The great housing bubble arse-covering begins

Cross-posted from Rational Radical.

Well this is all getting very exciting isn’t it?! The hills are suddenly alive with the sound of housing bubble music. Never mind that a growing mosh-pit of ‘doomsaying’ international economic peak bodies, ratings agencies, investment houses, economists, researchers, entitled Gen-Y bloggers with an axe to grind, and the odd journalist and politician have been rocking out to this bubble tune for the best part of a decade (or more).

We are somehow to believe that we’ve only just pushed play on the soundtrack of dangerous and devastating debt-fuelled asset inflation, rather than the truth that a megaphone has simply been retrofitted to the broken little music box that has been gathering dust on the proverbial shelf of values Australians once cared about, cranking out that same neglected and hated old tune of housing bubble doom.

Our three economic regulators have finally revealed themselves as the three witches busy tending their poisonous brew while chanting “Bubble, bubble, toil and trouble!” to a nation of tone-deaf property speculators and commentators-come-experts. The architects of our dreaded housing and economic Frankenstein are among the last to formally recognise the monster of their own creation for what it is – a hideous creature that defies all reason, logic, decency, ethics and ultimately, any ability to survive.

Such is the well documented exceptionalism and wilful blindness of the collective Australian bubble psychology, that bubble believers and sceptics alike have come to the physics defying conclusion that Australia has invented an actual perpetual motion machine. The problem with perpetual motion machines? They don’t exist. Can’t you just feel the growing friction rubbing up against the bloated sack of housing hot air? I am amazed at how tenacious the belief is that exponentially growing imbalances can go on forever, when every fibre of the economy must be sacrificed at the altar of housing speculation in ever more dramatic interventions just to keep the damned thing afloat for another few months or years. For just one more election cycle.

I’ve been researching the housing bubble, its root causes, and the concomitant bastardisation of our once dynamic and sustainable economic structure for about 6 years. I’ve been writing about it privately for 5 years, and writing about it publicly in this blog for nearly 3 years. Like many hard-working and determined commentators covering this matter of number one moral, political and economic importance, I’ve had my fair share of detractors and flat-earthers taking strips off me and trying to personally discredit me for having a “vested interest” as a young renter (imagine!).

Yet never before have I been so convinced that a self-fulfilling day of reckoning (a ‘Minsky Moment’ for those playing at home) is inevitable and closer than ever. For a passionate blogger with a day job and a family, it has become almost impossible to keep up with housing bubble news these days. It has for the first time in history become the daily issue, and is only set to become more so. If I were a highly leveraged property investor, I’d be starting to get very worried about now. If they haven’t been listening so far, they must surely be starting to sit up and take notice.

In the last month alone (in chronological order):

Everyone is covering their arse, a natural reaction to panic

So here we are. It’s official. We are in a lot of trouble. Nearly everyone in a position of leadership, influence, regulation, expertise, and editorial responsibility has commenced covering their arse. Regulators, economists, politicians, and major media outlets, faced with an incontrovertible truth that runs against their fixed world-view, are promptly following their natural instincts to re-write history and deflect any possible blame for the coming fallout.

Hell, even once raging housing ‘bears’, who in more recent times have given up hope of the laws of physics ever being applied to Australia, have been trying to keep up with recent developments, and are reasserting the likelihood of a major destabilising fall in house prices and an associated credit and banking disaster.

The three stooges of financial regulation move to save their own bacon

The RBA, APRA and ASIC have recently gone to long overdue lengths to explain the damage to the economy and risks to financial stability posed by record household debt levels and house prices. Yet the most significant mea-culpa inadvertently presented by regulators is that restricting growth in mortgage credit will lower house price growth. This is an implicit admission that rising mortgage debt drives prices higher, a fact long detailed by economists like Steve Keen and Philip Soos, and alternative economic media outlets like MacroBusiness who originally led the charge for macroprudential measures to slow the housing market back in 2013.

This admission is actually groundbreaking, because it agrees that physical supply/demand of housing is secondary to credit availability, and therefore that prices being so far detached from incomes and rent must represent a debt-fuelled bubble, not a fundamental shortage of houses to live in. It is an admission that the amount that each prospective buyer or investor can borrow is actually the chief determinant of house prices, and when backed by the favourable tax treatment of land and the textbook speculative belief that prices can only ever rise, has driven prices into the stratosphere without regard for the normal fundamentals of supply and demand.

By contrast, the real supply and demand fundamentals of housing (as a commodity), can actually be observed in the rental market where rents have not even kept pace with wage growth over the bubble period. There are both enough physical homes to house the population, and an inability to use leverage (borrow) to pay rent. The RBA’s admission is thus a refutation of the endless mantra of housing shortage (a characteristic mirage of all land bubbles), and from our top economic custodians.

The RBA has thus admitted that we have a credit-fuelled housing bubble, and they are now moving against it. No amount of mythical housing shortage is going to prevent a material effect on prices from tighter credit conditions. Why else would our regulators pursue these measures that they have for so long ignored or argued against? Contrary to views of the sceptics, it’s not just an exercise in managing public pressures. There is a unified and concerted effort here to dent investor lending, particularly the most dangerous form of lending: interest only loans, the very definition of ‘Ponzi Finance’.

If that doesn’t terrify you, the very fact that the measures announced by the regulators are minimal at best, and are still mostly an effort to deflect blame, means that they are terrified that any substantial measures to control housing credit growth would actually burst the bubble. As I’ve argued at length, they are damned if they do, damned if they don’t, and are trying to engineer a ‘permanently high plateau’ for at least as long as they remain in their jobs, which might see them avoid blame. This much vaunted feat has never been achieved in the long history of bubbles.

Government will never let prices fall, will they?!

Which brings us to the arse-covering measures about to be (or already being) employed by governments of all levels.

Further policy fraud intended to temporarily prop-up prices by bringing forward demand – such as first hone buyer grants, stamp duty concessions, unlocking superannuation etc. – are simply going to force the hand of regulators to directly burst the bubble by hiking interest rates or severe clamp downs on mortgage lending growth. It’s that whole rock and a hard place thing. We have reached a terminal stage of proceedings that prevents yet more gimmicks from manipulating the market much further. The housing ‘market’ is so comprehensively manipulated by successive and traitorous government policies on tax, pensions, superannuation, direct stimulus, investment and financial regulations etc., that further manipulations will have the opposite of their intended effect.

The latest attempts to stimulate the market will simply run up against regulators desperately trying to assist a flagging economy and shore up a financial system under significant threat – which is to say, they will simply force the hand of regulators and burst the bubble.

We look to be approaching the final panic stages of the last blow off in this epic bubble, as the kitchen sink is thrown at the market in a desperate attempt to avoid the inevitable. But it will only do further damage, and ultimately prove futile. This is the cost that we all have to pay for those beloved property prices – that illusory “wealth effect” that simply amounts to a pile of household debt as large as the difference between the total nominal value and the total fair value of the housing market.

Now that’s just the ‘extend and pretend’ side of the policy ledger. The actual anti-bubble, pro-market side of the policy ledger contains mounting risks to property speculators as well, as the affordability crisis has gone on for so long, and become so egregious, that political careers are now coming to depend on doing something about the problem instead of pretending there isn’t one.

Even a federal government that went to the previous election with a platform based on a property-crash scare campaign, and now hell-bent on avoiding real action on housing affordability, is coming under the greatest pressure in the history of this bubble to do something. There appears to still be a very real chance that the government will make some move on any/all of:

  • federal land taxation replacing stamp duties,
  • limiting negative gearing and/or the capital gains tax discount in some way,
  • enacting further enforcement and monitoring of existing foreign investment laws,
  • restricting ability of self-managed super funds to make leveraged property investment,
  • supply side reform to increase / incentivise the faster construction of homes and infrastructure,
  • implementing long-delayed anti-money-laundering legislation,
  • or possibly even reducing the net annual migration intake.

Political risks have never been greater for those punting on endless property riches underwritten by a government who “would never let prices fall”. Indeed, yet another ironic and self-fulfilling destiny of such a terminal imbalance in housing affordability and wealth, is that political demographics eventually moves against house prices, as landowners come close to or actually become outnumbered by renters and people who simply understand the risks and damage caused to our collective prosperity by this epic housing bubble.

