The only Australian economic question that matters

First, I need to set the scene. I wrote recently about how messed up the Australian economic cycle is, noting that housing booms come in several different flavours. Australia had a credit-driven housing boom from 2012 to 2017, and those types of boom/bust cycles usually have the following elements:

 

 

This is not the Australian cycle

  • In Sydney/Melbourne the construction was primarily apartments, which take a lot longer to build, and so the usual lags on both the upside and the downside are longer. In Perth, rising unemployment meant prices fell despite the credit boom.
  • Then the Banking Royal Commission stepped in to restrict lending. Sydney/Melbourne jumped ahead to elements of step 6 without the job losses (yet).
  • Now the Morrison Government is trying to spark step 1 of the process by loosening credit again, and the Reserve Bank has cut interest rates.
  • Meanwhile, we have the Royal Commission unequivocally condemning bank lending processes, followed by ASIC losing a pivotal court case which suggests lending processes were fine, followed by ASIC appealing the decision.
  • To top it off, there hasn’t been any deleveraging – Australians still have record housing debt. And construction job losses are coming. And new construction has crashed. And there is still apartment supply coming on. And the global economy is weak.

So it isn’t a typical cycle. As I wrote:

Is the Australian government really pinning it’s economic growth hopes on trying get the world’s second most indebted consumer to borrow even more?

It is a (morbidly?) fascinating economic experiment that the government has launched, seemingly in concert with the regulators.

We know from examples in numerous countries over history that housing booms can occur when the regulators are asleep at the wheel but there aren’t many examples we can look at where the government are actively encouraging over-leveraged consumers to borrow more and the regulators to stay out of the way.

Consumer Debt to GDP

There are plenty of cases where we have seen housing cycles spark economic growth. We just saw it from 2012-2017, and ten years earlier we saw the same effect process play out in the US.

Here is my take on the key factors affecting the housing market:

The one question that matters

And with the scene set, that leads us to the question alluded to in the headline: 

Can rising house prices drive the rest of the economy on their own without a construction boom?

For the optimists, the answer is a resounding yes. House prices have not only stopped falling but have risen over the last month. Buyer queues are out the door for limited supply which will inevitably mean rising house prices. And Morrison’s 95% lending for first home buyers hasn’t even begun yet. Investors will follow first home buyers, which will lead prices higher and then upgraders will start buying again. Rising property prices will mean consumers will start spending once more, construction will recommence, and a new Australian economic growth cycle will begin.

It would appear that the Federal Government has this belief.

Pessimists have a different take.

The worst arguments mounted by pessimists tend to have a moral angle: house prices are too high for children to afford, they will have to come down to a level that an ordinary person on a regular salary can afford. If that occurs, then house prices will fall 30-40%. While these arguments are compelling from a social justice perspective, or on a long term basis, the same arguments have been valid for 15 years – timing is important.

Other weak arguments base the depth of the downturn on extrapolating no intervention from governments – and we know the current government is hell-bent on intervening in the housing market.

The better argument notes that even with a sunny outlook for construction, employment will fall for at least another year as the construction decisions made over the past two years affect the number of people employed.

Rising unemployment in Perth led to a 10% house price fall in the 2012-2017 period while Sydney/Melbourne house prices boomed. What is to stop the same fate for Australia as a whole?

Per capita income has gone nowhere for 7 years, so it is hard to see any rescue coming from that front:

Five years of falling Australian per capita income
If rising unemployment does mean house prices fall further, then there are a range of probable adverse effects. There are some seriously negative economic effects if the effects snowball. And we won’t even get started about the impact on a fragile Australian housing market if an international shock (Brexit, Trade wars, Hong Kong unrest, corporate debt accidents, European recession) hits.
You don’t need to buy into the entire negative story to be cautious. If employment holds up, then the bull story has a chance (assuming benign international conditions). But, if unemployment rises, then Australia won’t need a global shock to see house prices resume a downward path.
When presented with an asset class that has limited upside in positive scenarios and significant downside in negative scenarios, I usually opt to avoid the asset class and look for returns elsewhere.

So, the answer to the one question

Can rising house prices drive the rest of the economy on their own without a construction boom?

will be found in whether increases in unemployment remain contained. I’m skeptical – but if I’m wrong this is where we will see it. 

