

      Odran Bonnet, Pierre-Henri Bono, Guillaume Camille Chapelle, Étienne Wasmer 30 June 2014

      Thomas Piketty’s claim that the ratio of capital to national income is approaching 19th-century levels has fuelled the debate over inequality. This column argues that Piketty’s claim rests on the recent increase in the price of housing. Other forms of capital are, relative to income, at much lower levels than they were a century ago. Moreover, it is rents – not house prices – that should matter for the dynamics of wealth inequality, and rents have been stable as a proportion of national income in many countries.

  9. As an aside I spent most of yesterday reading ISIL literature trying to get a feel for the narrative that’s driving this Islamic Caliphate. Why does it resonate with so many disaffected middle eastern youths? especially in countries as far afield as Libya and Yenen.

    For me the worrying thing is that three quarters of what you’ve written could just as easily have been ISIL propaganda hmmm maybe this is not just an Australian issue.

  10. the question of does Australia create a competitive globally exposed sector with house prices where they are

    Ok, the silly house prices don’t help, but remember Australian house prices in US dollar terms have fallen 10-15% over the past 12 months, as have our wage costs, mortgage debt, rent, etc.

    That is the power of currency depreciation.

    It might take 5-10 years but a weaker currency — and I’m talking an AUD in the 50s — will restore our competitiveness, and when it does, all kinds of unexpected industries will emerge.

    For mine, a slow melt is still the best outcome. Granted, it might not happen, we might be in too deep already, but that doesn’t stop it being a better outcome than the alternative.

    The sharp shock means a financial crisis, a broken banking system, followed by a sovereign debt crisis, a millions of home owners in negative equity, and decades double-digit unemployment. Basically, Spain, Ireland or Greece. These economies will take decades to recover, and they have much, MUCH bigger problems than unaffordable housing.

    I’m sorry, but I cannot see this as good outcome for Australia.

    I understand the frustration of many at the ridiculous cost of housing in this country, and the outrageous distortions that protect it, but be careful what you wish for.

    What sucked the life out of the productive Australian economy was the mining boom. It destroyed our competitiveness, made us lazy, and lulled us into a false sense of entitlement. We are only now waking up to the fact that the world does not owe us a living. Worst of all, the proceeds of the boom were leveraged up and used to bid up the price of existing housing. I cannot think of a more effective way of destroying wealth.

    For those of you who think house prices are our biggest economic problem I say no. A much bigger problem is that everything — EVERYTHING — in Australia is made somewhere else. That should be priority No. 1. The cost of housing, like all other costs, can be very effectively reduced through currency depreciation.

    • GunnamattaMEMBER

      I dont fundamentally disagree with anything you say there……

      I am not saying that i think a short sharp shock is somehow going to be better than a slow melt. I think if there was any likelihood of a slow melt I would take that as preferable. But…

      I am saying that I dont think we are going to get the slow melt – insofar as every last support for the RE sector will be milked to the utmost by the institutional/cultural dynamics in play (to be either boom – where it can be made thus – or bust – because the RE nerve is the most sensitive nerve of the Australian economy, and will be the first to get support, and I dont think there is any political ability to impose some form of discipline on the dynamic over anything but a short timeframe).

      That leads me to the view we will get the bust (especially now that we are having the boom). And I agree with you that a lot of people wanting it dont quite get what they want, and that it will be seriously painful.

      On the rest I agree with you, flawse and David Collyer that

      1. We need to produce things and be able to sell them in competition with the rest of the world.
      2. We need to be able to provide rewarding careers for people producing things.
      3. We need to structure the economy around the two points above

      But I suppose my conclusion was that none of that was going to happen with RE where it is.

      I agree that AUD in the 50s would make us far more competitive (and that productive industries would emerge at that point) But I aso think that given the level of mortgage debt in the economy and the level of offshore funding of that already within the banking sector, taking the AUD anywhere near 50s would in fact rupture the financial system, probably drive the banks to lift their mortgage rates (regardless of what the RBA did), bring about a depreciation related inflation surge (which would have to be looked through – and could you imagine either side of Australian politics in opposition being able to resist scoring points in that environment) and quite likely bring about the unemployment/NPL related meltdown of RE anyway (maybe unless a government was prepared to step in and tell the banks not to sell [or maybe even force people out of] RE being coughed back to them by people unable to support debt because of unemployment etc – but that would be a big ask).

      I also agree completely that having a financial system meltdown is no way to encourage investors from offshore (or even locally) to invest in productive enterprise here – and that it would only be some time after the AUD has been down for a while that the recovery of export facing sectors would start to happen.

      I dont see any easy way out of all this…

      • Fair enough. A bust is probably more likely, and policymakers will no doubt do everything to ensure it happens by defending the rorts until the very end.

        I am simply arguing for what I believe is a better outcome, and cautioning against those wishing for a housing bust.

        Imported inflation via depreciation is never as bad as many believe. There was no rampant inflation in 2001 when the dollar was at 48c. 3d has been trying to scare people for years about rising petrol prices if/when the dollar falls, and of course, the fall has coincided with a general commodities downturn, including oil.

        Offshore funding of mortgage debt at 50c is more problematic, but the dollar is going lower regardless. We’re going to find out just how robust our world-beating banks really are one way or another.

        If we have a housing bust, and a financial crisis, and sovereign crisis, and half the nation’s homeowners are underwater, the dollar is going to be much weaker than under a slow melt scenario.

      • I repeatedly argue that the Irish will look lucky after the 2023/2025 thereabouts Australian housing crash. Better to have a proper crash sooner while the median multiples are 6 and below, than put it off until they are 7 to 10 (or higher) and considerably more hostages have been taken by the racket.

      • Restrict some of the most unproductive capital inflows and that will address the majority of the issues that everyone is wringing their hands about.