But isn’t this time different, even the bears have lost faith?!

Perhaps the surest sign of nearing the peak of the bubble is that many housing market ‘perma-bears’ and ‘crashniks’ have seemingly been losing their minds in frustration, and in agreement with many delusional bulls have begun proclaiming that the government and regulators have the ability to prevent the bubble from bursting, as though every economic leader prevailing over historic housing bubbles had not tried the exact same impossible feat.

Fundamentally (and self-evidently), bubbles cannot be supported by market manipulation indefinitely. Did governments in the US, Ireland, Spain (and indeed Australia in the 1890s) attempt to manipulate the market to prevent the bubble bursting? Of course they did. Did it work? Of course it didn’t – in the end.

One of the key characteristics of a bubble is that even the deep skeptics and rationalists begin to imagine that things can go on as they are indefinitely. The problem simply becomes one of self-fulfilling destinies however, as the mathematical imbalances become so extreme, that any move to keep the party going ends up having the opposite effect and panicking the market. Ultimately people are ruled by fear and greed. They are two sides of the same coin, as every bubble in history has proven time and time again. Humans just have a way of forgetting that lesson, over and again.

Surely the Chinese bid will bail us out?

The Great Aussie Housing Bubble is seemingly counter-cyclical to the major residential real estate bubbles that burst in the US, Spain, Ireland, and other European nations, but is actually part of what I think of as the Great Former British Colonies Housing Bubble, in which Australia, New Zealand, Canada, Hong Kong and the United Kingdom itself are all experiencing even worse housing bubbles than the afore-mentioned ones that brought the global financial system and economy to its knees, the true fallout from which still remains largely unresolved.

The main feature common to at least Australia, NZ and Canada (and the reason these bubbles deferred bursting during the GFC), is that they are all major commodity exporters to China, and were in no uncertain terms bailed out by Chinese stimulus over the last 5 to 10 years. As a consequence, they all became comparably attractive places for foreign investment in real estate owing to the perceived (experienced) lack of downside to capital values following the GFC.

Because of this shift in capital flows away from the devastated housing markets in the US and Europe, governments in commodity countries like ours turned a blind eye to damaging capital inflows in order to help ride their respective housing bubbles over the general deterioration in global business conditions. It was just the latest instalment in the global commodification of land and housing, not new in nature, just in scale and distribution owing primarily to the wall of money trying to escape China’s push to reform and restructure its economy.

In light of that context, anyone who looks closely will notice many problems with the idea that the floodgates to more foreign capital can simply be opened up in order to bail out the market (or any other form of policy intervention for that matter). Namely:

  • Foreign investment in real estate was widespread in the US and Europe leading up to the GFC, and it did not stop their bubbles from bursting.
  • More accurately, such “investment” likely worsened the crash, because foreign capital was much more able and likely to flee a souring market than domestic capital.
  • As such, widespread foreign investment in our market has worsened the upside to prices, and will thus worsen the coming downside to prices. It’s a classic case of the demand / supply curve. Steeper up = steeper down.
  • Foreign investors are still investors at the end of the day, and while they may not care for cash flow, like anyone they will always care for capital preservation. When the writing is on the wall for a bubble, they will get the hell out, no matter how lax the investment laws may be.
  • Additionally, and a point frequently overlooked or underestimated, is that China cannot allow further capital to flee the country in the same volumes as recent experience. It is debasing their currency and destroying their attempts to reform their economic structure away from capital investment towards services and consumption. As such, they have announced tighter and tighter controls on capital flight, including their latest decree that all foreign investments and capital flows must explicitly state its purpose. They will never catch everyone, but recent experience shows that if ever there was a government determined to intervene in its own economy and financial system, it is the Chinese government.
  • Chinese investment has helped push the Antipodean / Colonial Real Estate Bubble into its most extreme and final stage. Anyone following global developments will know that the bubble is already bursting in Canada, New Zealand and the UK, and Australia will most definitely be next.
  • Because of commodity exports and foreign real estate investment, our collective housing bubbles are in fact bubbles hypothecated on top of the largest debt and housing bubble in human history: modern China. When that finally goes, we are so toast it is not funny.
  • A bubble that has caused such severe damage to the social and economic fabric of a country means that political pressures are always ready to invert when people least expect it, and as we have seen in Canada, and now in the state of Victoria, political jobs are now coming to depend on reducing foreign investment and mass immigration. The tide has turned, and we may even see movement on these factors in the upcoming federal budget.
  • The proof that foreign capital has already thinned out is in the actions by the Victorian government, which in my view are absolutely a panic move to shore up buyers for the massive pending glut of shoebox concrete boxes, which Chinese nationals are less and less willing and/or able to buy.

But what about our world-beating immigration rate – supply and demand, right?!

One of the last of the dying housing bubble myths is that Australia’s highest rates of immigration in the developed world will bail us out and keep prices from falling. Even a cursory analysis of historical bubbles demonstrates the fallacy of this assumption. Immigration flows tend to be cyclical in nature, and there are many historical examples of immigration crashing through the floor when the bubble finally bursts – as unemployment spikes, recession arrives and asset prices fall.

Our own land bubble from the 1890s, centred around Melbourne post the massive commodities and population boom of the second half of the 19th century shows that unprecedented population growth did nothing to prevent land prices collapsing, and subsequently immigration rates collapsing into the negative. People packed their bags and left, no doubt with good reason as the bust triggered an economic depression worse than that experienced in the 1930s.

I’ve dedicated an article to this topic previously, but to help round out the destruction of bubble myths currently underway, take a look at the immigration rates in Ireland leading up to and following the bursting of their real estate bubble:

Speculators, foreign investors and baby boomers will to try to cash out all at once

Regulators are specifically (and rightly) worried about the dominance of investors in the market, especially the roughly two-thirds of investors using interest only loans. The unprecedented stock and flow of interest only loans is one of the clearest signs that we are indeed in a speculative credit-fuelled housing bubble, wherein much of the mortgage debt will never be repaid. The investor dominance is also unique compared to previous bubbles and examples from overseas, in that it is much worse. Unlike owner-occupiers, investors (particularly interest only investors) have very little reason or ability to ride out a short-term fall in prices, and will not hesitate to liquidate when trouble strikes – if their bank doesn’t do it for them.

The massive proportions of cash flow negative speculators are the single biggest driving force behind price rises. There are simply not enough homes for every house-flipping speculator to build their property empire, so prices inevitably spike dramatically under this competition and artificial demand for physical housing. That rents have not followed prices (let alone wages) in the bubble era attests to this fact.

Roger Montgomery describes the madness (bubble-fever) that this entails, as investors implicitly assume that the next buyer to facilitate their profit-taking (capital gains) will accept an even poorer yield on their asset, making their negative cash-flow (known as carry) ever more risky. Mathematical and economic certainty ensures that there is a point where the yield is so poor, the cost of transacting and holding the asset so great, that it is either impossible for new entrants to bear or simply unpalatable compared to alternative investments:

“Property income yields are at historic lows and yet property buyers couldn’t be more enthusiastic.  Buyers who tell me that they don’t mind buying on a yield of 2.5% because they will get a capital gain need to understand that the capital gain will only come when a buyer is willing to accept an even lower yield.  And yields cannot fall much further when your oversupplied property is vacant and your yield is zero – as many leveraged Brisbane apartment owners are about to discover.  The end of every bubble is marked by the appearance of the greater fool principle; betting a bigger fool will come along and accept an even worse return.  It’s speculation, pure and simple.”

These speculators are utterly reliant on capital gains, and when enough of them realise that capital gains are not forthcoming, the artificial demand for housing will be decimated.

The army of retirees yet to cash out on their paper-wealth is another overlooked aspect of the issue. Unless you are flipping houses or downsizing substantially, you have not actually been made rich by sky-high house prices, as you have not yet cashed-in on the inflated price. When the investor bids start disappearing as their cash flow negative situation forces them to capitulate to a negative capital appreciation future, retirees and superannuants will follow soon after in a come-to-Jesus moment, rushing for the exits in a bid to cash out their presumed gains.