——————————-

Damien Klassen is Head of Investments at the Macrobusiness Fund, which is powered by Nucleus Wealth.

The information on this blog contains general information and does not take into account your personal objectives, financial situation or needs. Past performance is not an indication of future performance. Damien Klassen is an authorised representative of Nucleus Wealth Management, a Corporate Authorised Representative of Nucleus Advice Pty Ltd – AFSL 515796.

Follow me

Damien Klassen

Damien has a wealth of experience across international equities (Schroders), asset allocation (Wilson HTM) and he helped create one of Australia’s largest independent research firms, Aegis Equities. He lectured for over a decade at the Securities Institute, Finsia and Kaplan and spent many of those years as the external Chair for the subject of Industrial Equity Analysis.
Follow me

Latest posts by Damien Klassen (see all)

Comments

  1. One of the key points I remember from Phillip Anderson’s book “The Secret History of Real Estate and Banking”, is that crashes are often as bad as they can possibly be, because they come once everyone has given up waiting for the crash, and joined the party or the debt serfdom. So the exposure is the highest it possibly can be.
    Everyone issuing warnings, meanwhile, has become discredited as “doomsayers”. One of Phillip Anderson’s other points was that “fundamentals” are extremely difficult as the basis for picking cycle timing; Australia’s fundamentals have been worse than Ireland’s were in 2007, for nearly a decade already. The cycle length seems to run on unaffected; but the volatility of the ultimate crash (rather than the timing) is what the fundamentals DO determine.
    Australia might be a unique historical example where the run-up has been TWO cycles in length, the adjustment that should have happened at the end of the first cycle was postponed by fiscal and monetary skullduggery that very unfortunately succeeded. The Irish will look lucky compared to Australia, by the mid 2020’s. That prediction, “by the mid 2020’s” is something else I learned from Anderson. It could take until then to be proved right. It would actually surprise me (and other Anderson disciples) if the crash came before 2021. But holding or selling a portfolio is a different story altogether – the last few years involve such a slow, artificial market, that disposing of a portfolio is something best not left till the last bit of air has been pumped into the bubble. Best to be nearly cashed up already, I say.

    • Yes, a bubble will keep growing until there is nothing left in the economy to eat – and its burst will leave total ruin behind.

      Having said that, fundamentals are difficult to use because fundamentals almost always look terrible. It is a matter of how much ugliness you can live with (to hold your nose and press the buy button).

    • Good points re fundamentals and timing — veteran financial markets traders and investors understand this only too well.

      The general rule is that fundamentals will prevail eventually and the longer they don’t (esp owing to intervention) the more extreme the adjustment. Property is great until the day arrives that you discover the true meaning of the word ‘liquidity’.

      You wouldn’t want to be a forced seller when liquidity has disappeared altogether and sentiment is at rock bottom.

    • Professor DemographyMEMBER

      Yes. Catherine Cashmore, using Andersonian principles, predicted to me personally that we would see a mid cycle low point in 2019. Well, we saw a slightly earlier but decebt drop possibly bottoming in 2019. She then predicted a ~2026 peak building before an almighty decent crash. It is harder to believe I think due to the seemingly skipped 2008 cycle cataclysm but I remain open minded about the dedication Australians have to their South Seas Bubble 2.0.

    • david collyerMEMBER

      Thanks Phil. Anderson’s book is a must-read macro and I commend it to all.

      Klassen’s conclusion: “When presented with an asset class that has limited upside in positive scenarios and significant downside in negative scenarios, I usually opt to avoid the asset class and look for returns elsewhere.”

      Describes the logical conclusion anyone prepared to do the sums would arrive at. Those who follow Reusa’s dictum that research is for loosers can hop right in.

      We wring our hands at the financialisation of residential real estate – a consumption asset – yet for most individuals this is the mountain they climb to secure their future. The timing of entry can be life-making or life-breaking. I consider the current settings are suicidal for FHBs. In particular, the high rise fiasco has major implications for those involved, with very large and as yet unquantified spill-over effects into the rest for the RE market and overall economy.

      Don’t Buy Now!

      • Don’t be too proud of this logical terror you’ve constructed. The ability to make logical conclusions is insignificant next to the power of the Force.

