APRA must rein property or risk 1890s crash

So, now we know (if there was ever any doubt) that interest rate cuts will keep boosting the housing market, especially via the huge investor bubble.

The macroeconomic situation of the nation is now extraordinarily perilous, suspended between a commodity super-cycle bust on the one hand and a tearaway eastern states housing bubble on the other. Interest rates must continue to fall to bring down the Australian dollar or Western Australia is going to disintegrate over the next eighteen months, ultimately dragging down the rest of the country. Interest rates must rise or the eastern states (focused on Melbourne and Sydney) will enter a blowoff top in the fifteen year property bubble, right into the biggest commodities bust in over 100 years, with calamitous results inside two years.

The only thing that can bring order to this madness is the Australian Prudential Regulation Authority (APRA) and its embrace of macroprudential rules.

If APRA doesn’t act right now to contain Australia’s housing investors then Australia confronts a rerun of the Melbourne land bubble and bust of the 1890s following the gold rush. Recall the words of Tim Toohey at Goldman Sachs:

• The 1880-1900 period serves as an interesting historical parallel. i) House prices to income per head are currently as high as at any other time other than 1890. ii) Business investment as a share of GDP in 2011 will likely reach levels not seen for over 120 years. iii) Residential investment as a share of GDP finished 2009 well below the 2004 peak, yet it remains surprisingly historically high. If we are right in our forecast that residential investment will cycle up strongly in 2013, Australia’s residential investment as a share of GDP will approach levels seen in 3 historically high investment periods: the mid-2000s, the mid-1970s and the mid-1880s. iv) Australia’s export mix has again returned to a dominance in primary commodities with its economic fortunes increasingly tied to its largest export market. In 1890 it was Britain. In 2010 it is China. v) The withdrawal of foreign capital was a primary catalyst of the 1890s recession. The main risk in the modern era remains Australia’s reliance on foreigners to fund Australia’s investment savings gap which requires ongoing foreign appetite for Australian bank bonds.
• In many ways the 1880’s provides a rudimentary template for the economic conditions that could prompt the deflation of the Australian housing market. The prospect of an abrupt and sustained decline in Australia’s terms of trade, most likely associated with the combination of deteriorating excess returns in China and substantially stronger resource supply, would be the key catalyst for a shift in Australia’s house price dynamics. Absent a severe recession in China in the interim, the most likely period when such an event could occur is when bulk commodities enter a period of global excess supply. Our best guess is that iron ore and coal markets could well face this prospect in 2013-14.

Let me remind you that the 1890s bust ushered in a depression from which it took 70 years for Melbourne land prices to recover.

This is not an exaggeration. The iron ore, coal and LNG busts are barely half over and when the next global shock hits, Australia will risk being cut off from international finance as its housing markets roll over from towering proportions and its budget is spent.

This is no longer a matter of parlour discussion. It is a matter of urgent national priority. Joe Hockey should immediately follow the example of his counterpart Bill English in New Zealand:

The Reserve Bank is mounting a case for special rules targeting property investors, Finance Minister Bill English says.

The bank’s governor Graeme Wheeler last week warned that “much more needs to be done” to control the Auckland housing market amid fears it could face a sharp correction.

Today English would not comment on the odds of a fall in house prices in Auckland, but admitted the pace of increases had quickened and this could not continue indefinitely.

“No asset price can go up at over 10 per cent a year forever,” he said.

“Sometime it’ll stop.”

English said he had seen the Reserve Bank’s comments about the prospect of new rules for property investors, and he understood it was now consulting with the major banks about how this would work.

If it chose to implement the rules, English said the Beehive would support the decision.

“We support the bank following its legislative mandate, paying attention to financial stability, taking the measures they believe are required,” the finance minister said, adding that the Reserve Bank would need to make the case for the introduction of new rules, and this had already begun.

Get off your arse, APRA, and rein in the property investors. Only that way can the dollar be lowered in time to prepare for the super-cycle unwind without triggering an insane last leg up in the mortgage bubble. Get off your arse, Joe Hockey, and back them 100% into it.

Comments

  1. Parlour discussion? How quaint. It has been my contention that an episode of 1893 scale might be only thing that changes some truly rusted group think about exceptionalism.

      • The whole thing makes me ill. But it has been so utterly foreseeable (by yourselves and others) and the lack of action (macroprudential or otherwise) almost guarantees the 1890s crash is the only conclusions (i.e. when it is forced upon us).
        My young family possess citizenship of another 1st world country should it be needed…

      • It is not a wish, rather a view on the turn of events necessary to enact change because behaviour is obdurate on this matter and lacks the sense you often call for.

        The disaster in Melbourne post 1890s saw all manner of human depravity.

      • Yeah this ain’t gonna be fun for any of us. While MB readers might be well prepared and survive the Abbottalypse, there are plenty of Aussies who aren’t and have no clue what’s coming. I know plenty of people who are buying into the bubble and have no ability to survive a significant correction in real estate.

      • Let’s keep it in perspective HnH – 90% of the world would kill for our standard of living even if things do turn as pear-shaped as is on the cards. What a correction will do is lead to a washing out of the delusions of grandeur, sense of entitlement/exceptionalism and wholesale wankery that has consumed this great country in the past decade and a half.

        No one’s going to starve to death. Let it burn.

      • No one’s going to starve to death. Let it burn.

        I think you’re underestimating how serious this could be.

      • It is really disconcerting HnH that you continue to call those who want a fair-priced housing as crashniks. Note no one is wishing any evil on Oz economy, and everyone would love, really love, to see APRA/FIRB acting. All we are pointing out to you is that it is not happening!

      • Neither will I – but I don’t think it will Ian Narev.

        Apparently the anonymous individual who planned the Bali Nine’s smuggling attempt won $5million in Tattslotto and has retired from heroin logistics. I suspect that Ian Narev is a bit like that bloke, while most other Australians will find they have a lot more in common with Andrew Chan.

      • “People will certainly be made homeless, which absolutely shortens life expectancy, very considerably.”

        True, but how do we know further increases in property prices won’t also create homelessness, or further erode the living standards of low income renters? I doubt there is a scenario now were we get out of this madness unscathed.

      • What the hell kind of “booming, counter-cyclical business” can you build when the entire economy melts down?