All of a sudden there will be next to no reason to pay the prices currently being demanded – the maxim ‘houses are worth what people are willing to pay’ will come home to roost with devastating speed and certitude. Liquidity is crucial when choosing a quality investment and managing risk. It is always the first thing to disappear when a bubble bursts, and prices can indeed drop significantly faster than the time it takes for the media and market to accept and report that the bubble has burst. By then it is mostly too late.

Housing bubble panic is justified, time to cover your own arse!

So when is the long-awaited crash going to finally happen? And how fast and far will prices fall?

I’m going to cover the issue of price trajectory in a subsequent article, but to give you some robust analysis to this effect, Lindsay David and Philip Soos, two outstanding economists and housing research analysts have recently estimated the likely downside required to return housing to fair value. They estimate price declines of 40% – 60% nationwide, with Melbourne and Sydney needing more like a 65% decline, two-thirds of current prices. Anyone who understands percentage growth / falls knows that 65% fall equates to the erasure of 200% of gains. And that’s before we even consider that markets nearly always overshoot their mark in a major correction.

Put another way, those sort of falls would take real house prices (adjusted for inflation) right back to the fairly stable price-base in the 90s. Their eponymous and widely referenced constant quality real house price series should confirm the validity and likelihood of this possibility:

The crucial issue therefore is one of inevitability over imminence. Timing is a fools game when the risks are so monumental and inevitable. It doesn’t matter whether or not the crash is imminent, it’s coming. I’ve lost track of how many times I’ve explained this point to those pesky bubble-deniers who try to use failed crash-timing predictions to discredit the whole risk argument put forward by ‘doomsayers’ like me. It’s also a point I occasionally have to make for those angry bears who keep running out of patience for the crash that never seems to arrive.

It simply does not matter when exactly the crash will come, because the crash is now undeniably inevitable, and the expected price falls will take us back the best part of 20 years. In the same chart above we can observe that the 1890s price crash went on for half a century, invalidating any folks who might have been regretting “not getting in years earlier”.

Waiting it out really is the only option available to anyone who can comprehend the long and torturous series of events that brought us to this terminal phase of the largest debt-fuelled land bubble in our history. The snapping sound you hear is the dawning realisation in the cultural psyche that we should have listened these past 5, 10, 15 years to those warning that housing bubbles destroy economies and impoverish everyone in the end. And worse, the realisation that no one actually knows what the f*k to do about it, and have thus commenced their elaborate and predictable arse-covering. It is clear that the arse-coverers are already attempting to rewrite history before the bubble has even officially burst.

Whatever happens, always remember that the warnings were ignored for so many years, that any attempts by those with the power to save us from calamity at such a late stage were doomed to fail. Worse, they were probably doomed to actually be the pin that eventually burst the bubble.

Thus it is finally dawning on the collective consciousness that there is an intractable contradiction between Australia’s housing bubble and the ability to have a sustainable economic structure. It is no longer a ‘doomsayer conspiracy theory’ that our current epic house prices and household debt levels are not only a major threat to our financial system, but are also strangling the economy, as I’ve argued exhaustively. This is the ‘damned if we do, damned if we don’t’ Faustian Pact central to our housing bubble, which in the end is bad for everyone, including those who believe that high prices represented wealth without cost.

We have let this thing run so out of control, that if we act to rein it in, the bubble will burst, if we do nothing it will burst, and if we stimulate it further it will burst. And in the mean time the economy is bled dry as the reform process completely freezes in terror at this contradiction.

It’s hard to underestimate the significance of recent developments, which we can broadly summarise as confirming the following terrifying facts:

  • The housing bubble is damaging the economy.
  • The housing bubble is holding our economic and financial regulators to ransom.
  • The housing bubble is only kept alive by sub-prime lending and market manipulation in the form of repeated policy intervention, which enjoy ever diminishing returns to the point of eventual negative returns.
  • The housing bubble is one external shock away from a self-fulfilling crash.
  • The housing bubble does not need unemployment or interest rates to rise in order to burst, but they will rise anyway.
  • The housing bubble will burst if NO reform is made to housing or tax policy.
  • The housing bubble will burst if reform IS made to housing or tax policy.
  • The housing bubble will burst if more policy stimulus is NOT forthcoming.
  • The housing bubble will burst if more policy stimulus IS forthcoming, as it will force the hand of regulators already failing to reign in runaway prices and household debt.
  • The housing bubble is set to destroy the fifth government in a row, as all of the above facts completely freeze the political process and any hopes for reform.
  • We are now certain to face a very painful and damaging downturn in the housing market, financial system and broader economy, once preventable, now inevitable.
  • The longer we attempt to avoid that fate, the worse the adjustment will be – for everyone.
  • We cannot escape that fate forever.

So with regulators officially declaring Australian housing a bubble, government set to announce arse-covering measures of their own, and literally millions of cash-flow negative investors, superannuants, and pending down-sizers all set to simultaneously realise their capital gains prospects have vanished, are we still willing to bet that house prices always rise? Are you willing to time one of the most over-valued markets (for anything) on the face of the planet, and cash out just before the crash really arrives? Buy into an investment after 20 years of staggering gains, predicting that more of the same is ahead for you? That a greater fool will eventually accept an even worse investment yield on the assumption of even more capital growth – and the resulting political, social, economic and financial instability? Still think the government has your back? Good luck with that.

Whatever happened to “Buy low, sell high” as a sound investment strategy? Bubbles destroy such rational investment notions. What about “Buy and hold”? Sadly that only works if you don’t need to sell any time in the next number of decades to realise profits. It sure isn’t the strategy employed by that massive army of house-flippers is it? There is no investment strategy that can protect you from this market any more, except for refusing to participate. It’s the only sane choice at this juncture, and I don’t think it’s gonna be too much longer before “Buy low, sell high” becomes the figurative fish that got away. A regret that will likely torture the minds of the masses for at least a generation.

All of a sudden it’s fashionable to panic, and in typical Australian fashion, we love to follow the crowd into the latest fashionable trend. This is a once in a lifetime opportunity to dodge the housing bubble while you still can. So panic now or forever miss out.

Comments

  1. will be most interesting to watch the Register of Members’ Interests (d)evolve over the next 6-18 months

    Perhaps some smart bugger could create an ETF to track it in value and let us short it

    • Yes, you’ll probably start to see craziness like allowing super to be used as a deposit, or mortgage interest be tax deductible, whilst simultaneously the rats in Canberra will be exiting en masse.

      • haroldusMEMBER

        the rats in Canberra will be exiting en masse

        ready to go again when the dust settles!

  2. easypeteMEMBER

    One of the best summaries I’ve read in a while. This will be the link I send to friends/family about the whole situation.

  3. Heard it before
    Problem is that I understand and agree with all this but the powers governing this country will do something stupid to kick thrb an for another few months. Turnbull went last year to China to offer them the right to buy existing homes legally for their kids primary school enrolment
    You only need one decision like this to change the equation and keep the bubble going
    MB need to realise that it is a bubble managed by this government: started the first day the coalition took power in, and will continue while they are still in power
    I want that crash to happen now but realistically it won’t
    The coalition will not let it happen

    • The weight of money out of china is monstrous. Australian policy could be made way more accommodative. Up to now property has been placed before everything else. Why will this change? Australian property will crash when Toronto does.

      • China will be the trigger for the unwind.
        A big devaluation of the yuan and hard capital controls is coming in the next 6-12 months.

    • HadronCollision

      Rrreally good point

      The real question here, then, is: what does the governement and Opposition value more….

      If we know what we have our answer

    • Jumping jack flash

      Yes, I agree, all this means is that the problem is becoming more blatant and obvious.

      It doesn’t mean that anything will actually be done about it. In fact as more and more people chime in that there is a bubble I expect more and more people to stand around looking more and more worried while continuing to do nothing as earnestly as possible.

      Soon they’ll be doing nothing with such force and vigour that their faces will go red and steam rises from them.

