Australia’s mortgage debt bomb!

Via Martin North comes economist John Adams on Australia’s debt bomb:

And one chart for you to mull while you listen:

Note that after the 1890s, house prices fell for 60 years!

Houses and Holes
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  1. The fun part of these credit bubble unwinds is how long they last and all the bad debts that are never allowed to be written off. Here is the mess still left over from the US Housing Bubble 1 If you can’t pay you can’t pay but FASB 157 Section D lets them extend and pretend forever.

    I remember someone who was working on the Pyramid Building Society mess saying they found mortgages from the Great Depression ( who knows who they inherited them from ) pretending to be worked out still on their books

  2. If what is under Australia is a debt bomb, the real world equivalent is the Lochnagar mine.

    That’s why I’m so damn confident that the bubble isn’t done yet. Because it won’t go quietly.

    When the Lochnagar mine went off at the Somme, it was reportedly heard in London. The Australian debt bubble explosion, when it goes, will be deafening here and will be heard in Bali and London as well.

    • fitzroyMEMBER

      Hard to sell RE. A few bank.failures maybe with the taxpayer on the hook and bail outs and bail ins.

      • John Adams point that we are measuring inflation at CPI (2%) not broad money (7% pa) is a very good insight. Martin Wolf observed we are in a ‘controlled depression’ . Sadly correct

    • haroldusMEMBER

      Well I’ve learnt something this morning.

      We were over Thiepval and turned south to watch the mines. As we sailed down above all, came the final moment. Zero! At Boisselle the earth heaved and flashed, a tremendous and magnificent column rose up into the sky. There was an ear-splitting roar, drowning all the guns, flinging the machine sideways in the repercussing air. The earthly column rose, higher and higher to almost four thousand feet. There it hung, or seemed to hang, for a moment in the air, like a silhouette of some great cypress tree, then fell away in a widening cone of dust and debris. A moment later came the second mine. Again the roar, the upflung machine, the strange gaunt silhouette invading the sky. Then the dust cleared and we saw the two white eyes of the craters. The barrage had lifted to the second-line trenches, the infantry were over the top, the attack had begun.

      — Cecil Lewis, whose aircraft was hit by lumps of mud thrown up by the explosion

    • I’m a bit confused. My understanding is that the Lochnagar mine looked and sounded impressive but, in the end, killed very few people and made hardly any difference to the battle.

      • That is true. The mine heralded the start of one of the offensives, but it wasn’t a super-successful offensive for the brits.

        I’m focusing on the unmissable “heralding” bits I expect that the beginning of the end of the housing bubble will be more like that, rather than the invasion of Belgium which was preceded, reportedly, by German soldiers on bicycles delivering some terms to the Belgian government.

  3. Interesting that the real house price index starts breaking the peak around 1966; coincidentially when the Bretton Woods agreement started and the next big jump comes when it is floated and the deregulation of the financial system. A lot has changed since the 1800s currency and system wise. I could argue it isn’t houses that have appreciated but money itself is depreciating; it’s just that for some goods we’ve found alternatives to make things cheaper (e.g iphones, technology).

    • The nature of an “average house” might have changed between 1960s and 1980s: more square footage, better fittings, finish etc. But that does not explain the later price spike, which is about falling real interest rates and bubble thinking. The basic point is that long-run house prices should be driven by long run housing construction costs. Unless the nature of a house changes at some point, becoming more expensive to build. This graph shows this was basically true for a long period (up to the late 80s) but house asset prices became unmoored from house construction costs some time in the 90s. A telling and alarming graph!

      • Its not just the house though. Other pressures on finances have lessened. e.g. go to an Ikea store with a single week’s pay packet. See how much of your kitchen you can replace (cutlery, plates, glasses etc). Compare that to someone in the 80s.

        Cost of computers, cars, household goods and food have all dropped. McDonald’s barely costs more now than in the early 90s. Yes a lot of corner cutting and quality drop, but if you want any of those goods it costs you less. LED lighting has massively dropped the cost of lighting a house, and smart power management in PCs, TVs etc means that they too have dropped their usage (although vampire devices exist, if you’ve got a device waiting for a signal to turn on).