        Evictions-r-us.
        Soup Kitchen Supplies Pty. Ltd.
        Hobo Wireless Inc.
        AirCorrugatedIronLeanTo.com
        SellYaKidneyToGina.com

      • @StatSailor

        Pol Pot died in his sleep. Narev will be fine.

        “I doubt there is a scenario now were we get out of this madness unscathed”. Great comment.

      • What the hell kind of “booming, counter-cyclical business” can you build when the entire economy melts down?

        crimsafe.com.au

      • “Crashnics make me ill.”

        I would say that is from someone who never rented in Sydney.

        You may be underestimating the festering bitterness and resentment that was generated in the property boom. It wasn’t all winners. And the losers weren’t all voiceless trailer trash.

        Can you imagine how hard it was to be someone trying to do something productive while living in a inner west dump with a silver haired landlord who would look through you like you didn’t exist? Then you were moved on (with kids) so he could make $300,000 profit on his 3 year investment – negative geared.

        There were a lot of middle class people kicked to the curb like last weeks garbage. Maybe you never had to endure some well upholstered matron in a Real Estate office sneer about renters?

        Human nature is a strange thing. Even though no one starves in Australia, if someone abuses you or degrades you it awakens some deep instinctive emotions in the reptilian brain. It is a primal force, not subordinate to the rational model of the free market thinkers.

        I can guarantee that there are huge numbers of people who nurse a deep resentment against the petty landlords who profited from the misfortunes of others – and appeared to revel in the harm they caused. This will not go away. Look at the middle east or Ireland. Injustice begets evil that lives on for centuries. That is the great tragedy of modern Australia. We sold up our egalitarian ideals for an easy dollar at the expense of other people, and in the process created a monster that is yet to be fully revealed.

    • If there was a leader that could lead us through that then yes bring on the crash. Of not well… There is no point crashing it. That’s the problem.

      • I wish to reply to DarkMatter but seem to be in the wrong spot.
        Yes DM we have created many “landlords” who are total crap. Easy money made for them by the rest of us who actually think its their right to make super profits from sucking out money from easy prey. Property magnates big & small in Australia whether landlords or smug home owners are left to make easy money as though they are really smart people. They are not that smart. We are paying a massive price for them to suck any productive capacity from all other parts of our sinking economy. OZ property is the OZ problem! Always has been always will be! Fat lazy profits reaped (?) from unfortunates. MB may not like crashnicks but the property thugs have been sooooo smug its sickening. Personally don’t want a crash for OZ sake but one part of me says bring it on & crash the property thugs, especially the smug banker wankers who make money doing what? What do they do? Seriously CBA at $90 WTF??? Sick. Not one ounce of extra productivity for OZ with our banks ripping north. AND the joke is when the banks tank with the CRASHNICK property crash guess what the renter will have to pay again to prop up the friggin bank cause no-one could possibly see it coming. That is why CRASHNICKs say bring it on. Its cathartic.

    • It may be blood thirsty, but the only compassion I’ve ever received from a generation of rent seekers has been their advice to “Lower my expectations, work a little harder and live a little more frugally.”

      The will be no change without crisis – bring it on, the sooner it occurs, the sooner everyone else can start rebuilding their wealth on genuine foundations, instead of working their butt off, to maintain the wealth of those who have done nothing to earn it.

      I have 20 years to rebuild my wealth, my kids have their whole lives and frankly compared to the rest of the world, we’re 8 years behind where we should be in deleveraging our economy.

      As for the biggest losers in any rebasing, the Boomers – working longer, lowering their expectations and living a little more frugally will be a good experience for them, and if all else fails they can go on an asset based means tested pension capable of providing a subsistence existence that will allow them to fondly look back on their lives and think how good they had it.

      • i suspect the boomers have their gains locked in by now. I doubt they will be the ones to suffer. But maybe their kids.

      • Biggest losers in my view will be gen x. Mortgage to the eye balls with kids etc. boomers will just move on and gen y well they can declare bankruptcy and recover in a few years. Gen. x are fucked. Lucky I’m not in that generation. They were always the most depressed of the bunch. I can see why lol.

      • Who will cope it on the chin – everyone. But in terms of paying for it, you can’t get blood out of a stone.

        GenX are fucked (perhaps you can sense which generation I harken from and why I dislike the BB cohort so much) but after the bust they’re going to be as poor as church mice. Those that currently have equity in their homes, will see it evaporate as house prices decline, those that don’t will walk away and start again.

        GenY and Millennials never had any significant wealth and are unlikely to accumulate any prior to the bust. Follow the money… that only leaves a generation of Scrooge McDucks and their superannuation accounts, investment properties and by the large, debt free primary residences.

        True Super is held in bank shares, but at the end of the day, those super accounts will be the fattest thing left in a land of famine and it will be pretty easy to convert them at a stroke of pen from cash filled booty bags to life time pensions paying moderate income streams with no end of life capital reversion.

        Been done before, will be done again.

  2. APRA, RBA and Government will do whatever it takes to keep the current ponzi scheme going. In my opinion APRA, Government and RBA (unfortunately all central banks) are conducting morally hazardous activities and aiding the intergeneration theft by helping excessive risk takers, current generation and failed enterprises.

    Eventually, market and funding cost for banks will do on their behalf. Big question is when?

    • Can’t you already smell the fear?

      Hockey looks like a man who has stared death in the face – gone is the leaner and lifter rhetoric – in it’s place is talk of crisis and never ending budget deficits.

      His 6 November 2014 claim (yes only 3 months ago) that Australia is ‘on threshold of greatest era’ are now a distant and forlorn memory.

      http://tinyurl.com/ldar4ay

      The May budget and foreshadowed $56billion deficit is going to be a game changer.

      They are politically impotent to implement the necessary changes unless they have the courage to use the now overdue tax white paper, productivity commission report, intergenerational report and affordable housing inquiry to reset the agenda.

      We can only hope…….

  3. Hmmm. Probably not the best time to have the most incompetent Treasurer and Prime Minister in Australia’s history at the wheel.

    • Seriously Lorax you bang on a lot. Bring back big Wayne & see how different it would be! NOT. We are OZ its what we do. Nothing will change LAB or LIB its all the friggin same. So move on with the Joe/Tones problem, you reckon Bill & whoever the other no-name is would do anything different? Its way bigger than that. Its US, its us OZ people, where friggin different!

    • Abbott is just a scapegoat.. The real “adults” of the society, especially the baby boomer generation, are collectively responsible for the state we are in.