    • Agree Rod.
      I expect nothing more than a massive ramp up of immigration and Chinese investment to fill the hole to come.
      Capital controls are a “face” policy. Surely people are “getting” China by now? The capital policy will officially be declared, waived around, but this will only improve “dark” channels for the funds to pour through, typically controlled by officials in any case. Only naive Westerners “suckers” would believe anything different.

      We live in a world that has shifted dramatically from income to capital. Expect record low income growth for the next ten years as it becomes a norm, where climbing income is an aberration.

      The irony of consumerism, employees – “you” will soon be the disposable good.

  4. Its a great read and yes we will eventually pay a massive price for this policy failure but before everyone starts getting too excited keep in mind the following:

    Most of the ZIRP/NIRP driven foreign capital delivering ultra low mortgage rates to speculators and others caught up in the frenzy is NOT investing in housing. It is investing in our government guaranteed banks. Which means that hot foreign ZIRP capital is invested in the full faith and credit of the Australian nation.

    Viewed that way don’t expect any lack of interest in our banks until interest rates really start rising off shore and force up our rates (the CAD and Foreign Debt limits RBA action).

    If you think the government will let our big 4 banks default good because that is the only risk faced by predatory foreign capital.

    When have you heard anyone suggest we should reduce the supply of ZIRP/NIRP capital for mortgage lending secured by existing property anyway. Even the MacroPru Crew still want lashings of hot capital hustled in by APRA.

    Certainly not Ross Gittins.

    https://pfh007.com/2017/04/09/foreign-debt-gittins-gets-it-wrong-again/

    Secondly, the choice facing Chinese buyers is about buying an escape refuge and putting capital outside the reach of Beijing. It will continue to come as long as we allow it and there are ZERO signs that there will be any limit on offshore buyers buying newly constructed housing. A bunch of new units kept off the market do not drive up residential vacancy rates as Sydney with 300+ cranes and a vacancy rate of 2% demonstrates.

    For sure, IF that foreign owned new stock was sold that might increase vacancy rates and result in a surplus but having lived next to a house, foreign owned but vacant for 25 years, you might need to be patient. Eventually the owner of that house turned up and moved in.

    If you want to know when the bubble will “pop” rather than simply slowly deflate and grind the economy into debt deflation dust keep an eye on unproductive international capital inflows.

    Either we start restricting them voluntarily (which is recommended) or we wait until they stop coming and THAT might not happen until our creditors are satisfied they have a claim over everything of value.

    • Rational RadicalMEMBER

      Yes Pfh I agree with most of your deep understanding and analysis of capital flows and the monetary system, but not always your conclusions.

      What evidence do you have that Australia’s capital inflows regulations are the sole determinant of the ‘tap being switched off’. I’ve heard nothing but anecdotal arguments against the measures being employed by the Chinese govt to stop same, as detailed in my article.

      Secondly, as per my very explicit conclusion, inevitably is the key to avoiding current terminal housing risks, NOT imminence. And for that matter, neither is pace of devaluation/deleveraging in my mind. The scale of debt deflation required to rebalance the economy is such that either it happens and a price paid now will be ruinous, or it doesn’t happen in any rational timeframe and the economy and financial system collapse under their own weight anyway, forcing real deflation onto fixed assets in even greater proportions.

      I don’t pretend to k ow when and how the great deflation arrives, but if you wish to bet against these unparalleled mountain of reversing vectors and time the market, that’s your business! I just think you’d either have rocks in your head, or a touching faith in our government and regulators to control the market indefinitely. Always worked out in the past hey?

      As Roger Montgomery said, “It’s better to be 12 months early than 12 minutes late”. But you know, each to their own 🙂

      • Rational Radical,

        “…What evidence do you have that Australia’s capital inflows regulations are the sole determinant of the ‘tap being switched off’. I’ve heard nothing but anecdotal arguments against the measures being employed by the Chinese govt to stop same, as detailed in my article….”

        When it comes to the Chinese government anecdotes are about all we have. I have no doubt that the Chinese government is very very keen on stopping private capital outflows. But whether they succeed sufficiently to bust Australian house prices is the first thing – bearing in mind that it doesn’t take a lot of insiders “slipping the net” to keep our bubblista happy. The second thing is that while the Chinese government may not like private exports of capital they still are likely to be keen on capital exports generally as that helps them maintain the Yuan peg with less effort. Sure that doesn’t mean the Chinese government or SOE are going to buy a bunch of holiday flats in Sydney or Melbourne but it means that there will be plenty of cheap money available to locals in Australia and APRA will let them borrow up.

        So while the Chinese Government may work very hard to plug the holes I would feel much more comfortable if the Australian government was doing the same instead of welcoming foreign buyers of new apartments with open arms.

        As for your reticence on predicting timing I agree and more importantly I agree that there will be a day of reckoning. I am just concerned that it might be a lot further down the track with a much higher price tag than we expect.

        As an example:

        For years the narrative was that Perth’s property market would be completely smashed when peak mining CAPEX passed yet here we are with the mining CAPEX boom far off in the rear vision mirror and a slow melt – even with residential vacancy rates of 5%. Perhaps Perth is still going to collapse but we have heard that tale for years. How many of Dutton’s ponzi imports for regions will it take to soak up the Perth excess and get vacancy rates back down to 2%? 20,000 people? 30,0000? If Dutton and his property speculating mates put their mind to it they could allow all that stock to be sold with a permanent residency attached easy.

        I have been arguing for years that vacancy rates of 4%+ were exactly what was needed and yet I had a bunch of people telling me I was nuts and vacancy rates of even 3% would indicate the end of times were upon us.

        In Sydney and Melbourne – despite crane activity that is out of this world – we are still seeing vacancy rates that barely begin with a 2.

        As I said to rampaging Mark below – I would be perfectly happy to be wrong on this issue as this debacle is a national disgrace but after watching this mess unfold since 1997 – 20 frigging years ago. I take a lot of persuading.

        If the governments of the world learnt one thing from the last decade it was this – whatever else you do make sure you keep the supply of credit flowing and DO NOT let the price of assets that secure that credit collapse.

        By hook and mostly by crook they have shown it can be done.

        I hate it but I feel very uncomfortable betting against it.

      • Jumping jack flash

        “If the governments of the world learnt one thing from the last decade it was this – whatever else you do make sure you keep the supply of credit flowing and DO NOT let the price of assets that secure that credit collapse.”

        +1 this is all that matters.

    • None of this is even bordering on reality or relevance. It is purely talking your own book.

      The two points you make – that foreign investors are only investing in our banks which are secure, and there is no draw back on Chinese buyers is absurdity writ large and utterly ignores all evidence.

      The over supply of units into Melbourne, Sydney, Brisbane, Perth is stuff of legend. Denying the over supply of apartments is literally not even worth rebuking, it is blatantly an utterly absurd comment.

      We know that 50% of all apartments bought in the last 12 months are selling for a loss already.

      So – are foreign banks worried about our financial position – yes – you just read an article which sets out in great detail the level of foreign institutional angst over our extreme private debt. And that foreign money is not just being invested in our banks for shits and giggles – it is ALL SECURED AGAINST THE VALUE OF THE PROPERTY.

      This is an essential part of this bubble often overlooked. Its not just “borrowed” and hedged with nothing behind it – it is borrowed by the banks against the value of the property and then lent. This is where our country is in serious danger and I have not heard ANYONE address it.

      Finally the Chinese – sorry but again, you have simply ignored reality entirely. We KNOW that in January alone, after the Chinese government set up a new super agency, the largest of anything of its kind ever set up 12 months ago to deal with this specifically, curbed $80 Billion in foreign real estate capital flight. They have so far clawed back almost $300 Billion, they have shut down 500 shadow banks, curbed almost every popular mechanism of expatriating funds.

      Even Malaysian Gardens, one of the largest developments ever constructed is being shut down on an epic scale – run by the Chinese themselves.

      You are talking rubbish.

      .

      • Mark,

        Leaving to one side the spluttering and foam in your response you asserted nothing new.

        You claim thatoverseas investors have finally realised that Australian housing is a bubble goosed with their money. Well duh.