        It will not fix the internal lack of reform and support of rent seeking – but it will make fixing them more urgent and perhaps more likely.

        An over inflated $AUS is the result of capital flows unrelated to our trade performance.

        Sure mining was a boom but remember that it barely generated a trade surplus.

        The carry trade is not an accident it is driven by a deliberate strategy by our trading partners to devalue their currencies.

        If the mortgage book is weaned off wholesale lending (which is the main carry trade transmission mechanism) the $AUS will decline.

        Of course the carry trade should never have been allowed in the first place but it was and it needs to be fixed.

        Yes – this may put upward pressure on interest rates but the RBA can address that.

        What is much more likely is that it will reduce the demand for imports and increase the demand for import substitutes.

        If you are serious about a $AUS that reflects our trade performance rather than our capacity to consume our assets then you HAVE to manage, regulate at the very least the most unproductive transactions that drive capital flows into $AUS.

      • “Imported inflation via depreciation is never as bad as many believe. There was no rampant inflation in 2001 when the dollar was at 48c”

        For crying out loud will you, just for once, look at what else was happening around 2001 that meant that tradable inflation didn’t hit hard and look at what the differences might be now..
        You are just placing all your faith in the fairies at the bottom of the garden.

      • Tradable inflation was running far higher than it has been in all the years since – why was the flow on to the CPI more muted?

      • pfh
        “Yes – this may put upward pressure on interest rates but the RBA can address that.

        Nope! The RBA cannot address that – we WILL have higher interest rates in those circumstances – goes with the territory.

      • Leftee – also tradable inflation compared to the dollar devaluation was a lot lower then than it will be in future. At that time China was really hitting its straps as a supplier of low cost goods. My own import prices, even compared year on year ex China, were declining 5 to 10 % per year. As compared to other prlces like Korea and Taiwan when production started in China we were getting reductions, typically, in the 30 odd percent range.Demographics and prosperity re China are totally different now. Robotics is another issue altogether.

        I don’t know the future but it’s one of the stupidest things I know to assume the future will be exactly the same as the past without looking very carefully at the situation to see what things from the past might hold and what might not.
        Frankly the ‘no inflation’ crowd are relying on wishful thinking.

        I will have a new price list Feb 1. Prices will be up more than 10%. That takes a while to filter through in retail.
        Sure there will be squeezes as things get tight – so some prices will remain depressed. However anyone thinking that all businesses have some great profit margin to dip into are being just plain delusional.
        I do want to see the price of plumbers really get broken!!!! What sort of economy do you have when the damned plumber gets paid more than your best doctors, engineers and scientists?
        Then again i suppose that applies to a large section of our economy – particularly RE agents.

      • Flawse,

        The RBA can always address it – i.e. they can always set whatever target rate they want as that is simply a matter of driving up the ES balances of the banks so they lend to each other at the target rate.

        What you are referring to is that the RBA cannot control the price demanded by foreigners to fund a CAD.

        I agree they cannot control that.

        Nor can they control the mortgage rates charged by the banks. Which is why the mortgages rates have been falling even while the target rates has remained unchanged.

        And we know the cause of that – the banks have been busy off shore filling up on cheap carry trade money again. Issuing govt guaranteed private bank IOUs to attract capital which then supports the house price ponzi.

        The reason I make the distinction is that the RBA can always set a lower rate and if the actual mortgage rates are higher than people will blame the banks (or perhaps start to get an idea that there should be a connection between domestic savings and interest rates).

        Politically it is probably easier if the target rate is 2.5% but mortgages rates are 9-10% and TD rates are 5-6%.

      • pfh – re the RBA setting rates – well we agree the RBA cannot set the rates for the general economy – well in terms of controlling how much everyone will pay.
        You probably know more about this than I do but i’ll have to think about the mechanisms involved and my resident, ex RBA, economic brainiac will be home Thursday 🙂 Maybe I can get him to run through it with me over a beer o two!
        However thinking out loud!!!! (just for the sake of it)
        The RBA sets the overnight rate by either withdrawing or adding funds in the market. So to hold down nominal rates, in the face of excess demand from both government and private sector, it would need to continue to pour in massive funds. Obviously this runs you into your CAD and you then have to let the carry trade loose again to fund your deficit.
        There ain’t no such thing as ‘free money’

    • “The cost of housing, like all other costs, can be very effectively reduced through currency depreciation”

      ….and there you have it. The most ridiculous statement of the week.

      • ….and there you have it. The most ridiculous statement of the week.

        Obviously, it was a reference to how the cost of housing affects our international competitiveness. Obviously. But if you want score points instead of having a rational discussion, then fine.

      • In NZ in the 1970’s, an abrupt inflation in house prices in 1973 due to an ignorant socialist government giving free money to everyone to spend on housing, was unwound in real terms as high CPI inflation actually kept nominal house prices rising.

        There are no good options, and I don’t see this one as off the table.

    • A much bigger problem is that everything — EVERYTHING — in Australia is made somewhere else.

      It’ll be a bigger problem at USD 50c, what’s the matter with you?!

      • That’s the hole we dug for ourselves during the mining boom, and now we have to pay the piper. Fortunately, imported inflation is never as bad as the doomsayers (hello flawse!) predict. There was no runaway inflation in 2001 when the AUD was worth 48c.

        Certainly you don’t solve the problem that nothing is made in Australia by propping up the currency forever with higher rates.

      • So, in truth, you’re the crashnik because you want to crash demand for import, which equals crashing demand, which equals rising unemployment, which equals….

        Yes Lorax the piper will be paid, you’re just trying to put it off into the future by paying the bank (at low low rates for longer) instead of paying the foreigner today….