        All that money saved can then go towards needs/ticket clipping. Shelter, Energy, Transport/Access. I don’t doubt that Australian RE is in a bubble, but the bottom of any fall may be higher than we realise because budget allocations have changed over the lifetime of these graphs.

    • BrentonMEMBER

      A crying shame that all that money expansion didn’t translate into wages. Paying moar debt, with even moar debt, probably gives some hints on the ‘real’ price of housing. Elementary, my dear Watson.

    • I could argue it isn’t houses that have appreciated but money itself is depreciating

      An ordinary person wants to buy an ordinary house with his ordinary wages. That was and still is normal.
      In Sydney a block of land has gone from 1 years income to 10-20 years income.

      Indeed your money is depreciating, but something else huge happened as well.

      • Yep inflation hasn’t been measured correctly because the combination of money being “reformed” and making it cheaper (low interest rates) cause more lending which in turn creates inflation. What has happened is that wages have depreciated massively w.r.t assets and the things we need to have generally. Its no coincidence that technology is cheaper yet local food (particuarly nutrious food) is more expensive or farmers are taking less and less of a profit to keep it the same, private health and childcare are growing exponentially, etc. Wage value (a.k.a labor) has been devalued but so are some of the things in the CPI basket (often discretionary items usually paid for with wages) making that rate lower than it should be.

        When you have a “real house price index” you always question the inflation rate that turns the graph “nominal” to “real” – because the inflation rate itself is subject to political pressure and isn’t the same as monetary inflation anyway especially over a 100 year period. With most newly created loan money going straight to houses first and often wages last the discrepancy between asset prices and wages in a financial economy IMO is expected because inflation is not uniform across the economy – if none of the money ever gets to paying wages (and it isn’t as capital is taking a larger share of the economy) it won’t inflate that price. Sad but true.

      • The depreciating currency comment is quite relevant in regards to whether savers are going to get screwed over. It is possible even probable that real house prices fall hard, and nominal house prices rise significantly. i.e. massive wage inflation as per 70s/80s

        In that scenario, those who have been saving for a long time which be much worse off than what they are now. It really depends on how much you have saved and how much of your working life remains.

      • That’s the beauty of this – it’s either going to punish those property holders hard or benefit them as their debt is eroded away. Ironically the same event can have two diametrically opposed outcomes depending on the wild card that is the Australian Government and what it decides to do in response. Sure our currency might tank but that’s probably better from a Government perspective. I know which one I’m betting on as a CAD country; lie about the inflation rate some more (like this video clip which I just watched mentions but is common knowledge IMO), keep printing money and slowly bail things out through stimulus that “hits households hard and fast” like the GFC response. And “debt stress” from higher interest rates could be made by injections of printed money into mortgages keeping overall money supply the same swapping bank credit money for RBA credit money – of course it would be spun differently (e.g a family grant to help offset the cost of living, a tax cut, etc.)

  4. If house prices “fell” for 60 years, I can just as correctly say house prices have risen for 140 years.

    • True. I believe the point here is that, no doubting, this is an asset bubble. And we could easily see 60 years of asset value depression in the future.

      • Did the 1890’s bubble occur in an environment of free for all fiat creation, or was money tied to a gold standard or similar at that time. The answer to that gives a good indication to the value of the past performance to indicating the future.
        Any use of “Real” values is completely clouded by the varying methods used to determine inflation and how they have changed as time progresses.

  5. @John Adams (hopefully he is a reader). What are your thoughts on the recent tax cuts when considered against this debt backdrop. I suspect that is the government’s way of putting more money in the consumer’s pockets so that they can cope with rising mortgage rates and as a bonus continue to feed their much beloved GDP. I don’t believe they are doing this out of the goodness of their hearts – they are doing it because they can see the writing on the wall. It would be difficult for them to admit to this without causing panic and what we are seeing played out in Canberra is just theatrics to distract us(ok – maybe they aren’t just acting but it would be nice to think they did have a plan…giving them too much credit perhaps!).

    • JediYomi, the tax cuts are there because they couldn’t leave a pot of money unspent in the Budget. That would just be inviting Labor to spend it in the Budget reply and win votes. Win votes with the governments money, that is. Would never be allowed happen.