        Australian housing has been in a bubble goosed with foreign money for 17 years and not even the GFC stopped it coming. Perhaps you should ask yourself some deeper questions about why the money never stopped coming rather than spouting off like some others do around these threads. The answers you will find are the ones I gave you – offshore ZIRP combined with a taxpayer guarantee for investors in and via our banking system.

        Foreign capital was not and is not coming here because of some reasoned assessment of “fundamentals” which is suddenly about to change. The fundamentals have always sucked – apart from the fundamentals involved in ZIRP policies and Australian taxpayer guarantees.

        As for China, you simply do not know what you are talking about. The Chinese mercantalist business model was built around exporting capital and acquiring offshore assets to maintain a lower exchange rate. That is what $4T worth of US treasuries and SOE buying up assets offshore was all about. All we are seeing now is the central government desperately trying to regain control over that model. They don’t like private parties exporting capital as that is a key lever of the central government.

        Perhaps they will be able to plug up all the holes – the have been trying for years – but as any banana republic will tell you stopping capital flight is a lot harder than it seems as long as there are offshore assets that can be bought. And we still have plenty for sale.

        The simple solution to stopping Chinese capital flowing into Australian property is for Australia to stop them buying property assets in Australian but we are not hearing any suggestion of that.

        As for talking my book?

        I don’t have one to talk but I have been listening to people like you announce a false dawn for 17 years.

        Guess what if you are right and I am wrong – I will be celebrating as much as you.

      • I don’t have one to talk but I have been listening to people like you announce a false dawn for 17 years

        What’s important to remember is that 17 years isn’t a long time. Plenty of things in human history that are long gone have been out of whack for far longer, and looked more permanent than the Aussie property bubble.

      • Robert,

        Yes, and holding it up is the full faith and credit of the taxpayer and the nations wealth. While those pockets can be drained empty and the FIRE sector have that as their objective they are still very big pockets.


      • Yes, and holding it up is the full faith and credit of the taxpayer and the nations wealth.

        Okay, but I tend to agree with RR that there have been a number of people amongst the MSM and elsewhere that have lost the faith in the last two months. They are probably people whose lost faith is necessary for the end of the bubble, but it is too early to tell if the change is sufficient to bring about the end.

    • When i’m Spain I’m always floored by the local town’s bank. It is full of advertising for small loans for holidays and electronic goods. It’s a country that has been smashed by a blown bubble, EU-imposed austerity, a ceaseless tide of humanity from over the Mediterranean, high youth unemployment and underemployment and 0% savings rate for the rest. But private lending for unproductive shit is still seen as the way out. Now two entire generations have been thrown under the bus, and with that comes even lower fertility. Anything to protect the banks.

  5. ZIRP plus unlimited paper fiat equals (here and abroad) rising asset prices. We’ve all been calling it for a while, but housing won’t collapse until the faith in the current global monetary system collapses.
    This may happen from an external shock.
    Could the high likelihood of war in the ME be the last throw of the dice to maintain the petrodollar as the world reserve, or will it be the event that brings in the next iteration of bankers fiat like the SDR and probs a one world govt and army and tax system to go with it too.

    • He is likely right. “It doesn’t matter whether or not the crash is imminent, it’s coming”. This does not make any sense to me. When you are investing timing is very important. If you have sold your PPOR or delayed buying waiting for this crash then you have put your life on hold. For governments in drives priorities. Timing always matters. Like Steve Keen wrong for 8 years. At what point are you just wrong? Otherwise you are just saying any market will go up and down. It feels like the crowd that waits for the alien mothership to come and when it does not just says don’t worry it will come next year.

      “Foreign investment in real estate was widespread in the US and Europe leading up to the GFC, and it did not stop their bubbles from bursting.” This ignores the scale of China

      I bought into the MB and other bear hype and sold my PPOR appartment in 2015 and didn’t buy back in straight away. I hurts to say I was very wrong but I can at least admit it unlike the author. With government intervention and Chinese money this bubble could easily continue for the next 5 years. Even if it starts falling say 2018, the average length peak to trough is 3-10 years. Especially if you are like me and considering a PPOR how long do you put your life on hold?

      • Depends on the way you look at it. If you associate paying a mortgage with your life ‘starting’ , then yeah..you might as well dive in. Or you could just realise that a house is just a house and get busy living. I’ve been calling bubble since 1999 (Yeah, laugh it up). Was working at Ansett at the time and saw how many FAs were getting into property. Nationwide. Made me feel nauseous even back then. Around 2002 I realised this was a fool’s game and the only wat to beat it and keep my integrity was to take myself out of the whole charade. Change my environment and my headspace. Since then, moved overseas, met my wife, had a child, moved overseas again…etc. In other words…lived my life. These asshats in government and the media, big business and even here, are robbing you of your life.

        Get busy living or get busy dying.

      • Mining BoganMEMBER

        Just exactly how is not owning a home putting one’s “life on hold”?

        That may be the most ridiculous thing I’ve ever read here, and that’s saying something.

      • Agree Boges, that was simply some contrived, pro-property narrative drivel, devoid of any sense of analytical objectivity.

    • gballardMEMBER

      I remember people like you who were true believers in Bre X Gold. You may recall that it was all the rage a few years ago on the Vancouver Stock Exchange over the “fabulous” gold discovery in Indonesia. I wrote some cautionary comments at the time to a web site called Silicon Investor” which were construed as very negative negative and I was abused as being just another person who simply wants to piss on the party. Needless to say all the naive Bre X bulls were eating their own bullshit a few months later. OK, that’s the stock market, but property markets are not sacrosanct. I would strongly suggest that you bone up on history – read “The land Boomers” re Melbourne in the 1890’s or “Sydney boom, Sydney bust. the City and its Property Market 1850 – 1981 “

  6. ErmingtonPlumbingMEMBER

    “Treasury is rumoured to announce immigration cuts”

    What? Treasury runs immigration policy?


    • What? Treasury runs immigration policy?

      Are you saying it doesn’t make complete sense, given the last fifteen years of Australian politics?

    • reusachtigeMEMBER

      Aint never gonna happen but even if it did that would only bring things back to where all the losers on here were calling “bubble”… LOLOLOL!!!

    • Anybody who cannot see the reasoning behind Lindsay Davids statements is either a complete fool or a liar of a real estate “professional” in which case it would be both!

      • reusachtigeMEMBER

        No, they just aren’t permanegs like you lot and they value a positive spirit as that gets them rich! You poor bro?

      • And where has reason prevailed anywhere in this respect for the last 10-15 years. Each year there are articles just like this….

  7. Yes, Tony above is right, bloodbath or no bloodbath, the drop in fertility is already the price Gen X paid for this bubble. Not totally a bad thing but sad for some.

  8. boomengineeringMEMBER

    Read that Rational Radical the other day and it spooked me into looking into selling my place.

    • I’m in Melbourne and thinking the same. Actually got RE’s to have a look a the place too but i’ll wait till the may budget to actually make a final decision. If you don’t have a large mortgage or you bought a while back, it wouldn’t make sense to sell though

      • boomengineeringMEMBER

        Paul The more I’m researching the less palatable it gets, rent $1300-1800 week, will they take dogs, home workshop move to rent $500 week will they take short lease, (my factory central coast is full) too many toys/stuff as well, tax on the money deposited in bank, tax on selling, trauma of setting up small Brookvale premises to replace home workshop, get somewhere that wife can walk to work, off street parking, safety of money in bank. etc etc etc
        Already called the agent maybe he’ll find a savvy investor who will let me rent back while he waits for the new tunnel link to the city and the pedestrian overpass to Warringah mall to increase his fortune.

      • At the end of the day, it’s not always about money, at least that’s how i see it. Only reason why i would want to sell is to be mortgage free and to deleverage a bit. I’m single so my renting situation would be easy to manage unlike yours!
        If you can manage your mortgage and you are happy/comfortable where you are, i don’t see any reason to sell.

      • boomengineeringMEMBER

        Thanks Paul, Just finished talking for over an hour to the agent and he talked me out of it even though there is only one listing, and not his in North Manly. He was talking to a top CBA executive spending big bucks on research saying prices wont’t correct for 18 months, I didn’t agree and quoted external shock, but in the back of my mind knowing that most of the houses here are owned outright, including mine, so I guess there is less reason to drop as much.
        You are right it’s not always about money, trauma costs would be horrendous and I have never cared if my place went down in price anyhow.

