Property index points to Aussie recession

Cross-posted from Prosper Australia:

Real estate cycle expert Bryan Kavanagh says turnover and price declines in Sydney and Melbourne during 2018 indicate an economic recession in the 2019-20 financial year.

The 2018 “Kavanagh-Putland Index”, released today, shows the total value of Australian real estate sales to GDP.  Mr Kavanagh said the $50 billion pumped into markets by the Rudd-Swan government in 2008-09 to forestall the 2008 real estate bubble-burst of the USA and Europe “had simply kicked the can down the road for a greater financial correction”.

“Led by the residential sector, Australian real estate markets have been in bubble territory since 1996, and the 2018 K-P Index update shows the correction is imminent”, Mr Kavanagh said. “The Kavanagh-Putland Index demonstrates that recessions usually ensue within 12 months of the year-on-year index declining by more than 25% – and it did this during 2018.”

“Since 1984, Australia’s total land values increased by a factor of 23.5, averaging an increase of 10% per annum, whereas seasonally-adjusted nominal GDP growth has tracked at just 6.6% per annum. Whilst this represents a great return for buyers and landholders, it has been counterproductive because wages and demand have languished.”

“Quite simply, the more we spend on real estate, the less we have to spend as consumers. This hurts small business, wage growth and employment.”

“Australians have been doing what the tax system has encouraged them to do: to invest in real estate, because their increase in real estate wealth tends to dwarf the wages they’re able to earn”, Mr Kavanagh said.

“In 2010 “The Henry Tax Review” (Australia’s Future Tax System) recommended getting rid of 100 taxes in favour of four: income tax, the GST, the resource super profits mining tax and an all-in land tax. Implementing those reforms could have redressed the imbalance between real estate investment and productivity” he said. “Except for a failed attempt at the new mining tax, these recommendations have not been taken up.”

Mr Kavanagh said “The Progressive Era, from the late 1890s to the early 1920s, when much of Australia’s infrastructure and its regions were developed, carried lessons for Australia. Some 50% of all revenue at the time was real estate-based whereas it now represents less than 10%. Over the last six years, Australia’s income tax has ranged between 57.0% and 59.1% of all revenues and property-based taxes are now only between 8.6% and 10.8%.”

“Billions will be lost, including in superannuation, because we inflated a gigantic real estate bubble to which our political leaders closed their eyes”, Kavanagh stated.

More information is provided in the PowerPoint, The Economy Made Easy, presented below:

Comments

  1. No mention of the 50% CGT discount from 1999?

    The combination of the discount and negative gearing lead to increased short-term speculation and positive feedback loops.

    • They said get rid of 100 taxes in favour of those 4. I would think cg discount and ng would be just 2 of those 100.

  2. “Australian real estate markets have been in bubble territory since 1996”
    Two comments.
    (1) That’s a whole generation of Australians who have known no other way, and so (2) who can blame them for thinking that property always goes up?
    It’s been ‘obvious’ several times over the last 10 years that The Game can’t continue, and yet it has. Toady is just another one of those times.
    At some stage, economic gravity will take hold, and when it does it will be catastrophic. So much like Brexit – extend and pretend is likely to continue for far longer than most of us expected.

    • I can blame them quite easily. If you base the largest and most important purchase of your life on a naive and rosy view of economics, don’t do any research, look at other markets that have experienced a crash, only listen to the opinions of people who know no more about property than you do, then no, I don’t feel sorry for them.

      • ^ yep. * and mostly listen to people with a vested interest in you buying overpriced property

    • “The Game can’t continue, and yet it has”. RBA interest rate cut will ensure we postpone it for another few years?

      • Nope. The price falls to-date are primarily being driven by the availability of credit, not the price of credit.

      • The fix will need to accommodate that, if that’s a factor.

        Ideas for can kicks:
        1 – super release (reduce required debt load for a given level of land prices)
        2 – government grants (as 1)
        3 – deductible OO interest for FHBs (improves servicing)
        4 – government guarantees of FHB debt (no brainer benefits)
        5 – government funding of non-banks that tend to lend more freely, such as through AOFM RMBS purchases (circumvent RC fallout)
        6 – change responsible lending laws to provide exploitable safe harbours.

