RBA sprung cheating on negative equity numbers

Via Lindsay David:

David Llewellyn-Smith

David Llewellyn-Smith is Chief Strategist at the MB Fund and MB Super. David is the founding publisher and editor of MacroBusiness and was the founding publisher and global economy editor of The Diplomat, the Asia Pacific’s leading geo-politics and economics portal.

He is also a former gold trader and economic commentator at The Sydney Morning Herald, The Age, the ABC and Business Spectator. He is the co-author of The Great Crash of 2008 with Ross Garnaut and was the editor of the second Garnaut Climate Change Review.

Latest posts by David Llewellyn-Smith (see all)


  1. I don’t understand his point in this tweet or this post consisting of nothing more.

    I see his later tweets (had to use a private window because the poor snowflake blocked me after I pointed out past inaccuracies) talk about the way that an investor in Australia might use home equity for an investment property deposit… how does this work differently in America? Is it not possible to borrow against home equity to buy an investment property? He is comparing two different scenarios in his tweet and trying to equivocate them: https://twitter.com/linzcom/status/1116534134703190016

    How do we know the RBA is using the measures differently? Can you point me specifically to their description of the calculation vs how it was calculated for the United States statistic they used?

    • It’s called doing the research you freaking cyberstalker. Thats why I blocked you. You never seem to understand the point simply because I made it. You try too hard to argue everything I said (likely since you leveraged yourself through the roof). Go back to your little hole in Adelaide you whinging ninny.

    • Surely the asset is underwater or it’s not. Housing debt is mostly not a portfolio asset, maybe for a few, and even then the gearing ratios and values negate this approach?

    • I believe this may help:

      Buy Prop A for 100k with $5k deposit
      in 1yr’s time Prop A is valued at $110k
      Buy Prop B for $100k using $10k equity release from Prop A
      In 2nd yr’s time Prop A is worth $120k and prop B is worth $110k
      Buy Prop C for $100k using $20k equity release from props A and B

      At this point you own $430k worth of property with a ‘real’ deposit of $5k = personal leverage of 100:1 (just FYI).

      Individual LVRs end of Yr 2 based on market values:
      Prop A = 79%
      Prop B = 82%
      Prop C = 80%

      RBA LVR is calculated at 61.6%. Risk erased via the portfolio effect. Nice!

      Except that it is a house of cards not least because all the accrued equity is fake. Easy come, easy go.

      • @Eagle
        I’ve no idea — I was just having a crack at it and it didn’t work. That said, when calculating portfolio risk in finance it is the correlation of the portfolio assets that determines the risk of the overall portfolio. Low correlation = lower risk and vice versa. I strongly suspect that the RBA assigns low correlations to portfolio assets i.e. outcomes for each asset are independent of the prospects for all the rest. Reality is slightly different because when the market is weak then virtually all assets are weak and when a borrower is under pressure, the likelihood of default on all his/her assets increases, particularly where there are cross-default linkages.

  2. Here’s what I love about RE investments: If your property increases in value in real terms, ie. allowing for inflation, interest payments etc) then congratulations. You’ve just screwed the next generation as they will have to pay more for shelter in real terms.
    Now, if you add negative gearing into the equation, you screw everyone else as well cos you’re paying less tax. Love it – a real economy maker. And of course, the other nice thing about NG is that it’s has put the pricing of housing up which of course has increased rental prices. Yes, a sure winner – right up to the point where you exit just before it all implodes. I just don’t understand why the vast majority of other countries aren’t doing it……. Do they know something we don’t? I’s a bit like demanding better environmental outcomes while building giant coal mines. You know it makes sense.

    • Jumping jack flash

      You’re right, its so easy!

      If houses’ values are based on the last selling prices of all the houses around them, and those selling prices are inflated by greed satiated by easy debt, then the houses’ values are inflated by easy debt.
      Then, as debt is added and “values” rise, if the LVR readjusts to take the new debt-inflated value into consideration, the LVR actually improves!
      Debt improves its own risk!

      Furthermore, the difference between the new debt-inflated value and he old value is called equity.
      You can go to the bank and they’ll helpfully give it to you, and since the only money a bank can actually hand out that’s not your own money is called debt, that’s what they’ll give you. Debt.
      Debt creates debt!

      Its truly astounding! Why does nobody else do this? The possibilities are endless, as is the debt. Infinite debt.

      No wonder everyone lines up waiting for their turn to take the ride, you just can’t lose.

    • So I should only ever sell my house for whatever I paid plus inflation plus interest plus sunk capital? Is that what you are saying ? Even if the market clearing price is higher ? Just so I don’t “screw “ the next generation , even if the buyer isn’t from that generation ?

      Just clarifying

      • I don’t think this message was meant for you but obviously you’re really important and need a personal clarification. As property is for shelter, not investment why do you even care?