      • And even if your house went down in value, what’s the purpose of selling if it’s owned outright? Shorting the market?
        It doesn’t cost you anything now and you will have to pay rent to someone and i doubt that putting the money from selling in the bank or anywhere else would cover that rent. And even if your money from selling out will cover your rent, in the case of a downturn , the banks will hurt and your money might not be secure(also government guarantee on 250k deposit means you will need to spread your money around…)

      • boomengineeringMEMBER

        I did a quick calculation in my head yesterday rent cost versus bank income which turned out to be way off paying double for house rent , I would have put it in ING not trusting the big 4, but the bigger they are.
        In my home workshop, is a 100 ton press, milling machine weighin 3 ton, Colchester lathe about 2 ton, large german horizontal bandsaw, huge welding machines overhead cranes, steel rack and about 150m2 of tools. so wimpng out feels pretty good at the moment.
        Thanks again

      • boomengineeringMEMBER

        Simon, All my young life in WA I had been made to feel like a second class citizen for working with my hands, no white shirt.
        But looking at Fox it seems Mega structures, biker build off,etc floods the screens but no office stories so I’ve been beating myself up for nothing as the job satisfaction in my game is huge. Your interest just cements my new thoughts, so thanks.
        The day I arrived in Sydney 1971 I felt at home, more personal freedom and like Germany more respect for engineering types.
        OH If you want to play with the toys you’ll have to go to the factory at Berkeley Vale the wife has a problem and hates people

  9. Re ‘perpetual motion machine’ – I ask my mates if housing is getting expensive because you can borrow increasing amount of money. Or if you can borrow more because housing getting more expensive. Don’t get a straight answer.

    • In all seriousness:

      Housing is getting more expensive partly because you can borrow more money. (Not the other way round).

      You can borrow more money because interest rates are low and banks think property is a safe bet to lend on.

      • This comment takes me back to the typical rebuttal of around 2009. If house prices where a function of demand then Calcutta should have the highest prices as there is most unmet demand (I have no idea if this is true but you get the drift).

        If banks stopped lending tomorrow what would houses be worth? I am told this happened in 1961 credit squeeze !

      • Exactly Tony. Housing “demand” means demand by people with money (ie a loan). the availability of credit drives the bubble and the removal of credit would pop it.

      • @Arrow – actually it’s both in a way because the bank can then pledge the value of the underlying collateral (ie.the house’s increased value) to the next incremental wholesale lender (ie. the institution that supplies credit to the bank). Long story short, increased housing value acts as higher notional security/collateral for future bank funding. So it’s more a chicken or the egg issue to resolve.

  10. Tassie TomMEMBER

    I’d love to send this article to my parents and my sister, but I won’t bother. They’ll just say “you keep telling me this shit, but I think it’ll just continue to rise but at a slower rate”. You can lead a horse to water….

    • reusachtigeMEMBER

      Exactly! Sending this article to anyone is the sure-fire way to look like an idiot!! Thankfully, most people on here have learned that lesson already. Best to send them articles from the Domain showing the new hot spots to invest in!! They’ll love that.

    • Good thinking Tom,

      In 2013 I was telling a friend not to buy, that prices will remain flat, thankfully she didn’t take my advice

      I learned to keep my mouth shut, the property she bought has gone up in value by $300k

      Don’t fall for the doom and gloom trap, look at the bigger picture, what would cause a crash and how likely is it? very unlikely IMO

      • Tassie TomMEMBER

        Lucky she didn’t take your advice in 2013 and buy in 2016 instead.

        The only thing worse than being wrong is being right – too early – and then changing your mind.

      • Triebs, in dot points highlight what will cause a crash and what the impact will be on someone who has recently bought

      • Thanks Brenton, I’ve read it

        Somebody warning of a bubble, APRA saying blah blah, ASIC yadda yadda

        Suddenly the Chinese won’t be able to move money out of China, have heard that so many times

        All waffle I’m sorry

  11. Tassie Tom, send them a Google link of what’s already happened o’seas, our mining towns, North QLD and WA. Funny how some people will not learn unless whacked with a sledge hammer.

  12. In 2 years time half of the real estate agent will be drug dealers or prostitutes. Some are already the ladder

    • reusachtigeMEMBER

      Although it won’t happen, a crash that is, your scenario does sound pretty awesome. REs are the hottest people going so for them to open up their top shelf relations for cash will allow more people to experience the joy! More drugs and quality relations, probably at cheaper and cheaper prices, it almost has me sympathizing with the weirdo crashnik cause!

    • After the US downturn there was a decrease in Real Estate Agents, but there was a corresponding increase in Personal Fitness Trainers. Same personality type I’m guessing.

    • I have to say most female RE agents I’ve seen are very good looking, on the hot side of things

      And the guys are fairly comfortable in dealing with suitcases of cash from foreign buyers so they have the cash handling experience they need for the deals in that industry

  13. While I agree with most of what has been written, it doesn’t mean the bubble will pop.

    The question to ask yourselves is what would cause investors to sell up on masse, one would be a dramatic rise in interest rates (won’t and can’t happen), the removal of the CGT discount (wouldn’t impact current owners as much) and finally economic collapse

    There is no indication that the government will touch NG or the CGT discount

    The majority of those people currently buying up properties already own at least one, can afford to buy a second and even if prices do fall 5-10 or even 20%, won’t be impacted and won’t need to sell up

    If you own an investment property, and the price falls 5%, you don’t suddenly need to sell up, sit and hold and wait is the order of the day

    • what about interest rates moving up to a point where they are a competing investment both on outright return and risk adjusted return? I reckon that scenario could take out the bottom 20% of “flighty” investors and have their inventory hit the market at about the same time

      • I don’t just mean AUD. You’d have to practically be a hermit to miss the signal the FED has given on USD rates. This isn’t going down, it’s on an upward trajectory. We are talking global capital movements here.

  14. billygoatMEMBER

    @Rational Radical. Thanks for great summary of Australian property happenings. By all accounts it should blow to kingdom come however we live in a land of smoke and mirrors. Nothing is as it seems. For eg: Foreign Chinese nationals have had zero impact on price of housing & those that do have been closely monitored by FIRB. There is a chronic shortage of housing – never mind all the empty houses you see with your own eyes, never mind the packed letterboxes you see at dirty, crusty, filthy, mould ridden homes available for steep rent but empty for months!! Certainly never comment on the non Caucasian families walking there dogs, speaking excitedly in what I would guess to be Mandarin as they walk their puppies in Dendy Park Melbournes white bread capital. Even vocalising an observation will cause raised eye brows & a patronising ‘don’t be silly.’ Truth be told I wouldn’t be silly with delight if I’d managed to sell a 40-80 year old 2bedroom weatherboard home for 1.1 – 1.8million and would affect an attitude of innocence & disdain towards those who brought attention to my more than likely illegal benefactors. Plenty of ‘naked emperors’ walking the parks & driving the already paid for roads of Sydney & Melbourne in brand new prestige vehicles. Am I pissed off, jealous, envious, stressed and angry? Too right! Am I racist? NO!

    • Just because they are buying up 90% of houses in certain suburbs, Glen Waverley, Mount Waverley, Doncaster, doesn’t mean they are having an impact on house prices 🙁

      Secondly, sales of BMWs, Mercedes and Porsches are going through the roof, I’ve never seen so many around, I feel like I’m living in Toorak, I mean who doesn’t have $130k to drop on a new car for the kids?

      • You do know most of these will probably be novated lease, right? To maximise tax efficiency… It’s the Aussie thing to do.

    • @Billy – not racist to make that observation. In fact anyone who concludes otherwise is totally lacking in understanding the fundamentals of global finance and has no concept of large numbers or basic maths. Exactly where do you think all the profits go when you are the world’s biggest exporter? Even if they are deposited into a bank they get lent out. Not to mention the size of the population in your country. Either way there is a massive amount of Chinese nationals (former and or current)
      who are highly likely to be flush with enough resources to overbid for a safe haven investment.
      I’ll give you the benefit of the doubt and presume you would make the same observation if it was different talking Poms or Canadians walking their dogs.