  6. Oh dear, our pollies by and large have no clue about the train set they got for Christmas, but like any six year old, they’re busy yelling to everyone they are great drivers

  7. “It was obvious in 2006 that the Debt Party was coming to an end” and of course it was ( and it’s just as obvious today!), and here we have a brave whistle-blower who reported his Bank to his Central Bank, and hasn’t been ‘allowed’ to work since then. Would he do it again, having now ‘lost it all’? “Definitely!” Again….we need more brave men like this.

  8. John makes an interesting point about our economic fate being in the hands of our debt counter-parties.
    Imagine that the RBA says it intends to print our way out of this corner, or that our 4 major banks all are forced to default on their globally bonds. Either of these actions would plunge the Australian economy into a foreign exchange crises. Ultimately someone (some other sovereign or extra sovereign entity) would need to effectively step in and guarantee Australia’s debt. That’s fine in abstract terms but lets go one step further and examine which countries (international organizations) are in a position to offer such guarantees? AND what in it for them?
    This is precisely why I’ve been having a good chuckle over the evolution of these Foreign Interference laws. From my perspective we’re presently at a junction where it is highly likely that the Australian banking system will need to instigate some form of debt reorganization, yet politically we’re slamming shut the doors that would enable such a reorganization.
    I’ve long been of the opinion that we just need to bring-it-on because our children and grand children deserve a better starting point than the one that we’ve created, however what would be the new “starting-point” if Australia was to hit the proverbial debt Reset button?
    I think the answer to this depends on who we’re expecting to step in and guarantee our debts,(basically our creditors won’t go away until they’re made whole….think international private debts in Greece at the start of the GFC were basically absorbed by the ECB) Who will be Australia’s ECB?
    You don’t need to think long or hard before you come to the conclusion that either the FED takes a haircut or the PBOC steps into the breech.
    Interesting choices, made all the more interesting by our Political insistence that we intend to eliminate Foreign Interference by passing suitable laws….quite amusing when you think of the problem in these terms.

    • Why does anyone have to step up to the plate and bail out the Australasian System? Why does it have to fall on the taxpayer etc? How about we do an Iceland?! Just default and start again. It seems to be working for them after the initial pain ( but that’s coming in one form or another anyway – selling out the Country is arguably worse?). So let the creditors bear the pain – all of them and if that’s the bank depositors, then so be it.
      What Australia has will always be in demand – and absent the pile of historically accumulated debt it should look even better!

      • LOL!

        Poor Janet. Suffering a terminal case of idealism.
        This is no time for ideals! It’s a time for ACTION! WE MUST DO SOMETHING! WONT SOMEBODY THINK OF THE CHILDREN?! (Naturally, not *other* children. OUR Children as defined by… well, there’s a clause somewhere)

      • I have absolutely no problem with Australia doing an Iceland like Default, however that default did have short and medium term economic consequences for the Icelandic people.
        Yes Australia could simply default and it would be without doubt the best long term solution but you’d have to expect repercussions and a lot Asset shuffling on Multinational (and global banking / asset management ) balance sheets. In my opinion it would be naive in the extreme to not foresee such a situation developing, as such our Financial crises would need to trigger a round of Asset nationalization and this sovereign action would itself trigger a consequent round of monetary damages claims against Australia. In effect we’d shift the debt from the private balance sheets onto to the Public balance sheet much like happened in Ireland.
        So what was the main difference between Iceland’s handling of the crises and Ireland’s handling of their crises?
        Iceland refused to make it a sovereign issue and maintained throughout the crises that these were private debts and only the assets guaranteeing the loans were available to cover the loans. Ireland however absorbed the Private bank loans onto their Central banks balance sheet so that some liquidity could be maintained.

      • Iceland declined to put its foot on the land mine. Yes, it provided liquidity at penalty interest rates, while correctly declining to bail out private contracts. This is the best path. But our pollies and captured regulators are itching to assist the banks cos they are so handsome and well groomed. It will be just one small step and it will all be over

      • Nope. We are a nation with a convict mentality. Rivet the dept ball and chain on the leg of the productive economy and make it do its time by paying off the Rum Corp guards.

        As we dragged the chains of our jailers about Governor Turnbull came up with a blah blah blah innovation strategy. Unfortunately we only know how to break rocks and build houses.

        “I know” said Gov Turnbull to Queen Lucy upon the Potts Point Balcony, “let’s have an industry based upon swapping houses and the manufacture of leg irons! Because that’s what we are really good at!”