      • Fair enough Lorax but all I’m really saying is we’re going to get it all, the housing crash, the blown-up banks, the UE at 10%, ZIRP, all of it — unless the US really does pull up and somehow pulls us/China along…

      • If the US started fixing some of the worn out infrastructure, they’d have a chance… maybe She-Clinton will get it going

      • Absolutely with you, Mig, the nations that had a proper crash in 2007 will look lucky compared to Straya in the long term.

    • With everything made overseas inflation should rise thus eroding debt. Then again wages are not likely to rise. What do you think?

      • rich – wages will rise for some – those with the power. That means the Bankers, and probably their employees to some extent (or those that are left), those employed by the big monopolies (or those who are left), the lawyers, the powerful unions particularly in essential services or who can hold a section of society to ransom. You’re going to hear a lot of campaigns for wage rises sustained by the words ‘Because it’s fair’
        The average poor blighter, working in less powerful situations especially small business, is going to be expected to pay for it all.

      • rich
        Inflation created debt! It does not ‘erode’ it magically away.
        Inflation is accompanied by severely negative RAT rates. It pays handsomely to create debt and it costs heavily to ‘save’ in any fiat term.
        That is exactly how we have arrived at the situation we are in. We have created debt and inflation to ‘erode’ it so we now have massive debt levels that we have to continue to have inflation.
        At some stage this will explode into very high to hyper-inflation.
        You see Bill Evans calling on the RBA to ignore inflation????? That’s what it will be like. Higher and higher inflation while holding IR’s down. The end result is a loss of trust in the currency. Then everything goes totally haywire and dictatorships and wars follow.
        Economists think they are just playing some silly little game and if they are wrong well that’s OK. It won’t be!

      • Flawse. I completely understand and agree with what you’ve said. I’m a big fan of your anti asset sales posts. It’s very hard to know what to do with buying a house though because if you’re not in the game until it blows up, you get left so far behind. It’s very frustrating and I think if more people knew what was going on, there would be far more political pressure.

        Not much of what these economists say makes sense. It’s no mystery they’re older (Evans and Robert Gottliebsen) and it would be in their interest to remain doing what we’re doing at everyone else’s expense.

      • Thanks Rich and yes! Self-interest can make us think ‘objectively’, or so it seems to ourselves, in ways that serve our self-interest. I’m given to understand that personally Evans is a decent sort of a bloke so one assumes he is trying to do his best but is governed by his own self-interest.

        pfh postted something which is true I think. If we seem to be too far away from mainstream we seem to be loony so to get a voice heard one probably compromises. I don’t matter so i don’t have to 🙂

        Cheers

    • “I understand the frustration of many at the ridiculous cost of housing in this country, and the outrageous distortions that protect it, but be careful what you wish for.”

      Yeh, that’d be why you refer scornfully to those who raise the issue as the ‘i wanna house crowd’. You have zero credibility on this issue.

    • Interesting perspective, we love numbers and for many a high AUD exchange rate represented some sort of national achievement. Also highlights the Australian psyche with things and stuff i.e. property, mining, agriculture etc. yet the majority of the economy is made up of services (?).

      In addition to USD based deflation of house prices, the issue many have is that higher price growth is biased towards Melbourne Sydney eastern suburbs, obviously significant part of national market. However, regions do not have this issue, and has not been an issue since pre GFC.

      Another elephant in the room is the most significant demographic ‘bubble’ (age, voting and social) oldies and baby boomers with the former living longer and holding property assets/wealth, and ‘chairs’ (as the Turks say), while the latter demographic bubble are well into approaching the retirement exits….

      This should have a significant impact upon property market, as deceased estates emerge at an increasing pace, liquidating assets.

      I am surprised that no one has ever had a closer look at stagnation in the demographic time bombs in Europe where population growth (if measured at all) is declining to the point that overall populations decline (quantitatively, but worse are the qualitative imbalances)….. leading to tax base decrease while trying to shore up pensions and health systems (= the oldies vote in wackos who promise the world while MSM scare them shitless), working age leave looking for employment and disenfranchised youth are part of a brain drain (positives are remittances and learning new skills e.g. other languages, how to kick out crooks in govt., and in the EU relatively seamless inter state mobility, compared to Oz with its federation of state systems, laws and regulations….. and colonial capitals that attract most ‘resources’).

      For many in parts of Europe there is long term unemployment amongst the middle class, no expectation of a security net for youth when they are older and seemingly intractable political situation which favours the older generations at the expense of younger, for now….. scary thing for powers that be is that their youth/working age population become infected with ‘foreign’ ideas like asserting their rights, no taxation without representation etc.

      Australia’s ‘problems’ are not insurmountable, hopefully a long hiss of deflation on property, AUD and while Oz has been attractive for permanent migration (don’t think it is so much any more due to e.g. high house prices), at least many think that it has a future.

      PS Is George Megalogenis (who no doubt observed the steady decline of Greece over the decades) the only Australian with an external perspective and a positive take on Australia, where everyone seems caught up in echo chamber of negative memes?

      • Interesting and fair comment. Thanks.

        I think it’s true to suggest many MB commenters come from a position of discontent, often narrowly defined by the, to paraphrase Lorax, I Wanna House crowd. And then there are the others, the deep thinkers (Flawse PHF ChinaBob etc. (no order not exclusive ) and the range of views in between.

        My perspective whilst broad is coloured by my belief always in the importance of resources, agri and mineral, the keystones of existence.

        Nothing is insurmountable. However I pause on two things – the disfunction and lack of unified purpose by our entire elected representative body to focus on genuine long term reform and the reality of where we sit as a small open economy in the globalised world (I think many fixes popularly promulgated are for a pre gone era ). Add to that a deep uncertainty that global…well I’ll leave it that.

        • GunnamattaMEMBER

          Atta boy 3d

          ‘all that is required is the will….

          and a spirit of bold curiosity for the adventure ahead.’