        FHBs, remember to concentrate on the moment. Feel, don’t think. Trust your instincts. And the Force will be with you.

  2. Australia’s black swan looks to be the climate event over Antarctica. NSW is going to be ground zero by Christmas without rain. Insurance claims and thus insurers will fail taking unemployment into the low teens in no time flat

  3. forget the international aspects (which I think WILL tank the Australian economy) … increased pricing, on average, of housing stock requires continued expansion of easy credit and a willingness of people to borrow ever lager amounts of money.

    What about serviceability of that increasing level of debt? When net household incomes are, at best, not increasing how can increasing debt loads be serviced. The math just doesn’t work ….

    While I’ve always thought increased unemployment would be the substantive domestic trigger, the logic of ever increasing debt loads doesn’t need increased unemployment to trigger an on-going slump …

    The can can be kicked in the current circumstances but it simply can’t go on indefinitely. Just like QE, MMT and all the other juju that passes for economics/financial practices in the current environment, it seems to me that it is just a matter of time before the house of cards collapses and no-one can be sure as to the when or how …

    It depends on your time frames and stage of life – do you roll the dice and hope or do you take whatever steps you can to protect whatever wealth you may have and plan for very different times before they belt you in the face??

    • Yup, this idea that credit availability is all that matters is nonsense. As long as interest rates on mortgages are above zero there is a natural limit to the size of mortgage that any one individual or family can service. After that, rising wages are your only hope.

      Even with zero cost mortgages a bank must be reasonably confident they’ll get their money back so eligibility will remain a factor.

  4. Shifty Politician

    HI – the down turn in Australian house prices was resolutely NOT the result of the APRA tightening on rules – its such unmitigated carp.

    It was because $50 Billion annual purchases of houses from mainland Chinese stopped over night as they brought in draconian laws regarding purchasing of property and exporting of capital. The same thing happened around the world wherever the Chinese were active. So it simply can not have been the APRA rule changes.

    Further the graphs in the article from yesterday demonstrate that loans from FOREIGN BANKS followed the exact same trajectory – again – definitive proof that it was not the APRA rule changes.

    Oh and finally – the best evidence is that the house prices in the graphs started their precipitous change in direction BEFORE the rules came into effect.

    I don’t know if its willful ignorance or deliberately trying to manipulate the conversation to downplay the role of the CHinese in driving the housing market – but it seems incredibly absurd to deny its role, the impact it had in driving up prices and driving down prices – no mention of it at all in your analysis.

    There will be no recovery without their return on mass.

    Here is the article on it from yesterday

    https://www.macrobusiness.com.au/2019/09/interest-only-mortgage-cannon-reloaded/

    Disappointing .

    • Even StevenMEMBER

      Yes, it was because of APRA tightening. If it occurred before caps came in, it was because it had been telegraphed. From memory, APRA said banks had x months to comply (and of course, the banks didn’t foolishly leave it to the last day).

      I think foreign banks were also captured by APRA’s restrictions. Well, I assume this is the case, because otherwise there wouldn’t be a level playing field for all the bank lenders. I know if I was a domestic bank I’d be up in arms over such discrimination.

      I do know for sure that non-bank lenders didn’t get capped (Peppers, Liberty etc) – they made out like bandits while the ‘regulated space’ had to comply with the caps.

      • Shifty Politician

        Mate -Chinese represented over HALF of all established property sales at the time – it stopped over night.

        You are 100%, flat out, completely and utterly wrong.

        • Still the same – Chinese and foreign PR as a proxy to avoid FIRB are by far the dominant group buying low end property, along with a few Australians suckered into thinking they can finally mortgage themselves to the Max & buy on a dip & lower rates.

    • Exactly.
      It’s the flood of foreign criminal syndicate dirty money that underpins the Sydney & Melbourne property price bubble.

      $90 billion plus – of foreign criminal syndicate dirty money – laundered via TR / PR (now via a PR to avoid the FIRB), into very low end established housing..
      To evict the Australian tenants onto the street & convert it to migrant only cash in hand bunk slum share.
      -/-
      We have over 3.5 million unskilled third world low income no assets migrant non citizens (PR / TR SCV / TV) ‘rent’ in Sydney and Melbourne in ‘private shared accommodation’ (ABS).