      Your comments lately are partisan and useless..

  4. Hockey & APRA. Damned if they do and damned if they don’t. Hockey will be thinking he needs to stick to the party line. Better to go out as a “man of principle” than to appear to be a Shylock to the common man (which is fundamentally the type of behavior that the common man despises). APRA is faceless and don’t need to front where it hurts, which is in the face of the minnows they protect.

    In reality, I think that the key influencers and decision makers are likely to be like possums with torches in their faces. The internal and external pressures of their own peer groups count for a lot. And they’re not much more than a puppet of the FIRE industry.

  5. I sense anger HnH, …quite a departure from the usual serene outlook that while we have deviated from the ideal course, APRA has got it under control (or almost under control) and we will avoid a bath because APRA will use a confident hand to steer the HMS Australia away from the jagged rocks showing through the polluted water populated by crocodiles and pirahnas…. What’s changed?

  6. Problem is Joe Hockey doesn’t think there is a bubble:

    “That is rather a lazy analysis, because fundamentally we don’t have enough supply to meet demand”

      • “Tell that to the Canberra press gallery. They think he is a genius.”

        I reckon even the slowest members of the gallery (and there are plenty) are starting to reconsider that judgement.

      • “Tell that to the Canberra press gallery. They think he is a genius.”

        I don’t know about his intelligence, but he seems to be driven by a pretty narrow ideology. Not that there is necessarily anything wrong with that, but I really don’t see a lot of innovative ideas coming form him. Although you never know. Also, his political instincts are godawful! I mean they’re really bad. I’m sure his follow zeolots in parts of the business community and the Coalition lap up his class bashing, but it hasn’t gelled all that well with the public. At least he realises he is as much on notice as Mr Abbott.

    • See the trouble is you need to use small words with Joe.

      When he was told there was a Bubble and investors could take a bath, he walked away thinking..
      mmm… bubble bath.

    • “That is rather a lazy analysis, because fundamentally we don’t have enough supply to meet demand”

      Sadly, Turnbull said much the same thing at the pub the other night. Its all supply, no demand factors.

      That’s pretty much the standard line across the political parties these days, apart from the odd word about negative gearing and CGT concessions from the likes of The Greens and Nick X.

      • “That is rather a lazy analysis, because fundamentally we don’t have enough supply to meet demand”

        Tell that to the investors in Port Hedland……

      • Demand outstripping supply makes prices go up. That is all.

        It doesn’t mean there is a sound basis behind the demand.

        It doesn’t mean there is no bubble.

        Every bubble in history has inflated due to demand outstripping supply.

        And the demand can fall away bloody fast.

        See Port Hedland.

        POP.

  7. I sort of find myself mildly at variance here. On the one hand I agree with everything in the piece, but on the other I find myself thinking………

    ………..any form of MP from here will crash the real estate bubble – any form of diminishing investment into, curtailment, whatever you want to call it – and I would be inclined to posit that any form of disinclination to feed the real estate monster we have created ever more will kill it.

    I think that killing it will kill the economy, and leave a traumatising effect lasting generations.

    I suspect that the RBA know this, and that APRA, treasury and the Politicians know this too. Which is why they havent done anything about addressing it up to now, and why i suspect they are disinclined to do anything of substance (and I agree they are probably talking behind the scenes and buy the idea that Murray and the FIRB inquiry finding will probably crimp marginal propensity to speculate in RE over the course of the year) about overt Macroprudential.

    I think that the discussion needs to change from whether or not we kill the Real estate beast to one of acknowledging it is going to depart this mortal coil, and that it is going to take the economy with it – and I completely agree we are looking at an 1890s Melbourne type situation which will have a lasting effect.

    Letting it run will kill the economy soon. Macroprudential will kill the RE beast (and subsequently the economy) in short order too. Yes this will occur while the mining downturn unfolds and as the auto manufacturers depart.

    We asked for this, we (as a nation) made decision about it years ago, we should, like the hard men of old, stand and face the consequences of what we have brought forth. But we should prepare.

    • If you’re a truly hardened alcoholic the advice is do not attempt to detox by yourself – see your doctor to take appropriate measures, as DT’s is often fatal. That is the stage we are at.

    • They could start buy fixing the stupidly skewed tax regime that encourages people to funnel money into bloating assets and taking it away from productive areas of the economy. I mean what if NG and CG was grandfathered right now on property and instead applied to renewable resource technology and investment, or any other productive area frankly that could create jobs. You could kill two birds with one stone. Put a lid on house prices and funnel money into job creating industries. Though truthfully i know who i would like to use that stone on….

    • But it won’t be the decision makers and collective voters at the time that takes it. It’ll be the (then) vote-less young and the future generations. It’s total bullshit and I want the f*ck out!

    • Every day at work I see Macho men that accept a well known risk hand over fist but when the risk eventuates they turn into whining, finger pointing children, blaming everyone but themselves. Happens over, and over, and over….It will be the same in housing when the risk turns real. Just like the average Joe will accept climate change when the waves are breaking through the lounge window, and then some will still wonder how could this have happened. With the lack of leadership around only a repeat of 1890’s will force change to RE and it will be good for the long run – read Ross Garnaut’s Dog Days;)

      • Driesdtl,
        The whinging is what is going to do a lot of us in.
        “Woe is me.” shall be the new Australian catch cry.
        It’ll be like Tony Abbott having a sook about opposition pay rates.
        It’ll be like Hockey fibbing about senate numbers to shift the blame.
        They are us (in a general sense) writ large,
        And the masses will want blood once manure and fan meet.

    • Gunna: Agreed 100%.

      I’ll give a small anecdote as to why I have no sympathy.

      As a kid growing up we were never found wanting but we always did without unnecessary flashy things. We were savers. Other kids rocked around in their Air Jordans and I always wondered why I always had to do without. Then I started to notice more and more that their parents might be driving in BMW’s and lived in big houses, but it always had a veneer that came across as fake. They were the spenders.

      Time moves on as it all plays out. Their relationships fall apart, stress from buying expensive things they don’t need to impress people they don’t like from leveraging up to buy huge McMansions all take it’s toll. While I’ve been serenely saving and running my own race.

      Schadenfreude

      • Funny you say that mate, I had a similar experience growing up. Always went without the flashing things the other kids had, I’ve been saving for ages and put together a deposit for a house to call my own, but it took me so long and was a hard struggle to save that money and now that I’m faced with the fact it would only cover 1/4 of the median Sydney house price (and it took me years) I can’t fathom spending the rest of my days paying off so much debt and being stuck in a job I don’t like because of it.