  15. – Harry S. Dent provides a good explanation why the housing boom was inevitable. He notes that people in the ages from say 35 to 42 move the most to a larger house. Children then have grown up, need more space and that’s why a family moves to a larger house.
    – In the US the baby boom started in 1935 and peaked in 1961. Based on that Dent predicted that the demand for housing should peak in the year (1961 + 42 =) 2003. He was off by only 2 years because US housing peaked in 2005.
    – I assume that a similar model can be applied for us here in ‘Straya. But I have too little info to come up with a similar coherent story.
    – The fact that we here in ‘Straya are running a Current Account Deficit means that our housing bubble has been enlarged by foreigners.

  16. All good points, but when will it happen. My view is that the big falls in property won’t happen till China has it’s credit event and the stop buying all our mining/apartments/commercial property/business’s. Good news is that experts on China expect is to happen in 1-2 years. Until then, property price rises are probable and we’ll see investors being as cocky as ever.

    • Except the biggest driver of the Australian bubble is the Aussies. The Chinese are just the cherries on top… You are ignoring all the cake underneath the cherries.

      • Kev – I agree and disagree at the same time. I agree it is Aussies who are providing the rampant demand aided by loose credit. However, I reckon it is the foreign bid (legal/illegal) even if small in number of foreign bidders that sets that incremental higher price, a price that has gapped up on historical levels. Think about how property prices are set in this opaque market. Wife says to husband “what do you reckon we can sell our house for?” Husband replies “dunno, there was a place similar to ours 2 streets away that sold for $Xxxx (25% premium to historical), so I reckon we should go for that as well”. All of a sudden that foreigner’s outsized premium bid has permanently raised the suburb price level in one simple move.
        I don’t reckon this market with it’s loose credit has ever seen a situation where the husband responds “dunno babe, that place sold 2 streets over is way better than ours and we could only get 70% of what they sold for…”.

      • I agree that Aussies make up the most of the buyers of property – even new builds where foreigners are allowed to buy. A recent report stated that 25% of new builds in Syd were foreigners (mainly Chinese) and 16% in Melb were foreigners (mainly Chinese). So yes most buyers are aussies.

        My point is more that, hypothetically lets say household debt to gdp was 60% today (around half actual) and prices were basically half around the country – so no bubble per se. My view, is that when China has it’s credit event likely next year because of rising rates and the rising USD, Australia would go into a recession because China buys so much of our mining/commercial property/business’s/apartments.

        36% of total exports including services go to China and approx 75% of total exports go to the Asian region so Aust would have a big slowdown regardless of property prices just like in 1930, America had the great depression which caused their largest trading partner the UK to go into a depression which caused Australia to have a depression (we had the commonwealth agreements where most of our exports went to UK). Throwing a property bubble on top of this is just even worse. My view is that we will have a severe recession regardless of property and that is why I mainly watch China. When this recession kicks in, developments will decline, mining will decline, commercial property activity will decline, apt building will all but disappear and unemployment will jump. This is what I am watching for.

    • It won’t be a credit event as such. The PBOC can always keep the banks liquid even if they are utterly insolvent.
      It will look like a major devaluation of the Yuan combined with much stricter capital controls.
      The end result will be a dramatic reduction in Chinese spending internationally (including in Australia).

      • The most scary scenario is actually Chinese realising that the returns they can get in China out weigh the need to have funds offshore. This would cause the Yuan to appreciate, capital to return home and the appeal of foreign properties decline all together. This is not actually an unreasonable event. With some of the investment I am seeing in Ag and other renewable projects, consumer projects and non-heavy industry in China, throw in Silk Road and other capital projects, smart money from China is already reinvesting into long term China projects……

      • Agreed, but it will be some type of credit event. There will be bankruptcies, government takeovers, currency deval, zombie companies etc….

  17. MediocritasMEMBER

    Keep an eye on what’s happening in the refi space. Some monumental arse-covering going on between the banks there. People running into trouble with an existing loan and wanting to refinance with another bank can’t do so due to tighter rules. Particularly people on interest-only, about to enter P&I that they can’t afford, thinking they can just refinance another IO period with another bank. Oh shit moment. The banks don’t want to swap riff raff with each other anymore.

    Plenty of idiots are running up credit card debt, thinking that if they have to default on the cards then their home will be safe. I wish I was kidding but I’m not.

    • Yes Medio, eventually all lunacies come to a sticky end as you saw in that Youtube video about Ireland. When you hear stories that we have more cranes on east coast than the whole of North America, surely alarm bells must be ringing.

  18. gballardMEMBER

    I remember “believer” like you when Bre X Gold was all the rage on the Vancouver Stock Exchange. I wrote in at the time with some cautionary comment and was abused by the naive bullish true believers as yet another person who wants to piss on the party or words to that effect. Suffice to say those passionate believers were wallowing in their own excrement within a few months.

    • Excellent analogy, Gballard. This is exactly what will happen to all the devoted members of the Church Of Propertology very soon. They’ll be wallowing in their own shit, as you so succinctly put it. In fact Ireland (pop. 5mil) built 7 times more houses than the U.K. prior to 2008. Now you can have all those housing estates for free – if you’re still dumb enough to take them!
      https://www.youtube.com/watch?v=fiCXsu_4BoA

    • So when is it happening? Genuine question and not taking a punt. 6months? a year? 6 years? Wouldn’t you see all that waiting as opportunity cost if you look at it from an investment perspective?

      • Imagine for a moment that some people actually buy houses to live in. I know it’s an odd concept, but think about it…

      • Housing should be about putting a roof over peoples heads, no arguments there. But if the whole system is crooked , that doesn’t mean i should sit on the side and not take advantage of it while doing what i can to change things(I voted sustainable Australia and labor)?
        I bought a PPOR in 2014 when the whole doom and gloom of APRA doing MP has started because i saw an opportunity, lowest interest rates in history. I didn’t over leverage when the bank said here, we can lend you a million, i didn’t eve take half of it and on top of that i worked and saved hard to repay as much as i can while those interest rates where low and they still are by historical standards. Point is, not all buyers are over leveraged and i think this whole thing of people running to the exists is simply not happening as most people i know are not.

      • Timing is the hardest thing. Greenspan warned of irrational exuberance speech where he warned of the tech bubble was in December 96. It went hard for a further 3 years.

        Nobel prize winning economist Robert Shiller warned of a bubble in USA property in 2003 – went on for another 5 years…

        Timing is so difficult. My view, is the rising USD and rates will bite in 2018. Let’s see….

  19. paulIF, you will soon find out, In fact, the apartment market is already falling as we speak as visible by all the “incentives” plus ever growing blacklistings of postcodes by lenders. For a bubble to keep growing you need ever increasing line of buyers willing to enter the market at higher prices. This is physically impossible in the long run as buyers and lenders get scared and tenants become thin on the ground

    • Not disputing that it’s possible to keep this running forever and on the contrary, i think things will blow up but my argument has been that the government will use everything in its power to keep this running for as long as possible.MB and most followers has been way too bearish and been proven wrong way too many times. Regulators talking but not taking action means nothing. Recall MP from many years ago by APRA, where did that get us? I don’t pretend to know the solution or what will happen but I can guarantee you they will prop this thing till the last bit. Wait for the May budget and see for yourself

  20. paulF, if you bothered to read the comments section of the article you posted….the majority of said comments question the validity of the charts shown and the inferences drawn from these charts.

    • I did read the comments and I’m not endorsing the article, just sharing like many others do.BTW, reading the comments is good and sometimes educational but I wouldn’t be relying on the comments to validate the article if I was you.

  21. I found the article made claims which were somewhat contrary to what I have been reading/hearing elsewhere. Just to quote one:
    “Once again, the basic picture is one of prudent households, rather than a community of people gambling on house price rises”
    Funny that – I thought IO loans had gone thru the roof the past few years. Now if IO loans are not a means of gambling on price rises, just what exactly are they…
    One has to be careful judging an article based on the comments. But when they on the whole disagree with the thrust and conclusions of the article – there is a problem.