      They pay $130-$165 a week for bunkshare.

      6, 8, 10 or more in each little fetid migrant dwelling.

      So at least 600,000 dwellings.

      Seriously, where do the MB readership or these ‘analysts’ etc all think the migrant guestworkers live?

      And how, and who do you think they pay rent to?

      They live in vast migrant only filthy slums – ex Australian low income or rental housing now acquired by a foreigner (PR) and packed full of migrant Guestworkers.

      Go west – Lakemba, Auburn, Bankstown, Blacktown – Guangzhou meets Cairo, Dhaka and Mumbai.

      The dwelling purchase by the foreign PR proxy is often cash outright, others are by deposit & loan or foreign financed’ depending on how the foreign criminal syndicates structured their money laundering.

      600,000 dwellings x say $450,000 average purchase (is very low end mostly) x 20% deposit & SD etc..
      say $150,000 each to acquire the old established unit kick out the Australians, put in the bunks & rice cookers and then fill it up with migrants as a cash in hand doss house = $90,000,000,000 – $90 billion. Easily.

      All the affordable and low income renter housing literally wiped out.

      That is why we have 116,000 Australian permanent homeless on the street, and another 360,000 Australians seeking affordable housing.

      It’s a $30 billion $$cash rent goldmine industry.
      Only $10 billion of so is declared. If that.
      The ‘Minimum rent’ or legal occupancy only.

      Root cause.
      Third world unskilled poor migrant influx who can only afford a bunk in slum share.

      That’s why the foreign criminal syndicates are buying up all the very low end housing via a proxy PR – to house this migrant influx and milk this goldmine of untaxed cash.

      And to further insult Australians- this PR proxy is also often claiming taxpayer funded negative gearing as a kicker.

      It’s all about the rivers of cash from the migrant cram housing – they don’t care about capital gain.

      And as property prices fall it will continue.

      And it is now shifting to be ‘self funding’ from the now established onshore migrant subletting $30 billion cash goldmine.

      It will be foreign migrant PR at the auctions and property sales, further gobbling up the low end and affordable housing – to house the migrant influx in even more cash in hand subletting.

      Time for ‘National Housing Audit’ to expose all this.

  5. the Thing that really matters is the amssive housing shortage. Too many bods, not enough houses.

    After that, the things that matter are interest rates and unemployment. In that order, I reckon. These latter two factors affect the severity of unaffodability.

    • Shifty Politician

      Lol.

      On every single stat, analysis, report – whatever – there is a massive overhang of supply on a gargantuan scale.

      Whatever floats your boat I suppose, but don’t expect anyone else to take your absurd cognitive dissonance with even the slightest gravity.

        • Sydney (pop. 5m) having more residential cranes than all of north America (pop. 350m) that’s currently in the middle of the largest condo boom in American history clearly tells a story of severe housing shortage we have

        • Shifty Politician

          You should try just reading a website called macrobusiness.com.au which details every single day the apartment / housing construction boom in Australia.

          The truly absurd core of your posts is that you think you are clever, or smart and onto something. The repetitiveness of it would be fine it it were mildly amusing like Reuch. But your not trying to be funny – you clearly believe what you are saying, and are clearly trying to convince others of said ideas.

          I’ve never in all my life seen a more concrete example of Dunning Kruger – you are literally too dumb to understand how dumb you are. And that stupidity frustrates you as you simply can not comprehend why others don’t appreciate your clarity as much as you appreciate yourself.

          The smug inanity reminds of Malcom Roberts. Just totally sure of themselves while the entire room laughs at them.

          Idiocy is a self reinforcing mobius strip.

    • Jumping jack flash

      Not entirely true. If the bank says “no” then nobody can buy it.

      1/4 of Australians have less than $1000 in the bank.
      And yes there’s a bit of inequality but the point is that NOBODY who would buy a “starter house” on the city fringes would have the asking price in their bank. They would most certainly need to rely on debt from a bank to pay it.

      • Yup, if there is one property available for $1m and 10 people looking to buy, all with budgets of $500k then no transaction is taking place.

    • I want to be on your side here but there is not a single example in history where a shortage of property has kept a bubble aloft.

      And China, perversely, has a huge surplus of property AND a simply epic bubble at the same time.