          I’ve always thought you had a touch of the Merkwürdigliebe about you

      • the keystones of existence

        And how are you going to get them to the keystone of profit, your consumers? By agriculture? By mining your way there? Hmmmmm

  11. SoMPLSBoy made a good comment back up there and I attempted to reply to it but it got blocked.

    http://www.macrobusiness.com.au/2014/12/australian-real-estate-prices-and-the-economy-we-want/#comment-950916

    One of the depressing things I have read recently, and found quite convincing, is Phillip J. Anderson “The Secret History of Real Estate and Banking”.
    The problem is that these property price boom cycles can go on for so long, and a downturn that should have been an actual crash could have been averted by government playing dirty tricks (eg in NZ and Australia in 2008) – that the likelihood is a HUGE crash later instead of a medium one earlier, so much further down the track that everyone will have resigned themselves to it never coming!

    This might not be till 2023-2026 in NZ and Australia.
    One of the biggest problems is that women regard their men as “losers” if they don’t “own” and it is very, very hard to hold out against that for as long as is necessary to finally be proved right. So when the real big crash comes, it really does take down the maximum number of victims you can envisage in your worst mightmares.

    Not only will speculating maniacs have been still gearing up with more and more overpriced additions to their portfolios in all the preceding years, but numerous first home buyers will have been enticed into the market with “innovative” solutions, not just involving finance, but involving disgraceful sacrifices in housing space and quality. Expect large numbers of deeply distressed “owners” or PART owners of tiny shoe-box type “homes” for which they will be mortgaged to the extent of 6 to 10 times their annual incomes, in which they will end up massively in negative equity.

    • FFS the spam filter on this site is maddening.

      The Irish could end up looking lucky that their housing markets crashed properly early on with the median multiples doing the following:
      2007:
      Cork 4.7
      Dublin 5.4
      Galway 4.6
      Limerick 3.5
      Waterford 4.1

      2008:
      Cork 5.4
      Dublin 6.0
      Galway 5.6
      Limerick 4.3
      Waterford 4.9

      2009:
      Cork 3.6
      Dublin 4.7
      Galway 3.2
      Limerick 4.2
      Waterford 3.7

      Get that – their HIGHEST median multiple was 6.0 – in Dublin.

    • Hmmmm. Someone who partly understands public mood. I don’t think it will go as long as 2023 but you’re on the right track. NZ will go before OZ because the disparity there between rich and poor seems much wider. And they will be too smart alec to drop their interest rates quickly enough, much to Janet’s horror .

      • NZ might go before Oz because they have less’ in-ground’ natural resource to flog to foreigners. Their RE is pretty desirable though.

      • “I don’t think it will go as long as 2023”. Agreed. Whilst I am surprised ‘we’ kept the charade going as long as we have done, November 2016 has always been my terminal date; still is. If it hasn’t happened by then, then Phil’s “a HUGE crash later instead of a medium one earlier” is all the more plausible. There is no way out until we have cleansed the system with a deflationary bust. Then we can rebuild.
        “much to Janet’s horror “. Not much horrifies me these days, God! I have a view of what will happen; suggestions as to what alternatives we might have, and will be fascinated as much as horrified to see what does eventually happen!

  12. The Irish could end up looking lucky that their housing markets crashed with the median multiples doing the following:
    2007:
    Cork 4.7
    Dublin 5.4
    Galway 4.6
    Limerick 3.5
    Waterford 4.1

    2008:
    Cork 5.4
    Dublin 6.0
    Galway 5.6
    Limerick 4.3
    Waterford 4.9

    2009:
    Cork 3.6
    Dublin 4.7
    Galway 3.2
    Limerick 4.2
    Waterford 3.7

    Get that – their HIGHEST median multiple was 6.0 – in Dublin.

    • Yea I secretly believe that the spambot is my biggest fan and keeps the best of what I write for itself ….now where were those meds.

    • I used to think the ‘Spaminator’ was the unbeatable foe in the octagon–a literary ‘wood chipper’ with no appeal process, or sense of humour , and possessing a fearsome and deadly spin kick.

      But it’s not and your pertinacity made it ‘tap out’ and might I add, alot of great ideas flowed through as a result.

      PS Those ‘Philly’ guys–tough as!

      “It Ain’t How Hard You Hit…It’s How Hard You Can Get Hit and Keep Moving Forward. It’s About How Much You Can Take And Keep Moving Forward!”
      ― Sylvester Stallone, Rocky Balboa

  13. “Imported inflation via depreciation is never as bad as many believe. There was no rampant inflation in 2001 when the dollar was at 48c”

    This is an interesting question Lorax and one that I expect we’ll probably find out the answer to over the next year or two.

    If you have a look back to 2001 you’ll see that inflation in tradables was literally through the roof – but while there was a spike in the CPI, it didn’t flow on to the same extent.

    Perhaps there were offsetting factors (lower oil price? I haven’t checked). It was nearly 15 years ago so perhaps we still had more domestic productive industries that could step in and compete – I think they would be mostly gone by now.

    We should never underestimate the effect of hysterisis. The low point you mention was preceeded by many years of a fairly low dollar – not as low as that brief period obviously but much lower than it has been for a long time. So our industries and consumers were long accustomed to a lower currency which leads me to suspect that while domestic production capacity had been waning for a long time, it was probably still significantly greater than today.

    The fall to under 50c also came from the mid 60’s – we will have been falling from a rather higher position if we were to go that low.

    What vestiges of industrial protection were still in place 15 years ago? What dumb-arse free trade agreements hadn’t we signed yet?

    Hysterisis is the word (even if I’m spelling it wrong).

    I tend to think the inflationary shock might be somewhat larger this time round – or the margin squeeze will accelerate rising unemployment as lower returns make it less viable to hire more people.