        Having lived abroad also I’m disappointed at the way this country has stayed stuck in a time warp. Perhaps a massive bath is what will eventually see this country turn around and innovate again. That would truly be something, a place where the younger generation is given opportunity to make this place and the world better.

        Maybe then we’ll actually drive renewable energy and become a world leader in that field. Maybe we’ll make sacrifices in terms of our standard of living and realise it can’t go on like this forever.

  8. The property market in Oz either rises in accordance to more credit fuelling rising house prices or it goes bust…. nothing in between.

  9. What a load of absurd, hyperventilating hyperbole.

    1890s, yeah right.

    Sure, APRA should cool down the property market, but civilisation as we know it is not at stake. With the resources slow down, most likely the economy will bump along at 1.5%-2% growth, and unemployment will climb up to 8 per cent or so. Houses will get more expensive.

    Disappointing? Certainly. But disastrous? No.

    • Don’t exactly remember the last time unemployment rose to 8% (1990-1991) as being a barrel of laughs, but whatever.

      The last reported quarterly GDP was 0.5%, so I”m guessing if GDP falls any further, it be a little lower than 1.5-2.0% btw.

      • Unemployment rose to 11.1% in the early 90s, which is a lot more.

        The last time it was at 8% was December 1997. This was pre-boom, but no one was slashing their wrists back then.

        People need to get a grip. The Australian economy is going through a profoundly, and perhaps long, phase of mediocrity. It’s disappointing, We should be doing better. We pissed the proceeds of the mining boom against the wall. We should have invested them for the benefit of future generations.

        But we didn’t. It’s the Australian way. We never do.

        But we are not about to become Bangladesh.

      • Obviously not Bangladesh, but we could resemble 1970s Britain or present day Detroit in a few years.

        Why won’t this happen?

      • “present day Detroit”

        Obviously you have not been to Detroit recently. The place looks like it has been nuked and the survivors are battling each other for survival.

        “1970s Britain”.

        No chance. 1970s Australia. Maybe, but without the inflation and the strikes.

      • Aren’t we seeing that with each crisis a new round of stimulus is launched and a new group of people fall below what they previously considered an acceptable standard of living, and Australia’s just about to hit a big bump in that road.

      • In ’97 we got to 8% after 11% a few years earlier. KInd of a different vibe compared to rising from 4.5% or even 5%.

        If we get to 8% from here, that will cause panic in and of itself.

      • When UE rate was 8%(probably more) it 20%in Northern Tasmania. Families were living 2-4 families a house and paediatricians were seeing epidemics of illnesses,such as rheumatic fever scarlet fever, that have not been commonness in Anglo Australians since Dickens time. Those are diseases of poverty and the consequences follow those children for the rest of their shortened lives. All that living standard stuff which falls precipitously in depressions is really important j

      • 20% in Northern tassie- it’s over twenty percent in broadmeadows and Elizabeth right now and the car factories haven’t even closed yet. They’ll both be well above thirty when they do.

      • js. Yes I agree the health costs of high unemployment are terrible. It’s amazing how blase people are about it, especially when it is preventable.

    • I’d love to hear your reasons Acme. What do you foresee for the Australian economy for the next five years?

      How do we prop up the housing market with such a large fall in national income? … or doesn’t that matter?

      • Looking into my crystal ball, I see five years of sub 2% growth, mostly maintained by population growth, so probably gently falling GDP per capita. Of course, this is on average. Some people will continue to do very well, others very badly.

        The exchange rate will depreciate a lot. We’ve seen the $A < $US 0.50 before and we'll see it again. So holidays overseas are out, holidays to the Gold Coast are in.

        Nothing to cheer about, but not disastrous.

        I see a population that refuses to accept the party is over, so there will be a lot of one terms governments because they will never be able to deliver what the punters want.

        I see the housing market either being propped up by foreign investment, London style, or if not then maybe falling a bit in nominal terms. But no crash.

        Of course, if a Grexit causes the European banking system to crash and burn, then all bets are off.

      • You do realize that sub 2% growth is stall speed? History says that the likelihood of growing at sub 2% for five years without falling into recession is pretty low.
        Where is nominal GDP growth in your crystal ball?

      • Acme
        Sorry discussion below makes this irrelevant!
        With the large fall in the A$ we WILL get tradable goods inflation. However to appease those who will not think let’s call it ‘could get’
        If that happens there will be a multitude of wage claims ‘because it’s fair’ You can hear it already.
        What do you think the RBA will/can do with IR’s in that situation.

        Secondly HnH, and I agree, thinks we will see a crunch in the External Account with a loss in Credit rating etc etc. This probability/possdibility cannot be ignored and what happens to your prognosis in that event?

        Note I’m not arguing just seeking your thoughts!

      • @bourki

        Yeh, here were only talking about a one hundred year housing crash.

        I reckon H&H might be a AD reader.
        ” If the commodities boom goes bust in the way I think it will…”

    • ACME, please explain why it won’t happen not just call me names.

      If the commodities boom goes bust in the way I think it will then the Australian current account is going to blow out massively just as the budget runs out of puff.

      I have no idea how large the bust could get if the international flow of finance gets cut off but it is certainly likely to get much more expensive as the budget runs into huge deficits.

      8% unemployment is a dream if that happens. You need to explain why it won’t.

      • The current account won’t blow out at all. If the mining sector goes tits up, then we will have a lot less foreign investment. Every dollar less of foreign investment makes the current account deficit one dollar smaller, other things being equal.

        What will also happen for sure is a big, fat fall in the dollar. This will help the economy. We’ll get a lot more income selling university places to foreigners. But it will mean a fall in living standards, at least for a while. All those things that were cheap, like holidays in Europe, BMWs and books from Amazon, will get much more expensive.

        That’s the way it’s gotta be.

      • That’s was badly written (by me). CAD will blow out in build up to bust or there’ll be no growth at all. Much of the CAD is bank borrowing not mining investment and the less of the latter the more of former or you can’t grow. Then implodes in the bust.

        You need to reread what I’ve written. I said that unless APRA reins housing then the 1890s risk is real. If not then the CAD does blow out, mining investment or not. And your not going to get your big dollar depreciation without more rate cuts, meaning both housing and CAD rise as housing blows off (in the absence of firm MP).