    • Most people realise that when you jump off a cliff you can fly – because they have never hit the ground. Makes sense.

      Derpa derp.

      The only way to overcome the global economic malaise – the ONLY WAY – is to increase wages. No ifs, no buts about it.

      The second wages are unleashed so too is inflation and interest rates and we all crash.

      The options are ever collapsing consumer activity – or rectifying it and crashing the economy.

      We absolutely MUST have a debt consolidation process.

    • When I was a younger man in the 2000’s and property began to boom here in Perth, I just figured it was normal. I had no idea that housing could crash. And then it crashed in America and throughout Europe and led to the GFC. And then I started to ask questions about Aussie Real Estate and got very unsatisfactory answers from the property crowd. Why have not the rest of the country been asking the same questions? I give a pass to young people (below the age of 30) who are surrounded by idiot elders but not the rest of adult Australia.

  3. ““Billions will be lost, including in superannuation, because we inflated a gigantic real estate bubble to which our political leaders closed their eyes”, Kavanagh stated.” – this hits the nail on its head and make me angry even on a fine Friday like this..

  4. “Quite simply, the more we spend on real estate, the less we have to spend as consumers. This hurts small business, wage growth and employment.”

    What should be highlighted is that ‘what we spend on real estate’ includes repaying loans for all of those rapidly depreciating investor grade properties and negative equity OO properties that cannot be sold or refinanced to better rates. The problem is not suddenly going to correct because RE prices are falling.

    From time to time we get comparisons of our plight to that of Argentina’s and the comparison is quite apt: primary producers, middle economies, wastage on poorly planned infrastructure, destroyed by corruption (in our case distributed across the private sector, but publicly enabled, in Argentina’s case more publicly concentrated and mediated by cult-of-personality politics).

    In any event, their middle class ended up locked out of banks and rummaging through garbage to survive. Now there are differences too, and perhaps Argentina is thought of by many (rightly) as an example of/byword for abysmal economic failure that we ought to avoid replicating.

    But for those interested in extending the comparison, the household debt to GDP figures are mind boggling:

    https://tradingeconomics.com/argentina/households-debt-to-gdp

    Argentina’s ratio is only 7.5% now, its highest this century. It never rose above 7% in the lead up to its turn of the century economic collapse.

    And Australia? Presently north of 121%

    That’s one huge economic hangover to contend with. Hair of dog anyone?

  5. Kavanagh is running the risk of repeating Keen’s mistake. Yes, objectively there should be a recession. Indeed we need one. The problem with economists is that they’re technical boffins who can’t see institutional factors – which just keeping getting more creative. Keen learned this the hard way, I suspect Kavanagh will too.

    • Very distinct risk of that for Kavanagh.

      He’ll have to lose the “Real estate cycle expert“ claim, if he fails to take into account the hand of government/institutions in driving real estate cycles.

  6. I have just received a letter from my lending bank vampire stating that my payments will increase $100 a month next month.

    These greedy vampire bastards never have enough profits. They are always after the average man’s $100 a month increase to increase their profits, as poor them they only had 9 billion dollars profit last year.

    Australia seems to be more capitalistic than the US counterpart capitalists themselves. They seem to be importing everything bad about capitalism from America and leaving the few good parts (like your mortgage payments never changes during your repayments).

    Don’t know but I think they know that Australians will never wear yellow vests as they are busy with their weekends bbq and beers.

    • can’t say they’re more capitalist – it’s pretty hard to outdo the yanks on that in any given sector. But Australia is the land of the oligopoly, and that is our curse. That’s why the largest companies in any given sector give ZFs about customers and don’t need to compete or innovate.

    • What I find interesting is that if I borrow $500k or more I can get an interest rate of 3.99% but if I only want to borrow $250k I have to pay 4.5% odd. I also don’t get as many options around an offset account etc..

      You’d think a lower loan amount would be a lower risk therefore a lower interest rate.

      Then there is all the hidden charges they sneak in, if you pay off your loan too quickly (on fixed rates) you can pay $1,000’s in fees etc.. it’s not enough they get to gouge you for 25-30 years.

      Would be nice to buy a home without using a bank at all… I hate giving them money.