      • You want to be on my side? That’s strange – most seem to want to be behind or on top, but whatever, man.

        It al depends on timeframes, dunnit?

        The most recent episode is decades old. Can they eke another decade out of it? I don’t see why not.

        History shows that London has maintained housing unaffordability for over 200 years, briefly interrupted by the dislocation caused by the rise of the automobile….

        • Sorry Peach, things have reached a real low point when your opposition starts sympathising with you. I shouldn’t have done it 🙁

      • Dominic,
        One can be price-focused or suffering-focused.

        When it comes to the Sydney Housing Disaster I am suffering-focused. As long as the shortage persists, decent people will miss-out on decent housing. This will happen regardless of price. I want the shortage fixed!

        You appear to be price-focused. You want the price fixed.

        there is not a single example in history where a shortage of property has kept a bubble aloft.

        That is true. And yours is a price-focused observation.

        • Claw, the whole lot is the Government’s fault: from immigration to zoning restrictions to regulation to stimulus packages.

          Everything they do is geared to putting money in the pockets of their mates the developers and helping to keep the value of their nest eggs going in the right direction.

          I’d have every one of them sailed out into a shark-infested sea and tossed overboard. It’s what they deserve. (Apart from Rex whatshisface)

    • When an item is in abundance, the item sells at its “cost of production”.
      However when an item is in scarcity, the price can detach from cost of production and is determined by the buying power of the strongest loser.

      For example when 1/4 acre blocks with houses were being built at a great rate to match immigration circa 1970, a house cost about 4 years wages to buy. That is because all the things that went into a house took, roughly speaking, 4 years of human effort to produce. That is your “cost of production”.

      However now that supply has been choked and demand has been poked by government, there is a shortage of housing and a house will sell for 1 bid higher than what the loser bidder bids. (buying power of the strongest loser)

      So for those price-focused readers, what is it that determines the buying power of the strongest loser in Australia? That’s easy, it is credit, because most people do not save up and pay cash for their housing – they borrow from a bank.

      Years ago I said that the shortage determines how many people miss-out on housing, and credit determines the price at which they miss-out.
      (Damien Klassen’s silly little green and red pointery things are no improvement on what I said years ago.)

      Which one bothers you the most? Decent families missing-out on decent housing, or price?
      I say concentrate on getting decent housing for all Australians, and let price take care of itself.

      Oh and Peachy, I love your work, but your spelling today is shite.

  6. 1.2m people directly employed in construction industry (plus indirectly construction workers like independent tradies, consultants, traffic controllers, construction sales and marketing, …)
    our housing construction bubble is massive and there is no way it can be sustained leading to massive unemployment

    Our construction increased from around 150k dwellings in 2012 to 240k in 2015 and than it stayed high (above 220k) for 3 years. Total number of extra new homes constructed in the period of 6 years is around 400k – equivalent to almost 3 year normal supply prior to boom.
    In comparison US construction boom went up from 1.5m to 2.1m in 6 years between 2000 and 2006 – equivalent to less than 1.5 times annual rate before the boom

        • doc I’m not disputing your observations. I just don’t ‘get’ this statement
          “Our construction increased from around 150k dwellings in 2012 to 240k in 2015 and than it stayed high (above 220k) for 3 years. Total number of extra new homes constructed in the period of 6 years is around 400k – equivalent to almost 3 year normal supply prior to boom.”
          It kinda doesn’t make sense.

          • what it means is that during 6 years boom we constructed 400k more dwellings that would have not be there if we didn’t have the boom (that equivalent to almost 3 years of non-boom construction output)

            that got compared to US construction boom (one that Luci Ellis said we never had and that’s why we are different).
            during US boom they increased construction by far less and during 6 boom years they built only 1.5 years wort of normal supply.
            Now let’s see why Luci Ellis thought in 2012 why we are different than USA
            https://www.rba.gov.au/speeches/2012/sp-so-110412.html

            The first is that housing supply is quite elastic here, at least in enough parts of the country to matter. The housing boom was a construction boom as well as a price boom. As a result, by 2006 there was already a substantial overhang of excess supply (Graph 1). The inherent stock-flow interaction in the housing market means that construction booms sow the seeds of their own destruction. Prices can undershoot formerly sustainable levels.

            what she thinks now after our much bigger construction boom accompanied with bigger price boom?