        If housing is reined in now then your lost decade happens. In other words we kind of agree but you’re assuming that the dollar can drop without rates falling to 1%. I’m not.

      • Whether or not APRA reins in the housing market there is very little risk of an 1890s bust.

        But APRA (or is it the RBA?) should rein in the housing market anyway. Having one policy instrument, the cash rate, is just not enough. The housing market is big enough, ugly enough and important enough to merit its own instrument. Make the max LVR 60%. Make people save up for the difference. If markets work at all then prices should fall by enough to make the saving task not all that onerous. And if that doesn’t work they can rent. People in Europe – middle class, upper middle class people – rent their whole lives. It’s not that big a deal.

        And the exchange rate will fall regardless of interest rates. If there is one thing the last 30 years have taught us, it is that when the exchange rate needs to fall so the economy can adjust, it does so with a vengeance.

    • Have we had raging currency wars over the last thirty years?

      You’re claiming I’m being hyperbolic for arguing that we need MP or we risk 1890s crash on mortgage blowoff as rates are cut to lower the dollar, while at the same time arguing that no such crash can happen because the dollar is going to fall by itself without further rate cuts.

      In other words you’ve assumed away my assumptions so you can marginalise my view as bear porn. You’ve got a bullish bias my friend.

      • Bullish? I’m saying 5 years of sub 2% growth, which hasn’t happened since the 1930s, if it happened then, and that makes me bullish?

        I suppose compared to the wrist-slashers around here, I am bullish, but then again a ward full of compulsive depressive patients at Callan Park Hospital would be bullish compared to the wrist-slashers around here.

      • Whew! The very fact of the falling A$ is going to smash retail and services like retaurants and coffee shops in a big way. This is the major part of the economy. We are in for a hard time even if NOTHING else goes wrong.

      • Acme,

        No it didn’t happen in the early 30s. There were big contractions followed by sharp but not sustained growth. In fact I’m pretty sure it never happens due to the way the business cycle works and the accelerator effect.

        There is basically no chance of 5 consecutive years of sub 2% growth without a recession. Unless we become Cuba.

        Fed has actually researched it in the US and found that when yoy GDP growth falls below 2% a recession follows within a year 70% of the time.

      • The very fact of the falling A$ is going to smash retail and services like retaurants and coffee shops in a big way.

        Why? Falling incomes and unemployment will hurt retail for sure. Retailers margins will be crunched to the bone and there may (eventually) be some imported inflation from the falling AUD, but its gonna be next to impossible to raise prices in a stagnant economy (Acme) let alone one in deep recession (H&H).

        Or are you saying we’re in for a bout of stagflation, in which case we really will be like 1970s Britain.

      • I used to think stagflation but nthat was a decade or so ago! We’ve made it a whole lot worse since. So I don’t know what we’ll call extreme stagflation.

        Know a lot about retail and wholesale margins? You don’t think there has been any competition in Australia these past 10 to 15 years? Do you seriously think that wholesale and retail margins are larger than say an approx 40% reduction in the A$ value? If so you’re nuts and living in a fantasy world!

        Further if you think it is only retail retail margins that will get squeezed then you are underestimating the problem. Just depending on where we are at in this cycle you’ll get a series of following events. Let’s assume, in my view wildly incorrectly, that we are at the stage of the cycle where retail margins are at a bubbley peak, then you’d be right. The next stage is margins get squeezed ACCOMPANIED by a major cleanout of business so that you end up with way less competition. Then you would get all your margin squeeze made up and then some!!!!!!! You’ll get very high inflation in spades.
        That’s just reality!
        Further we are talking tradable inflation not just imported inflation. Perhaps you should give it a minimum of thought, read some about different sources and causes of inflation; do a bit of study about demographics and prosperity in China.
        Never know! You might find that you can’t predict your unlikely future with such absolute certainty.

  10. Housing Bubble ???

    No such actual thing in terms of price relatives – that is housing prices compared to bond prices, share prices and income levels over medium term historical experience .. in actual fact it’s cheap, cheap, cheap ( ala Woolworths ads ) currently !!!!

    Looking forward … interest rates tends are down, down down ( ala Coles ads), providing further stimulus to house prices. Go baby go.

    Limited land supply, unlimited demand = radical upward shift in demand curve ( same demand met at higher prices, only) is rational expectation; it’s that simple, Mates

    So, rational expectations = above.

    Contrary indications from ‘ Doomsdsay Preppers’ awaited. Remember the ‘rational expectations’ comment.

    Go for it, Mates

    • It’s rational in economies that aren’t entering an historic commodities bust nor one that is dependent upon a clean budget to support the flow of finance.

      On that, I agree, but that is’t here.

      • Housing finance rockets!
        [refer Macrobusiness ‘Unconventional Economist’ post today]

        Damnit, but actual, real, active investors in Property Market getting it right, again …. going for housing finance in huge way = clever guys, very clever guys !!!

        Getting in BEFORE the prices, logically correctly, rise further over the medium-term. SMART investment decisions being made, smart !!!

        [Remember .. they probably know housing VERY cheap relative to shares, bond prices, average household incomes, prospective interest rates = displaying objectively defined rational expectations] 🙂

      • “going for housing finance in huge way = clever guys, very clever guys !!!”

        Nothing says “clever guys” like following the herd to take on debt.

    • “Go for it, Mates”

      Thats it, i’m convinced!! Where do I sign up? haha.

      (My great grandad gave me the best advice ever. He said that in life you only need to worry about 2 things – where you put your signature, and where you put your dick.)

      Now it seems too many Strayans have put their signatures in the wrong place.

      Partly thanks to Capt Glenn.

      • (My great grandad gave me the best advice ever. He said that in life you only need to worry about 2 things – where you put your signature, and where you put your dick.)

        Comment of the day.

      • Ortega – your great grandad was a very wise man.

        What fantastic advice for a young man.

        Comment of the MONTH!

      • That’s the best advice ever. I’ll use it in the next “client coaching” boot camp! LOL. Great grandad was very very astute.

    • “Remember the ‘rational expectations’ comment.”

      Read up on ‘global games’ and ambiguous/indeterminate expectations. Rational expectations is a fudge, when suddenly everyone realises the game is up.