      • No Superunknown. Next generation shouldn’t subsidise your sale with their tax money. Especially since most of them don’t own a house.

      • @ Superunknown, agree with your comment.

        Well presented comment but lost on the MB ( Macro Boofhead ) socialists on this site.

        MB generation, it’s time for a “boutique” craft beef and a smashed avocado on focaccia.

        Mummy and daddy will pay for your 6 month trip to Europe because Uni was soooh exhausting.

      • Superunknown, you should sell it for all you can get and strut around like a peacock on meth telling everyone how smart you are because you “worked so hard” investing in a collosal debt bubble and the young are just lazy and feckless if they do not want to partake in it.
        However, the government should remove negative gearing and put a land tax on investment properties and second homes. Additionally the treasury should take over money creation in Australia and all money should be created without an additional interest burden attached to it. Lastly outlaw loans for asset transactions, that should reduce land and property prices by 80% and make things affordable for the future generations and destroy the financial parasites while you are at it.

  3. Pretend I am an Idiot; I am an idiot. Can someone explain it to me so I can use it in conversation at BBQ’s?

    • LVR = One property + ‘One’ loan.
      CLVR = Multiple properties + Multiple loans.
      The risk with CLVR is that it only takes one property to ‘go bad’ ( for whatever reason) and it can take the whole portfolio down with it if the CLVR deteriorates beyond a banks tolerance to lend. With LVR that risk is just attached to one – which could in itself be bad, but it doesn’t cascade across many properties/lendings.

      • @ Janet

        Agree, but in itself the LVR or CLVR have only become a problem since the banks loosened their lending criteria from 20% deposit to 5% or even 0% deposit and reliance on purchaser’ having to take out HLIC insurance.

        Buyers became wilfully blind to the risks, because Aussie property only ever increases in value…..sarc.

        Another idealistic example of CLVR is that your Adelaide property may have fallen in value by 15% but your Brisbane property may have increased by 20% therefore, “No problem with equity mate”…….until the house of cards falls and infects everyone.

    • You know centrelink’s robodebt?
      Yearly income/26
      It’s like that.

      They added up all the debt of everyone and divided by all the equity of everyone.

      So people who own a house 100% are counted as equity when they shouldn’t be counted at all!

      It’s the LVR for the entire country.

      • Surely that can’t be true? Are they really doing that? If so, I am gobsmacked more than I thought I ever could be.

      • TailorTrashMEMBER

        So according to this if I own my house 100% (better say 99% or I’d be debt free and they couldn’t count me …surely not ) then I’m helping keep Reusa’s LVR lower than it otherwise would be ?
        Surely the RBA are a bit more sophisticated than that ………….or as LD Points out they are trying to hide the real extent of the growing problem .

      • So we are all in agreement then? They are monumental arsehats with the combined integrity of Scomo’s sphincter at Engadine Maccas?

      • TailorTrashMEMBER

        Tried to add ….surely this is a combined LVR at the level of the individual investor ….ie Reusa and his mates …but it would still hide a large number of shakey loans in those individual portfolios ( giving the illiquid nature of the backing assets )…..so probably the RBA trying to dress up the increasing problem

      • TT, thats what I was suspecting, combined per investor. It’s still fudging the figures but surely they couldn’t be doing what Myne was suggesting?

    • I knew somebody who bought in London at the peak of the market in the late ’80s. Crash followed and it took them 10yrs to get back to even. Not everyone has the stomach or ability to stick it out. You need to keep your job, for starters.

  4. Same with subprime
    By common US definition of less than 20% genuine savings for deposit and repayment more than 30% of regular income, almost every mortgage in Australia issued in last 10 years is subprime

    By RBA definition (only total junk non-conforming loans are considered subprime) there are almost no subprime mortgages in Australia
    Don’t meñtion 90% plus lvr interest only liar loans – the most comon kind in last 5 years

    • A colleague in the US put down a 50% deposit on a home, and was given a sub prime. In two years I think his mortgage was sold on three times. Years later he told me HSBC made more giving him that mortgage, so I wonder how many others were screwed over like that.

  5. Jumping jack flash

    In Australia we love statistics. Anything involving averages, its the way we roll.
    Averages are great, they smooth everything over.
    Averages of averages are next level.

    “‘ello, fire department”
    “You must come quickly my building is on fire, some of the cladding I think. One of the levels is now raging with fire!”
    “Mate! Sounds serious. How many storeys we talking?”
    “20 storeys?”
    “How many are on fire”
    “One is on fire, but quickly, help!”
    “Maaaaate, on average its all awesome. Call back when over 60% is on fire, and 30% of the building next door, then you’ll start having a problem.”

    • This is true.
      The shortage deniers told me that a vacant house owned by a Chinaman + one Aussie family on the street averages out at no shortage of housing.
      They told me that one Granny in a big house cancels the shortage of a family in a dogbox.
      THEY LIED.