    Interesting times anyway.

    • The mining boom is not the main factor behind the $AUS as even with the boom we have struggled to produce trade surpluses.

      The $AUS should be lower but it is has been held up by the currency wars by off shore central banks.

      What a lot of people seem to be struggling to understand is that carry trade money requires a transmission mechanism.

      That mechanism is the off shore borrowing by our private banks in wholesale markets and the commonwealth govt increasing dependence on the sale of govt securities off shore.

      We are talking about $700B in mortgage related and govt security assets sold off shore and which require off shore parties to buy $AUS to acquire.

      As it seems almost impossible to get any traction on this issue the most likely outcome will be that the present process will continue UNTIL the price that off shore parties are willing to pay for those assets falls.

      • Absolutely!

        “as even with the boom we have struggled to produce trade surpluses.”
        I would just note that the really important number, the Current Account, has remained very negative through this whole period. It is absolutely correct to say that mining has not caused the over-valuation of the A$ – it is our willingness to underwrite the giant carry trade with sales of assets.

        “As it seems almost impossible to get any traction on this issue”
        Yes!!! Not ‘almost impossible’ ‘absolutely impossible’ and MB despite numerous invitations to enter this arena has absolutely totally refused to enter into this issue – why?

      • I’d say it’s probably a bit of both Pfh007 – has the currency war you mention receded? Because the Aussie has depreciated by around 20 cents US over pretty much the same time as the mining boom has headed south.

        I agree with you regarding the carry trade, I just think it’s not the only factor.

      • Flawse,

        I think the reason few seem willing to even discuss the issue is:

        1. Most people simply do not understand what we are talking about. I think people understand trade and exports and imports of goods and services but current account and capital account does not register.

        What is weird is that people do not seem to get it even when I characterise the capital account in similar terms to trade.

        I.e. in additional to goods and services we are exporting the ownership of assets and claims on our future income. If a trade competitor wants to buy less of our (and others) exports by keeping their currency lower they must buy more of our capital exports as that requires our currency and helps drive it higher.

        Pretty bloody obvious that is exactly what Japan, Germany, Korea and China and the US have been doing for decades. Buying our (and others) capital exports to affect the relative exchange rates and thus support their manufacturing sectors.

        Yet – our dumbos downunder work hard to make this process of trade warfare easier rather than limit it. FTA’s with $1B no custom check asset purchase allowances.

        One only needs to wander around the comments sections of news limited, fairfax and the abc for a few minutes to see that the vast majority of people either have no idea about this issue or actually applaud the process by which our economy and asset base is being picked clean by our trade competitors.

        2. I think a lot of the current wave of economists from right across the spectrum simply cannot comprehend that regulation of capital flows transactions may be necessary.

        They think capital is just like trade and bar some restrictions for quarantine, slave labour, dumping etc – the more free the trade the better.

        They are even more convinced when it comes to capital because they think it is the most pure form of trade and it flow effortlessly to where on the globe it will do most good.

        To suggest a need to seriously regulate capital flows by regulation the transactions that constitute them cuts right to the core of their faith in modern economics as being almost science like.

        I try to explain that regulation of some unproductive capital transactions is NO different to quarantine laws to keep out noxious diseases, pests and drugs of addiction. Addiction being quite appropriate when talking about carry trade cash.

        The idea of a partial roll back of our approach to the regulation of capital flows and transactions is simply too much – its like explaining to the medieval Vatican that the earth moves around the sun.

        I think some people have legitimate concerns if they start talking about the need for re-regulation of capital flows and transactions they will be characterised as loony by the ‘mainstream’ who for the most part do not really understand just how flaky their certainties actually are.

        There is nothing remarkable about these issues – they were being debated fiercely in the 80s and 90s (and I was on the other side of the debate back then) but just at the point we actually have experience to inform the debate and to demonstrate the dangers of a fundamentalist attitude to free capital flows, everyone has forgotten there was actually a real debate on the issue.

        I am happy to say that the experience of the experiment in a largely open capital account and the supporting transactions proved me wrong and I changed my mind.

        As with quarantine we need careful regulation of the capital transactions and resulting capital flows to ensure we do not import obvious capital diseases, pests and addictions.

        We are talking about minor sensible changes, introduced at a steady rate to limit the shock.

      • Leftee
        The underwriting of the carry trade is important. If the carry trade sees risks in the currency it falls away .Remember this is a dynamic not a static with lots of individuals making decisions at any moment. So money stops flowing at one level but will resume again at a lower level.
        I’m still trying to find out how the hell all the Banks borrowings can be covered! Just trading it is impossible. Are our banks so smart that they are correct on currency movement 100% of the time? Nope! They ain’t! So someone is holding the can for them and it is us. The RBA must be guaranteeing the banks Foreign borrowings. So the banks can just keep on doing it without risk – hence Gail et al find it damned easy to get their $10m dollar salaries.
        Somebody really needs to get to the bottom of this one. Banks should be responsible for their own currency risk.

      • “actually applaud the process by which our economic is being picked clean by our trade competitors.”

        Yes! That really gets up my nose! The fact that we have just sold another large tract of farmland, an essential business, or a mine is actually celebrate! FFS!

        “I think some people have legitimate concerns if they start talking about the need for re-regulation of capital flows and transactions they will be characterised as loony by the ‘mainstream’”

        Yep!

        The predictions by some,especially John Stone, made at the time of the ‘float’, have been borne out. As you say nobody seems willing to have a sufficiently open mind to really look at what has happened.

      • GunnamattaMEMBER

        Good discussion gents, cheers

        I’d join in but have to be out at a kids birthday party in 15 minutes

      • “1. Most people simply do not understand what we are talking about. I think people understand trade and exports and imports of goods and services but current account and capital account does not register”.