  22. boomengineeringMEMBER

    Next time you come across a stupid old man (like me) ask him when it will crash and he will say, look around you it’s already started. Just because it hasn’t reached your area yet doesn’t mean it isn’t coming. The dam has broken but don’t worry its only a crack at the moment.

    • davidjwalshMEMBER

      and there you have it Boomer. I hate to say it, but it appears age can help gaining understanding of what’s happening around you…..assuming of course that you have retained a questioning mind and willingness not to be part of the herd.

      My take – I’ve been correct too often in anticipating trend outcomes (but usually sucked on accuracy of timing – generally have expected things to happen faster than actually happened) – for last few years I have thought 2017/18 for the real impacts to start. By this I mean that the majority of people finally have their ‘ah ha’ moment and understand that it wasn’t ‘different this time’ and the wonderful little world constructed in so many minds of entitlement to unearned wealth and lifestyle is seen to be the illusion it has always been…….

      Then the hurt begins. Yes, we have just had the crack in the dam and when the inevitable deluge finally hits and the weeping and nashing of teeth begins, we will enter a whole new universe of ‘why meism’, ‘it’s not my fault’ etc etc., while as a nation we will have to get to grips with the fact that the dream was always just a dream and the really hard work begins.

      Pity about the kids – they are the ones who will have to bear the ongoing consequences, especially of a grossly corrupted immigration ‘system’ that has unalterably changed our nation for the worse

    • 100% agree. The last 10 days have been a psychological assault on the overcommitted property owner/investor’s confidence. The country needs more of this on a prolonged basis.

    • boomengineeringMEMBER

      I timed the 87 induced 89 crash to the day but it didn’t save me as I made the mistake of thinking that commercial wouldn’t be as affected as residential but the opposite happened and annihilated us.

  23. Excellent summing-up, Rational Radical. Some of us have been onto this even longer than you.

    I continue to point out that the PM’s Task Force Report on Housing Affordability of 2003, comprehensively said almost everything that needed to be said. Including its focus on the supply of land for housing development. I hope Rational Radical is clear about that.

    http://www.macrobusiness.com.au/wp-content/uploads/2016/10/2003AustPMTaskforceReport-1.pdf

    Two thousand and freakin’ THREE!!!!

    And Chris freakin’ JOYE was the main author! I’d love to read a strictly true account of Joye’s career including this highlight and everything he’s done since, with an explanation of “why”. Maybe after the crash, he will provide one. Very smart guy, I reckon.

    • boomengineeringMEMBER

      Thanks Mining gave me a laugh, Roxby realtor seeing rebound. good time to buy I suppose.

  24. I don’t think anyone needs to cover their arse. It’s been a massive debauched party and the only innocents are people like us. We’re probably about 2% of the population if that. Fat lot of good it will do. Good for the heart and the conscience I suppose. That’s about it.

  25. Rational Radical – thank you for such a comprehensive summary around which some great discussion can be (has been) based.
    First to just outline myn own circumstance so nobody misunderstands my intent.
    1.Three years ago I bought a property PPOR on the Gold Coast for 20% less than it had sold for 10 years before. In fact the price I paid was some 60% below the replacement value of land and improvements. So I don’t argue prices cannot fall!
    2.I’m a bit older than most here. This housing property bubble has been going for 50 years with a couple of very short term interruptions. As an economically conscious individual I have ranted and raved about this and the effect on a productive economy for pretty much all of those 50 years. So don’t get me wrong in what I am about to say – I want this thing killed. You can’t play with it. You can’t have a permanently high plateau – you have to kill the damned thing – quite deliberately!!!!

    So given that I want to make a couple of observations
    Most here assert China is the source (or last blow) of the bubble and the bubble will end when capital stops coming from China. This is looking at the symptom not the cause of the international capital flows. As per pfh the problem is unconstrained non-productive capital flows which, for a variety of reasons including our willingness to flog anything and every asset to foreigners, tends to flow to havens like Australia.
    Now, the point everyone seems to have missed. The Yuan is NOT an international reserve currency (yet). The main reserve currency is the USD (64%) followed by the Euro 24% The next are the pound and the Yen at 3 or 4% each and the rest of us don’t really matter. [perhaps a note on Aus (1.8%) later]
    Now the between the US Fed and the ECB they have been injecting some 2 TRILLION dollars a year into the world currency reserves. From memory of the currency ‘printed’ by the ECB only about 40% remains in Europe. For the US that proportion is probably a little higher but not much (I just don’t have time to get the exact numbers right now)
    So roughly you have something over a trillion dollars being let loose to flaot around the world looking for a home. Our requirement to maintain the fiction that we actually have an economy is about US$50 Billion. Given that housing is now the economy that is all we need to attract out of that 1 TRILLION – 5% of the money freely sloshing around.
    (Note China is a major recycling station for this stuff – NOT a source!!!!)

    So while I grant all the dangers sensibly listed by RR and others here we need to keep in mind some of the monetary maths. This is especially so given the poor relationship between population base (political weight) and production as well pointed out over time by Stephen Morris. The rest of Australia has already been treated as fodder to keep this Sydney/Melbourne BS alive. We can be absolutely certain that this process will continue. There are no limits in this regard.
    So whether this collapses or turns into an extraordinary asset spiralling inflation, the like of which we can hardly imagine, depends to a very large degree on the US FED and, to a lesser extent, ECB. As was warned by various sages at the time of the float of the A$ we have turned ourselves into a cork on the ocean of these institutions and the politicians of their host nations. We gave up being masters of our own destiny many decades ago.

    So what happens here will depend on timing of ‘recessions’ in these major economies. If these come early we can expect ‘printing’ on a scale even now we can’t imagine. In that case this bubble can blow to much larger massive proportions. On the other hands if the forces now bubbling are reinforced by tighter monetary policy by the Fed and ECB – then the crash in prices we so need will surely happen.

    So…timing? Who knows How much? Who knows? You have to understand you are dealing with economic theories totally devoid of reality and economies run by people who are totally deranged.
    Now tell me what is going to happen!!!!!!

    • Rational RadicalMEMBER

      Mostly valid points, but it still won’t stop the end game from playing out. Look at Canada. And then look at the government’s plans to put a new tax on foreign owned vacant property. The raging bears who deny this thing is close to it’s self-fulfilling demise continue to ignore the changing political pressures and terminal imbalances in the economy itself, which if pushed any further, will self-destruct from counter-cyclical rate hikes, seeing capital reverse direction pronto and asset prices collapse anyway. I’ll say it again, there is no such thing as a perpetual motion machine, yet the rusted on old bears that have done their nana in frustration think that it indeed exists. One commentator called this “grey sky thinking”; people on all sides of this equation can’t remember things being any other way, and have enveloped themselves in a self-righteous comfort-blanket of recency bias.

      I just look at balance of probabilities, including “post-colonial” housing bubbles bursting all around us, and draw the obvious conclusions. I listen more and more to the reasoned analysis of folks like Roger Montgomery these days. I’ve lost patience to trawl though millions of angry bears declaring themselves closet-bulls.

      But hey, I’m just an angry know-it-all too 🙂

  26. adelaide_economistMEMBER

    I guess I would be defined as a ‘property bear’ in a broad sense and I think I have capitulated. Haven’t bought yet and probably won’t but I have made an inner peace with myself about the whole renting thing. At least for me I know I will probably own a house someday (allowing for life happening) but most likely it will be when I’m near retirement and I’ll be buying something somewhere coastal – as in non-tourist town, not near capital city coastal – where I’ll be able to buy outright.

    The spruikers and our Federal Government are right in that there are ‘affordable’ places around – as long as you are financially independent/don’t need to find work and being 1.5 hours drive from any major health, transport or social infrastructure doesn’t bother you. Shame about the preceding 40 years of constant uncertainty, watching savings get taxed at full marginal rate, power tripping 23 year old ‘property managers’, crap temp furniture, no pets, no paintings and invasive inspections though…

    • While I was renting RE agents were a constant source of bubbling anger for the reasons you outline. Personality defect that really meant I needed to buy – just for my health!!! 🙂