            The second factor is that the system of financial regulation did not stop an even greater easing in lending standards than occurred elsewhere. And they eased in a way that exacerbated the tendency of mortgage borrowers to default in a bust. There were gaps in both prudential and consumer protection regulation. Even where those regulations applied, they did not prevent lending practices not seen elsewhere, especially around income documentation and amortisation.

            What she thinks now after our world record IO mortgage boom and Royal commission revelations?

            This links to the third factor, which is that a range of tax and legal differences, as well as industry convention, created a system that discouraged amortisation. Interest-only loans, explicitly negative amortisation loans and cash-out refinancing, all meant that loan-to-valuation ratios that were high at origination, stayed high well into the life of the loan.

            LOL – we are the ultimate winners in all these areas

            so if she has to give a speech right now what would she say?

          • How many Jimmies did the US have compared to us?

            How much of a shortage did they have as a starting point, before their construction boom?

            HMMMMMMM?!

            With a more severe shortage to begin with and more Jimmies, it is little wonder that we end up with a severe shortage notwithstanding more construction. Very little wonder.

          • david collyerMEMBER

            I hope you, and Luci, are not including all the high rise incinerators in your dwelling numbers. They may be additions to the housing stock, but this sector is paralysed until the building defects are fully identified and liability apportioned so the banks can remove their finance bans. A mess.

            DBN!

          • Americans had plenty of jimmies but more importantly they never built as much as we did

            US population growth in a decade before the boom (90s) was around 32 million and during the boom (2000-2006) was over 18 million – during the same period prior to boom they built around 13m new homes, during boom they built around 10 million homes – around 1 home per 2.5 people before the boom and around on average 1 home per 1.8 people during the boom
            Our population growth in a decade before construction boom (2002-2012) was around 3.2 million and we built around 1.6 million new homes, during the boom (2012-2018) population increased by 2.2m and we built 1.3m new homes
            – around 1 home per 2 people before the boom and around on average 1 home per 1.7 people during the boom

            So statistics is quite clear we had way more oversupply before the boom – one new home per 2 new residents vs. 2.5 in USA and we also built more homes during the boom one per 1.7 new residents vs 1.8 in USA) both countries have stagnant household size at around 2.6)
            BTW. none needs more than 1 new home per 2.6 people when average – mean household size is stagnant at 2.6

    • Shifty Politician

      Thanks – well put.

      The ABS employment data on construction details the specifics of those employed in sector and it is highly selective reading at best. Only specific types of architects, engineers, and even builders themselves are included. While almost zero internal fittings are included – so carpentry is included but plastering is not.

      Think of the landscape gardeners, interior designers, fixtures and fittings sales, home ware, right through the supply chain. Lawyers, agents, surveyors, digital and print marketing, right through to the cafes and lunch trucks servicing these people – its such an all encompassing sector.

      I read a few years back that if you include every single aspect of housing, apartment, sales etc – from getting interested in housing from a TV show, to looking for a house you like, to inquiring about buying a house, to making an offer on a block of land, to planning on building a house, building it, fitting it out, painting it, moving in, furnishing it, doing the garden – then using the equity from it and everyone who services all those industries along the way – encompasses something like 60% of the workforce.

      • ABS stats are dodgy:
        here are few interesting official stats:

        only 1.6% of professionals work in construction – 3 times as many work in “other sectors” and “not stated” sector
        out of “Design, engineering, science and transport professionals” only 6% work in construction –
        out of over 100k Architects, Designers, planners and Surveyours – only 5k (<5%) work in construction – LOL
        out of 20k Architects only 1600 work in construction and out of 12k surveyors only 1300 work in construction – HAHAHA

        other funny examples are that only 80% of bricklayers, 75% of construction managers, and 85% of construction trade workers work in construction LOL

        even direct construction employment is heavily underestimated by official stats

  7. Jumping jack flash

    “For the optimists, the answer is a resounding yes.”
    I am a realist and I say “Yes” too.

    “…house prices are too high for children to afford, they will have to come down to a level that an ordinary person on a regular salary can afford”

    You forget about tiny houses. Coupled with land they will give us another 10 years of “perpetual” credit growth which will drive the economy, or rather the top end of it, higher.