        Pfh007, Right so anybody who doesn’t agree with you and Flawse doesn’t understand how the BoP works?

        Here is the key point you and Flawse are missing. Managing Australia’s net capital flows (and equivalently the trade account) means managing the risk free long term real interest rate differential.

        Both of you want to have higher interest rates and an even more unfavourable interest differential yet simultaneously want to reverse capital flows. It doesn’t work.

        When you talk about regulating the capital account, can you spell out exactly what you mean? Banning sales of commonwealth bonds to foreigners certainly wouldn’t work as long as the demand for yield was there. Foreign investors would move to the next asset, then the next asset, then the next asset (similar to the way international investors moved into MBS and Fannie and Freddie paper when China drained the world of Treasuries)
        The only thing which would work would be a policy which depressed yields on *all assets* relative to yields on foreign assets ie. an interest rate cut.

        If banning the sale of one asset doesn’t work. How do you propose we regulate the capital account? The only way to do it, is to have state management of the fx market and ban all fx conversion for capital account transactions . ie completely close the capital account (similar to SAFE in China). Apart from the fact that an open capital account is written into pretty much all our trade agreements and would provoke instant retaliation, can you consider how this would affect the business model of the country. We are completely integrated into global capital markets – banks finance themselves overseas, all levels of governments finance themselves overseas – and we currently owe the rest of the world more than 50% of our annual GDP and have a recurring interest bill on our net borrowings. If we close the capital account, how are we supposed to rollover these debts?

      • First the accusation of not understanding simple stuff is an MMT thing.
        I give you an example. I had a discussion with a Senior Economist of one of the major Banks and when I mentioned the problem of asset sales to foreigners to fund the CAD he looked at me completely blankly. His contribution to the conversation then was ‘but….but…Australia has always been a Current Account Deficit coiuntry’ That’s where we are at in mainstream economics.
        As to our trade agreements – perhaps it’s time we took a really hard look at some of them and figured out whether they are really doing our society any good. This bloody baloney of mainstream economics where everyone else is free to wreck our society without any hindrance whatsoever is just gross stupidity on our paqrt.
        Furhter contrary to MMT and your theory the CAD is not costless to us. If you’d been a rural producer for the last 55 years would know that full well. If you were a manufacturer here when the tarriffs were cut you would know it full well. The CAD with everything it is actually is a redistribution of income from producers to consumers.
        We CAN and should control foreign investment in our own country.

        By your last statement Sweeper your solution is to just grow the debt and the sale of assets forever. Bloody wonderful. Again like briefly – what a bloody wonderful economic and social policy! Yet you feel free to lecture the rest of us on our conscience!
        We CAN control the sale of assets. We DON’T have to sell farrmland. We don’t HAVE to sell mines. We don’t HAVE (well didn’t have to) to sell our food chain outside the farm gate. We do NOT have to guarantee the Banks against all forex losses on their borrowings.I’m sure there are a myriad of other options available to us that would tighten asset sales to foreigners and borrowings from overseas.
        Foreign investment may move down the chain but the return to it will be less and less as it does so and it will slow.
        The underwriting of the speculative flow would thus be stopped so the certainty of an increasing exchange rate taken away so this would put a severe dent in the exchange rate.

        Have I ever argued this is costless to everyone? have you ever seen me write anything like that – NO As a matter opf fact I go out of my way to emphasise the deep damned trouble we are in. But what are the options – you want to just keep selling the country so there is virtually nothing left for future generations. The effect of current policies is obvious. Finally it is starting to effect cities as we find our children can’t afford houses! But that is not important in your wortld for some reason – just keep running nthe CAD’s and borrowing forever.
        I’m sure this can go on forever!.

      • Sweeper,

        Flawse has pretty much ticked all the boxes but one thing that needs correction.

        Neither Flawse nor I have a view on interest rates simply because if what we suggest needs to happen, did happen, and a healthy attitude to saving and investment developed interest rates would not necessarily be particularly high anyway.

        Interest rates should reflect the relative supply of savings versus the demand. If everyone wants to save rates will be lower.

        What we object to are interest rates that are effectively subsidised by the sale of assets and claims on future income off shore.

        Certainly weaning ourselves off subsidised rates will likely mean higher rates but higher rates are not an end in themselves, they are the short term consequence of not having a healthy savings culture in the first place.

        It amounts to a national credit card where no understands the cost of using it and someone else down the road will pay it off anyway – presumably with the income from assets that are no longer owned.

        Good to know you understand exactly how it works but that just makes your endorsement of it more disappointing.

        As for your claim that Australia not only should not regulate unproductive transactions forming the capital account but cannot due to FTAs well that is both poppycock and a bloody good reason not to enter FTAs that go beyond tariffs on goods and services.

        In any event the coverage of the China FTA made quite clear that Australians would continue to face severe limitations in their capacity to acquire ownership of chinese capital assets.

        The $1B no checks allowance is all one way.

      • Sweeper,

        With regard to your concern that foreign investors would just move to different asset classes if the government guaranteed zero risk ones were denied to them (a circa $700B asset class).

        Where would they go?

        They might try real estate – if its new housing they can knock themselves out.

        If its buying tax farming opportunities – well block those as well.

        But if it was building a network of new Cosco retail stories or new factories or other hard assets – fine.

        Preferably as a joint venture.

        Managing capital inflows and restricting them to productive purposes is not hard.

        Our trade competitors have been doing it for decades – the only people who seem to have a problem are ticket clippers and debt leverage spevulators who like the nation to subsidize their business models.

        Does that sound familiar?

      • Flawse,
        I’m not sure if you are calling me an MMTer. In any case my view on MMT is that it is completely wrong. Even in a closed economy where the government issues its own paper money it is wrong – I have made this point on other topics here.