        “True innovation” said the Queen of Sydney “I’ll invite a few million neighbours”.

      • It’s worth remembering that Iceland’s external debt coming into the GFC was somewhere between 7 and 10 times GDP (whereby Iceland’s financial sector alone was something like 25% of GDP). So realistically there was no way that the Sovereign state could guarantee these loans. Bit like a Millionaire going guarantor for a Billion dollars in loans, it might look good on paper but in reality that guarantee is worthless anyway.

      • The default is only part of the problem. At that point our international reputation and our currency would be trashed. We’d be paying cash for everything we bought and it would in A$ terms be outrageously expensive.
        However, more importantly, the default is caused by gross structural malformation of the economy over 60 years. This can’t be fixed. All the reasons for the indebtedness in which we find ourselves would still be applicable. We cannot suddenly shift millions of people to locations where they will be more productive. We can’t suddenly re-educate millions away from the lawyer, real estate, government, coffee shop industries to more technically oriented externally facing industries.
        There are no easy solutions. As I look at it, without calling in the PBOC (fisho is spot on), there are NO solutions that are, in any way, possible without the destruction of the society.

        It serves nobody to think “All we have top do is lower interest rates” “We’ll just default” It’s taken 60 years to create this mess. The path we are on gets narrower and narrower every day. It seems doubtful that there is any room to turn around.

  9. reusachtigeMEMBER

    I’ve seen that 1880s to present day evil crashnik propaganda chart so many times yet it continues to be irrelevant for the modern day and always will be. For example, back in the 1880s topless bathing was frowned upon. Now we all love it!

    • Very wise words.
      The easiest way to predict the future, one that is used by most successful people in the world, is to judge the direction of a trend and then plot its continuation.
      Going by that chart of housing prices, we can expect several more doubles in the near future. And, in reference to Reusachtige’s excellent analogy, I would soon expect bottomless bathing to be smiled upon.

      • Actually it seems like we are going backwards. More and more these days openness in sexuality seems to be being frowned upon. So much for the continuing trend.

      • Yes, sadly I am noticing a new prudishness. Reusa should be very careful at relations parties to make sure a consent form is signed *enthusiastically* with each counter party, indicating the full range of activities to be engaged in, and witnessed by a JP or person of high moral character such as a real estate agent.

        Topless bathing may be undertaken in one’s own bathtub, so that the beaches are available for all to instagram.

      • BubbleyMEMBER

        Agreed. I think we were a lot less repressed in the 1980’s.

        Mind you, we didnt have to worry about our chubby little butt’s getting posted on Face Book or Instagram if we did something stupid.

  10. That graph is misleading.
    Stretch out the bottom scale and compress the vertical and its more or a small hill then a mountain.

    • Change the scales any which way you like, doesn’t change the fact that real house prices hung within the 100-200 range for over a century. Then in the last 2 decades, it tripled.

      • Of course, in the last few decades, how we convert from nominal to real has changed significantly as well. Might want to consider how that affects your conclusions.
        If housing prices are a significant part of inflation calculations, then by definition they must be relatively stable in real terms. However remove house prices from the inflation calculation and they can then decouple. When were house prices removed from the inflation calculations again?

      • BrentonMEMBER

        My conclusion remains the same, all of what you said supports that conclusion and is implied therein.

      • That real house prices would likely have stayed around the 100-200 band if it remained part of the inflation calculation?
        Given higher house prices=higher inflation = lower real house prices.
        Doesn’t really sound like the conclusion you were going for.

      • BrentonMEMBER

        Not sure if you’ve confused yourself or you’re simply arguing for arguments sake, but I suggest reading OP’s initial post and then my reply.

        In regard to house price inflation detaching from CPI (not discussed by OP or myself; ie chart interpretation), I am not in disagreement. Not sure how else to say that. You seem to be looking for ‘conclusions’ to disagree with.

    • ‘Real House Prices’ is really a BS measure in terms of making financial decisions. To buy the house you borrow fake money – not real money. CB’s know only to devalue money/debt. The real value of the house might decline but if it declines more slowly than the purchasing power of the money then you’re still in front.
      Just sayin’! Be careful of believing that the only way it can be is the way you want it to be.