    Statistics will do the rest, like it has for the past 10 years.

    Tiny houses and smaller and smaller blocks are the future.
    Apartments are on the nose. Besides, no “True Australian” would be caught dead in one of those things. They want a backyard, dammit, even if it’s only the size of a large bed.

  8. Shifty Politician

    Small business is the largest employer in Australia. 90% of small businesses rely on loans backed by equity in their primary residence.

    Think about a down turn in retail and house prices and the negative feed back loop involved in that process.

    Scary.

    • I heard on the radio a couple of days ago that a recent survey discovered that 56% of small business owners in this country suffered from some or other mental illness owing to the stress they were under …

      They are perpetually on the ragged edge. Good thing our economy’s going gang-busters 😉

    • 90% of small businesses rely on loans backed by equity in their primary residence.

      so most of our business loans are mortgages as well

      That is the tragedy of this country
      how can that even be legal

      • Even StevenMEMBER

        Because 90% of small businesses go belly up within 2 years (might have the figure slightly wrong). Understandably, a bank doesn’t want to lend without appropriate collateral. If the loan was secured by the business assets only (which are typically worth very little in a firesale) there wouldn’t be much business lending going on at all.

        I don’t know what the solution is. Running a small business is tough.

        • It’s like that here but not in other places – states for example
          having personal property used as collateral for business loans is not that common

        • Shifty Politician

          Banks used to engage in risk and lend to businesses. Lending on houses was a low risk enterprise where very little money was to be made and it was tightly regulated by the government – interest rates were capped at 5% (Boomers – lols).

          Then the banks decided screw that – and here we are. Upside down land.

          .

    • Jumping jack flash

      This!

      Small businesses are often run by “mums and dads” who are people with enormous quantities of debt.
      All profits from the business are absorbed into their personal debt repayment.
      The business owners replace employees with the cheapest possible alternatives to maximise their own incomes and their own debt.

      This is how it works.

      This is why incomes aren’t going anywhere for the next 30 years.
      Even if they stopped the immigration, which they surely can’t for much the same reasons as they can never raise interest rates again, incomes wouldn’t rise. Instead, small businesses would simply stop being formed because it wouldn’t be viable.

  9. Greta article Tim. The only other variable that is missing but can influence prices is Australians borrowing capacity. Loosening of lending rules means loans 7-8 times yearly earnings. So we are almost back to the wild ride we had until Apr 2017.
    Employment is important but in an environment like ours where citizens hold record high debt and are encouraged to load up more it beggars the question how much more is actually possible. My call is (from pedestrian point of view) prices will go up another 5% on top of where they are right now before we hit the borrowing limit. After that employment will have marginal influence on what happens to prices. Reason why I am saying this is because we are back at playing flipping houses and not buying to live in them – not at these prices – this is again game of greater fool.
    MB should have some data on what med wage in Oz is and from there should be able to work out what max med loan can be. Once we hit that I think music stops and there is no turning back unless there is free money.

    • you think unemployment has nothing to do with borrowing capacity?

      Also, how do you mean just flipping, for a ponzi to work (someone selling and making a profit) someone needs to bring new money in
      many of highly leveraged investors cannot enter the market at the moment because previous falls of 15% wiped out all of their equity

    • JMO
      There IS going to be free (and better) money. That’s RBA and Treasury policy. How it plays out I have little idea!

    • Jumping jack flash

      “MB should have some data on what med wage in Oz is and from there should be able to work out what max med loan can be. Once we hit that I think music stops and there is no turning back unless there is free money.”

      Not sure about median wage across all employment types including the humble rideshare driver, but for the average fulltime employee it was around 88K last time I checked.

      Great observation. We only have 1% of cash rate cuts’ worth of cheaper mortgages left. Once that’s exhausted then that’s all there is from that avenue.

      After that, to get more debt out there they’re going to have to perform some really strange contortions, and the biggest problem will be appeasing the retail banks. They need their interest to be paid to them to exist!

      There was already a hint of pushback from the banks regarding lowering interest rates further when the RBA was testing the waters regarding QE!

      So what they’ve got up their sleeve must be truly something, if they have anything up there at all.

    • I forgot to add – reason why Employment will play marginal role once prices go up another ~5% is because there is no wage growth.