        Pfh007,
        On interest rates. When I say we need lower interest rates. What I mean is that we need to structure the economy in such a way so as to lower the natural rate of interest, allowing the policy rate to be set so that returns on AUD assets are closer to returns on world assets.
        I should say ‘needed’, because this doesn’t really apply to the economy today. Today we need lower rates just to grow – and a weaker dollar will be part and parcel of that. However it certainly applied during most of the Howard government when foreign debt exploded by about 25% of GDP and then in the Rudd/Gillard governments when the dollar was recklessly allowed to reach $1.10. The obvious way to have done this was through a SWF.

        Also I don’t think you have really explained what you mean by regulating foreign inflows. Do you agree that piecemeal bans on some assets won’t work? Do you agree that hiking interest rates here will make it even harder for piecemeal bans to work? Are you saying we should close the capital account completely through fx controls?
        If so how is this going to work when net foreign debt is about 55% of GDP and gross foreign debt is about 100% of GDP. Do you think that turning the switch off may affect one or two balance sheets somewhere in the country?

        btw. this isn’t an endorsement it is just a basic recognition of where we are.

      • Sweeper,

        There is a cost to having low interest rates if you run an ongoing trade deficit.

        Nothing wrong with low interest rates but how you get them is the point.

        Running a trade deficit through most of a mining boom means that the price we are paying for low interest rates is very high – the open door policy to selling assets and claims on future income are evidence of that.

        Can we fix the problem over night – nope.

        Can we start fixing the problem – yep.

        APRA can direct the banks to wind down off shore borrowing related to mortgage operations over an extended period to allow the adjustment.

        The Govt can limit a growing proprtion of bond issues to be held by locals only.

        This is not about stopping all transaction that are relevant to capitals flows. It is about reducing the most unproductive.

        That will put downward pressure on the $AUS.

        Keep in mind that when you try to control tye exchange rate with interest rates the results can unpredictable as the lower the rate the more chance there is that the carry trade might suddenly change direction.

        Given the fact, as you have noted, that we have a large foreign debt trying to manage it with lower interest rates may not only be dangerous it may not be possible.

        Starting to regulate the most unhelpful capital flows is the safest way of managing the process of recovery and pushing the economy slowly in the right direction.

      • Interesting discussion, I must admit that I’m more in Sweeper’s camp than Pf’s but that’s because I view the local mortgage market as a far more competitive place than it probably actually is. In my opinion if you deny our big 4 banks a profitable slice of this market you’ll just create a booming mortgage broker market that’s 100% foreign funded. I’m certain that theses newly minted mortgage writers will find many inventive ways to circumvent whatever capital controls you instigate, it would not surprise me if this took the form of actually lending in USD and then selling a supplemental hedge against exchange rate fluctuations. I dont think many Aussie mortgage consumers would recognize the dangers of this sort of loan, especially if they must maintain some minimum Loan to value ratio.

        Makes me believe the present bank led system is probably better then what would replace it if capital controls were instigated.

      • China Bob,

        Yes that is the point I was trying to make. Capital controls are notoriously porous. Even more so when you try to combine them with a large unfavourable interest differential (and Flawse and Pfh007 want to make this differential even worse by hiking rates). They can work in the immediate aftermath of a crisis or when there is international cooperation from everybody (and I mean everybody – on management of the global payment system). That was the history of the Eurodollar market, despite capital controls on USD, foreign investors outside the US were able to get their hands on USD and circumvent the controls.

        A similar thing would happen here. Unless you do something to narrow the interest differential the incentive for foreign investors to circumvent the controls is going to be way too strong. Actually stronger, because they would get the yield differential plus the risk premium implied by assets being outside the conventional banking system/RBA oversight.

        I agree, it would just change the nature of the banking system. ADI’s would be replaced by shadow banks (like securitisers and others who pretend not be banks but are banks). Similar to what has happened in China. As a result credit growth may actually end up being worse.
        Anyway it was an interesting discussion.

      • Sweeper,

        I am not seeking to crank up rates so you can leave that little misconception at the door.

        You and CB note that some people will seek to circumvent capital controls or that the non- guaranteed RMBS market will expand.

        Two points.

        1. The Big 4 banks are attracting funds because they are taxpayer guaranteed. That is not the situation with RMBS issuance and if there record of RMBS issuance is any guide the supply of foreigners prepared to take the risk with direct non guaranteed exposure to the residential market is limited.

        2. There is a huge difference between some people trying to evade capital regulations and making foreign capital the core of your banking system model for residential mortgages. Some people try to and succeed in evading customs but they doesn’t mean you get rid of the customs service.

        3. There is nothing wrong with shadow banking – rates reflect the risk involved and the taxpayer is not on the hook. Shadow banks are not deposit taking institutions – they have investors lending to borrowers.

        But it has been a good discussion as it illustrates the very point I am making. When it comes to capital flows and the transactions that comprise them people struggle to understand that they are just as manageable and unmanageable as trade in goods and services.

        • When it comes to capital flows and the transactions that comprise them people struggle to understand that they are just as manageable and unmanageable as trade in goods and services.

          I agree. With the AUD looking at 81s this eve I find myself wondering about the stickiness the bank borrowings to fund mortgages has lent the AUD. A mate explained it on the weekend as pulling a brick across a sheet of sandpaper with nothing but a rubber band (at a kids party) – the band stretches and the brick doesnt move at all for ages, then all of a sudden the brick lurches suddenly. Thats what i reckon the AUD is setting for (or is probably already doing). We should have been trying to manage this for years. I was always a fan of issuing specific infrastructure bons to soak up OS demand.

      • Pfh007
        Sorry I thought you did want higher rates.