  11. Housing finance rockets!
    [refer Macrobusiness ‘Unconventional Economist’ post today]

    Damnit, but actual, real, active investors in Property Market getting it right, again …. going for housing finance in huge way = clever guys, very clever guys !!!

    Getting in BEFORE the prices, logically correctly, rise further over the medium-term. SMART investment decisions being made, smart !!!

  12. HnH,

    if 30% of real estate in Victoria goes to foreign buyers, and the stories I hear from my Sydney relatives about sky high prices going even higher are accurate, If there is a further weakening of the dollar, will there be even more money coming from China to purchase what has not already been purchased? Perhaps what we are witnessing is the conversion of Sydney and Melbourne into international cities, with the economic expulsion of the refugees (original inhabitants)? This process and the associated weight of money will mitigate any slump will it not?

    Are your fears overblown?

    • Geez, I can smell those soiled pants from here.

      International cities? what, you mean Coolaroo?

      Good luck with that.

    • 30% of new property goes to foreign buyers not existing.

      My fear of a rout includes the trigger of the next global shock. It that event foreign money will repatriate, making the local bust worse.

      In the aftermath it’s a fair argument to make that foreign dough limits the downside.

      Chinese money could buy our banks for instance (if Barnaby allowed it). After all, Oz is still a great strategic asset in the Pacific.

  13. Aren’t we all forgetting that the RBA’s grand vision/plan/hope is for housing to smooth out the mining downturn?

    Why would APRA work against the RBA’s only plan?

    It seems completely unrealistic to suggest APRA will implement any policy that would place this “plan” at jeopardy.

    Any reform will likely be window dressing.

    • All this talk about APRA doing anything worthwhile is pure “dream time” nonsense.

      APRA is the most gutless, useless, stupid & underfunded wank of any Australian Govt Department.

      It has NEVER performed to protect as designed and has ALWAYS underperformed. It will continue to do so.

      • it only exists so people say stuff like this –

        “But APRA (or is it the RBA?…)

        Department of misdirection.

  14. BTW, anyone increasing their cash weighting in super and/or other investments at the moment? ASX went bonkers from mid Jan and I can’t see it continuing until Glenn announces another rate cut.

    • I am only exposed (SMSF) to TLS, BWP, one medical, cash, and whiskey/alt investment.

      Plus gold.

      And land/food/water.

      • Pretty narrow portfolio there Mr Marsh, but hard to argue with TLS. It doesn’t make sense, but you can’t argue with the returns over the past 4 years.

      • Lorax, well it’s obvious why I am not in finance. It’s not my core funky focus that is for sure
        One day I will relay to you the debacle of 2007 (over a cheeky Shiraz overlooking our valley perhaps).

        Letting the winners ride.
        I think TLS DOES make utter sense
        Data is a basic service now

        [It helps I got it at 2.50 odd]

      • I had a minor debacle in 2007 with an investment that essentially vanished overnight (you can guess what kind of investment). It turned out to be a blessing in disguise because it gave me such a fright I put everything cash including all my super, which is where its stayed until 2010-2011.

        I’m still waiting for the invite up to the farm!

        P.S. TLS doesn’t make sense to me simply because of my customer experience with Telstra.

    • Yep, it’s been a good run but one can’t be too greedy. In cash with some international stocks till the next big one.

  15. APRA wont do anything. Macropru now would be akin to bringing on the collapse and they’d be blamed for it, along with Abbott and Hockey. Its too late.

    Foot to the floor, its all thats left. 😉

    Crashnicks or Catastrophists, call them what you like. It isn’t their will (or fault) that this is happening. But it is the will of those standing before the levers who won’t (and now can’t) pull them.

    70 years to recover?

    Gee whiz.

    I see a Mad Max / Thunderdome future for Straya.

    “Its death on a stick out there!”

    hehe.

    Now there’s some catastrophism.

    • Crashnicks or Catastrophists, call them what you like. It isn’t their will (or fault) that this is happening.

      Yep. Calling people crashnics is about as weak as it gets.

      • Crashniks should be careful what they wish for. In most cases, they have absolutely no idea what they’re wishing for.

        Admittedly, crashniks will have absolutely no effect on the outcome. There have been plenty of Australian housing crashniks on the intertubes since the turn of the century, and they’ve all been wrong, for 15 years (at least).

        Just sayin.

      • “Admittedly, crashniks will have absolutely no effect on the outcome.”

        I feel fairly confident that very few of the characters on this forum will have no effect on the outcome.

      • “Crashniks” just sounds like some lame primary school insult. If you have a problem with what someone is saying explain why and refrain from the nonsense.

        The majority of people are just spruiking for what’s in their best interest. I don’t really blame a lot of these younger people – that have zero chance of buying a place – for being annoyed.

        If I was in their shoes I might be hoping for a crash as well.

  16. when the bubble pops, anyone holding anything remotely resembling a pin is going to get tarred and feathered

    pollies and bureaucrats know this so wont be picking up any sharp objects until the shows over

    • Absolutely.

      Unfortunately, we’re too far gone.

      Who’d want to be blamed for bringing on a hundred-year-bust in house prices?

      So its foot to the floor – as evidenced by the latest (“surprise”) rate hike by the RBA (with more to come).

      Forward guidance, bubble worries, pffffttt!!!!
      Cheap money. Its all that’s left.

      Just sign on that dotted line (42 square meters, view of a brick wall, don’t worry!! foreign buyers will pay you double for it in 7 months).

      • I keep asking this question re the debt jubilee – how are you going to convince a worker in China or Bangla desh, who has been prudent, saved and worked very hard all their lives to forgive you your debt just so you can go on leading your profligatte lifestyle in an even grander way than ever before???

        I keep asking and nobody ever answers.

      • The answer to that question is that they will not but then none of the IOUs issued by Australian banks have the names of Chinese workers on them.

        Those workers have no idea that their govt has driven down their income – by exporting capital – to keep their currency low.

        In any event a debt jubilee is an inherently unfair concept.

        Why should debtors get a free hand out?

        The appropriate approach is for APRA to direct the banks to wind down their borrowing off shore and for the government to stop selling bonds off shore.

        Existing debts are honoured but new ones are not permitted.

        This of course will increase local interest rates and encourage deleveraging. That is not a problem providing there is sufficient money supply to allow it.

        In addition it will cause the currency to decline which will discourage imports. There are heaps of things we import which should be made here and are not simply because our trade competitors are smart enough to know that a productive country is critical to economic health.