        1. The Big 4 banks are attracting funds because they are taxpayer guaranteed. That is not the situation with RMBS issuance and if there record of RMBS issuance is any guide the supply of foreigners prepared to take the risk with direct non guaranteed exposure to the residential market is limited.

        Yes I agree. However this just means that foreign investors would get a risk premium on top of the yield differential as I said before. That is what happened in Eurodolla – Eurodollar deposits paid a higher yield because redemption wasn’t guaranteed by the Fed. The yield differential is the problem

        2. There is a huge difference between some people trying to evade capital regulations and making foreign capital the core of your banking system model for residential mortgages. Some people try to and succeed in evading customs but they doesn’t mean you get rid of the customs service.

        I very much disagree with this. Regulating the trade account through quotas or tariffs is very easy by comparison to the capital account. If more goods arrive at the ports than are allowed by quota, they remain in the containers. Tarriff’s are also basically impossible to avoid because goods have to cross borders

        Regulating the capital account means managing the FX market not just here, but if FX leaks out, overseas as well. The line between trade and capital is not always obvious. Enterprising financiers always find a way to blur the two.

        3. There is nothing wrong with shadow banking – rates reflect the risk involved and the taxpayer is not on the hook. Shadow banks are not deposit taking institutions – they have investors lending to borrowers.

        Taxpayers are always on the hook. Ask Goldman Sachs and AIG Financial Products

    • Left-lee

      Not sure why my comments was under yours.

      I was responding to something up above to the effect that the exchange rate was all due to mining.

  14. WRT the Aussie economy short to medium I must admit I’m somewhat resigned and I accept that what will be..will be. If you spend ten years consuming everything in sight to construct the worlds biggest shit sandwich then there are no prizes for knowing what’s on the menu for the next 10 years. Suggestions that we’ll each voluntarily take more than our fair share of the sandwich and eat it quickly…well frankly that’s delusional.

    Regardless of these short to medium term problems Australians must maintain focus on the factors that will deliver long term Aussie success. IMHO the most important of these is creating a superior Education system for our kids followed closely by the creation of alternative new industry development sites outside the Sydney/Melb metroplexes.

    • Yep CB but how? As per my post above – it’s a vicious circle. We educate the kids we don’t have the industry. As you have pointed out so often you don’t get ‘a’ factory or industry – you get a clump.
      Who in their right minds is going to invest in this environment.
      Further, even if we get the A$ below say USD 50 cents, what guarantees are there of it staying anywhere near there – NONE!
      As long as we have TFFFFFEFR and the ‘free flow of capital’ philosophy we will have nothing.

      • Flawse, I have no expectations that we will develop any new actual production focused export oriented manufacturing industry I’m afraid that train has departed. As 3D1K would say the rot was already evident long before Aussie manufacturing stumbled in the 2000’s, Mining just provided that final kick to the head sometime around 2011.

        That said generic robotics is a disruptive change that’s coming and it’s as profound as the development of the original IBM-PC. When the PC was developed even insiders at IBM were blind to effects it would ultimately have on their business. They expected PC’s would immediately spur demand for big centralized mainframe Hardware (interestingly they weren’t wrong (see cloud computing) they were just 30 years ahead of the curve). Australians are very well positioned to develop applications for generic robotics hardware in much the same way as 1990’s programmers developed specialized application suites for the generic PC.

        Creating a Brick-laying robot is probably not that difficult a task however the real money will be earned by seamlessly integrating this hardware into today’s construction flow. This means coding the what-we-actually-do (conventions) and complying with existing and future safety requirements. In the first instance I guarantee you legislation will be passed that basically prevents robots from entering building sites this’ll be overcome by political pull and probably some good old fashioned graft. My point is the individuals that can actually pioneer this change (within each industry) will likely reap the greatest rewards. Lots of scope for lots of new businesses.

      • Thanks Bob
        I guess i don’t mix with the elite of this kind of stuff. From where I sit we seem to be educating people in all the wrong fields – generally speaking.
        I have a nephew who is a real ‘gun’ in the computer world. Unfortunately he is in the USA so I don’t get to talk to him.
        Thank you. I value your writings.

  15. It feels like they want to turn Australia into some sort of Grey haired utopia, a retirement zone that has reverted back to the days of their youth. Here’s how.

    Inflate away the Boomer generations debts effectively gifting them a free ride throughout their lives – Check!

    Allow Boomers to leverage their Super and Offspring into property – Check.

    Allow Foreign capital into the Country unhindered to buy leveraged Boomer property at inflated prices. – Check!

    Implement Tax policies that allow Tax to be avoided at all costs. – Check.

    DO NOT allow the media to report on any of the above, only report Sport – Check!

    Release David Koch to brainwash the masses each morning, quickly move onto Sport – Check!

    Make sure all Boomers have wonderfully feathered nests, pontificate until this is achieved – in progress

    Reduce access to education and employment opportunities for the pesky youth – check!

    Restrict welfare to those with concessions cards (i.e. Baby Boomers) and DO NOT means test it – check!

    Stop foreign foreign capital coming into the Country before they start moving here and inhabiting the empty properties – in progress.

    Chase the educated Youth out of the Country with a recession. – in progress.

    Crash the currency to allow our rich White brethren from overseas to move here with their Boomer money and liver Happily ever after – They will not complain about house prices with an exchange rate heavily in their favour – In progress

    Reduce minimum wage, offer the remaining poor, unemployed and uneducated youth jobs as bum wipers for the Boomers – future policy

    Send Gay people to Manus Island (aptly) – future policy

    Tear up the indigenous recognition proposal – future policy

    Last Boomer out turn off the Coal power Station.

    What a mess we are been left in!

  16. Many thanks Gunna & all responders.

    This is the most interesting & insightful discussion I have read @ MB

    Worth the subscription on it’s own