        At the moment there is the problem that control of the money supply is in the hands of the banks and people are getting reluctant to take on the trailing commissions the bankers demand.

        The government can fix that by cutting tax (not increasing expenditure) though of course the standard rules apply – create too much and you get inflation – so there are limits – but with lots of people paying off their debts inflation is not likely to be a major problem and the solution is straight forward if it does – increase tax.

      • I think the idea advanced by Steve Keen is compulsory payment of loans for debtors and deposits for non-debtors for fairness

      • fitzroy,

        That would work but I would prefer that they just increase the tax free threshold as that avoids the easy political target of govts handing out “money for nuthin”.

        At least by creating a deficit by increasing the tax free threshold it encourages people to work knowing that the for the first $XXX they pay no tax.

        Encouraging the debtors to apply the extra cash in their wallets towards debt reduction (and discouraging new speculator leverage) is achieved by the higher rates resulting from reducing the hot money inflows and /or RBA increasing the target overnight rate.

        Having said that if the deficit is large enough and the propensity to save is higher the rise in interest rates will be more modest than otherwise.

      • fitzroy

        I don’t know what happened to keen. I think the external account made his maths too complicated. So he simplified and decided to ignore it for the moment then forgot it existed altogether.
        So we wipe out all the debt then we’re ready for some really serious consumption – but hang on we’ve refused to pay our old debts to foreigners. Nobody is responsible for all that debt – maybe the government? So now we’ve changed nothing except have a debt jubilee so teh day after the debt jubilee we’re going to want to borrow some foreign funds – who the hell is going to give them to us.
        The debt jubilee idea is realyl really seriously stupid and has not been thought through.

        One other thing we’d need a lot of foreign funds to buy Tanks and Figher Bombers as well. We’d make ourselves very ‘unstable’ and vulnerable quite suddenly.with few if any allies.

    • But Frau Merkel says “no”. No debt forgiveness for you! She’s setting the global tone there.

      Govt bond rate loans? We cant even get the most rudimentary macro-prudential (prophylactic) instruments in place. Unfortunately.

      “Nobody ever saw a dog make a fair and deliberate exchange of one bone for another with another dog. Nobody ever saw one animal by its gestures and natural cries signify to another, this is mine, that yours; I am willing to give this for that….But man has almost constant occasion for the help of his brethren, and it is in vain for him to expect it from their benevolence only.”

      We’re animals guided by the invisible hand of our benevolent Capt.

      Straight up that ramp.

      But some will get what they want.

      They always do.

      • I’m not saying it’s right, moral hazard and all, but
        a) there’s precedence: hello banking cabal taxpayer bailouts in GFC
        b) might it not be better approaching it that way (for PPoRs) rather than banks becoming mortgagees in possession of a LOT of properties (who will buy) and a shedload of bankrupts…lost jobs.

        It’s not a simple as what we think is right, or a case of “suffer in yer jocks”.

        Broken families, lost generations, suicides…I think we can probably manage it smarter, should it sadly come to that.

        With obvious caveats.

      • Yes, agree completely.

        Smart animals don’t have to behave as if guided by an obviously visible “invisible” hand.

        But that’s not called capitalism – and it may only come about with its transcendence.

        There will be immeasurable pain if houses go, its the last brick holding up the jenga – obvious for all to see.

        We’re now ‘hurtling’.

        Frozen, stunned, incapable of action, in fact, pushing the pedal through the bottom of the floor.

      • = Moral Hazard insanity

        Nah!!!! Just think about it. We’ve been trying to wipe out savings in western economies for the last 70 years! This will really finally do it. We’ll be really sset for some serious consumption here – no debts and no savings – it will be all consumption = you bloody bewwdy! So we can overconsume and use up the planet at a faster rate than ever before. This is all good!

  17. Holes reckons softening the blow is better than allowing a recession to run its course? Doubt that would change the Australian investment psyche because people would just buy the dip. Sydney house prices down 20%.. bargain! (just think about how the average investor buys a stock and holds it in hope as the position goes against them – it’s the same for property)

    I think it needs to get really bad before people realise investment properties are not a sustainable path to riches.

    • Good insight

      Can we divest the notion of the need for a correction from PPoR owners and specufesters,

      Moreover, a splitting of overpriced cities with rest of Straya might be useful.

      I said it in another post, but we need to rethink the idea of everyone crowding into cities. It’s not making sense or working.

    • “softening the blow ”

      True capitalism is about letting the blow happen and clearing the decks. The reason the Euro zone is stuck in malaise and will continue to be is because they live in fairy land where they too want to soften the blow.

      • Frederic Bastiat

        Softening the blow is nonsense…Orwellian double-speak!

        The blow can never be “softened’…just spread amongst more victims and over a longer time span…in fact the overall impact of allowing malinvestment to continue adds to the overall damage

      • “in fact the overall impact of allowing malinvestment to continue adds to the overall damage”

        Agree wholeheartedly. It’s like pushing a coil further and further back to it’s limit, eventually it flexes back to position, and much more violently.

  18. The problem is RBA rely on CPI to decide interest rate and CPI doesn’t include housing…
    M3 grows from 1625 Billion to 1732B for last year or 6.5% while GDP up by 2.7%…it does mean CPI is up at least 3.8%…

  19. I’d love a massive crash!!! The only annoying thing will be listening to economists and so called “experts” running their stupid mouths about how “no one could have forseen/predicted this”.

  20. “house prices are up 23 per cent in the last 2½ years and a whopping 33 per cent in Sydney” (RP Data CoreLogic)

    “housing turnover varies over time, on average, around 6 per cent of the housing stock, or
    around 500 000 dwellings, change ownership each year” (RBA)

    So what’s the big deal of the price correction back to 2.5 years’ level?

    Those who owned the property assets before, would not feel much pain.

    Out of 1.25mil properties that changed hands in the last 2.5 years, some were downsizers and some upsizers – upsizers might feel some pain.
    Some were first home buyers (10%?) – those who purchased later would feel most pain.

    The remaining majority were investors, local and overseas – they have taken the risk by investing in the property, and would get their (negative) return – given the level of risk taken.

    Don’t see a big deal of market correction back to mid-2012 level.

  21. The word deflation is non-exist in paper money era…

    The deflation scenario is in fact resource misallocation.

    Most of the money goes to somewhere(housing) doesn’t include inflation calculation…

    Sadly RBA solution is to pump more money there…

    As the house price goes up, inflation goes down…

    When RBA print out more money and pour it into housing….it is just a process of ripping off the people without houses…

  22. No.

    We need to have the crash – anything else will hurt more. A crash is the ONLY way we can restore a genuine appreciation, as Japan did, for what is important to society and business.

    We need to return to nation building which means Australians need to have a value placed upon society rather than purely themselves and what they can get out of each election. This requires a paradigm shift – and that requires a crash.

    Secondly we need to be realistic about what is going to happen. Australia has almost 200% of GDP in private household debt. That is a ridiculous figure which blows away almost every other country on earth bar one or two.

    The reality is with a sever TOT shock via a mining reset we are Argentina – there is simply no way getting around this unless we have a miracle.

    $1.5 TRILLION in mortgage debt……seriously people think about that.

    No, the ONLY way Australia can move on from being a primary producing nation which relies on selling its productive assets in downturns is to have a total paradigm shift and a lost decade.

    We have had 30 years without recession, no other country has done this – we are MORE THAN due for our fair whack – and no better time could it come, under a fascist right wing LNP government to remind everyone that abandoning our egalitarian ways, abandoning nation building and resorting to every man for himself is a sure fire way to total national wipe out – and should NEVER happen again.

    Anything else will leave us trawling along the bottom of the sea bed in a society of extreme income disparity and a tiny fraction of wealthy and a seething underclass of grinding poverty.

    Seriously – there is literally no alternative to a massive house price correction which will push consumers into a massive spending hole.

    This should be coupled with huge borrowings from government to engage in massive long term nation building exercises in areas of energy, transport, communications, medicine, science, bio-tech, robotics, and most importantly space.

    The call to limit the housing correction is one of the most dangerous self serving calls I have heard, almost as bad as those screaming for a rate cut, and then crowing about it – the very cause of the problems we now face.

    As we have been saying – there will be no APRA, no FIRB – just rate cuts which will devastate the economy.

    Some of us have been more right than others.

  23. For all the talk here Narev’s comment earlier today said it all – APRA mp has not impacted risk appetite. One can only assume APRA satisfied with current situation, banks having successfully persuaded need for mp tightening does not exist.

  24. This from a reliable friend who works with there:

    In 2012/13 the Victorian state government demanded a 35% reduction in elective operating in a major South East (unnamed) hospital network. This last 7 months, and destroyed waiting lists. It was briefly reported in local news. The quiet word from management was that the unprecedented slow down in tax receipts from the property freeze in the previous 2 years had exhausted government cash reserves. This directive to management only eased when the transaction taxes picked up again.

    The inner city networks were protected (albeit a warning was sent out apparently, but nothing eventuated). My source had no information about the other suburban networks.

    It is sad to think that a state government receives greater than 30% of its receipts from such a volatile source.

    It is even sadder to think that the decision to provide elective (and essential) surgical services in the public health system depends on stamp duty for property transactions to such a degree. “Auntie Nellie” only gets her hip replacement if developers continue to sell concrete tents to foreign investors.

    Imagine what would happen in a full blown investor retreat.

    Imagine the rationing of essential services.

    Don’t park on the street. Get a big fence. DON’T GET SICK.

    • Yes completely loony.

      Hopefully South Australia is a sign that state govts realise they need to start shifting their funding base – and fast.

      • As I said elsewhere, do not believe a word that comes out of any current SA politician. The big J & the spin doctors are doing a fast spin cycle at the moment. There is no way they are even caring or believing their own spin. Its just spin because its a good time to spin. Feed the chooks! That’s all it is. SA is not the state to follow, do not get sucked in by the Big J spin. It is all crap. SA is totally broke, they just don’t it yet as they are all too busy flipping shitty properties to each other. The Big J wouldn’t even know what his funding base was other than “we should get help from the Eastern States because, because, because, I don’t really know, but sounds like a fair thing to expect…..”. The State of SA is BROKE!

  25. I just don’t think you can view Australia as a national housing market, and in Sydney it’s hard to see how a crash would eventuate. There is no oversupply as in the classic bubble dynamic where supply rises beyond what’s needed to meet inflated demand from rising prices.

    There is unlikely to be either sharp rises in unemployment in nsw or sharp rises in interest rates.

    So while there may be a period of stagnation from 2016 I just don’t see how a crash is triggered. More likely to see low volumes as people just sit it out, with no pressure to sell.

    I really wish I’d come to this conclusion 3 years ago instead of listening to the irresponsible don’t buy now bullshit. I’d have had a 30% buffer against any falls at least.

    And I’d have probably used some of my extra disposable income from lower mortgage payments on a subscription to MB;-)

    • And FWIW, I have been listening to crashniks saying Sydney housing was going to crash for almost 20 years now. I held my nose and bought in Sydney in early 2000s — no choice because of growing family. I paid what I considered a silly price and sold several years later for an even sillier price. Now living in regional Australia.

      Do I think house prices are crazy? Of course!
      Do I think its a crime against younger generations? Of course!
      Am I appalled by government policies that prop up house prices? Of course!

      But if anyone asks me if house prices are going up or down, I always answer I have no idea.

  26. Sad thing is, when these fascist money printer’s scheme’s blow up, we can’t even sit back, get out the popcorn and enjoy the show because we get caught up in the shitstorm. Never the less, I’m having a good old chuckle at the hysterics while I still can.

  27. Houses

    Interesting historical parallel, but the major difference is the floating currency.

    The 1890s featured yes capital withdrawal but at fixed exchange rates, therefore the internal adjustment was lower credit, lower prices, and the consequent collapse of real estate values caused half the banks of the time to be restructured.

    Echoes are in the Club Med parts of the Eurozone if there is no “new deal” for recycling fiscal transfers within the monetary bloc.

    With a floating exchange rate, then the biggest response to an external shock would be a lower AUD. Which improves exports but makes capital goods used for investment more expensive.

    So to produce an 1890s outcome, you would need the AUD locked in at a high level and not responding to falling domestic activity. Which the RBA has been working at avoiding for some time now.

    Housing boom/bust potential outcome from RBA easing does need to be managed, and the Canberra parliamentary gridlock puts a worrying large load on the limited number of levers the RBA has.

    I agree with your concern but don’t agree the use of the historical comparison, the differences against today’s situation are too significant to project that history as the likely future outcome from the current position.