Tag Archives: FHBG

RBA Officials Have Vested Interest In Fate Of Aussie Real Estate

23 Jun

From Business Spectator, September 20, 2010:

According to a recent report by Goldman Sachs chief economist, Tim Toohey, household debt levels in Australia now stand at an elevated level, both in relation to historic norms, and compared to other countries. For instance, Australia’s debt to household income ratio is higher than in the United States and Spain, and stands at a similar level to the United Kingdom.

Toohey has written a perceptive report on the Australian housing market, in which he argues that housing prices are between 25-35 per cent overvalued. As a result, he says, we run the risk that Australia’s house prices could drop sharply if a sharp decline in Chinese growth prompted a steep drop in our export earnings.

Interestingly, it appears that Reserve Bank officials are the keenest investors in rental properties. “We are not sure whether to be relieved or concerned that of the five central bankers who were brave enough to note their occupation on their tax form, all five had an investment property!”, the report says. “Of the 200 occupations classified by the Australian Tax Office, the employees at the Reserve Bank topped the list with respect to their investment property exposure.”

There’s more than one way to look at this very interesting revelation.

1. The “independent” RBA has a vested interest in fuelling Australia’s property bubble – which helps to explain the low interest rate policies of the early 2000’s that so helped to encourage excessive borrowing and real estate speculation.

2. The “independent” RBA has a vested interest in keeping the property bubble afloat – so that RBA officials do not suffer capital losses on their existing property portfolios.

3. My favourite.  The “independent” RBA has a vested interest in first fuelling a property bubble with low interest rates – meaning officials make profits on the way up – and then, collapsing the property bubble at a time of their choosing (by raising interest rates), so that officials can buy in to the property market again (and buy up even more), after prices have fallen dramatically.

One can only wonder about the investments of “independent” RBA Governor, Glenn “$234k Pay Rise At GFC Peak” Stevens.  Has he profited from his Board’s decisions on interest rates? Will he personally profit by (again) raising interest rates into the teeth of an onrushing GFC 2.0?

Next time you hear an RBA official like Stevens talking about interest rates, or the housing market, just remember this article.

And remember that, whatever happens to the housing market, it is those same “independent” RBA officials who know what is going to happen… before you do.

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‘Til Debt Do Tear Us Apart

11 May

Senator Barnaby Joyce writing for The Punch yesterday:

Well, I hope you all feel comfortable that you now owe $140 billion. If you take our population as approximately 22 million, that means you owe in excess of $6300 for each man, woman and child in Australia.

I will keep talking about debt until people realise the dangerous position it puts us in. We are borrowing in excess of $1 billion each week. We see every night on the news the problems of other countries that have not dealt with their debt but have waited for the inevitable when the debt deals with you. How could we be so foolish as a nation to be mounting up debt the way we are?

Then, to all intents and purposes, nationalise half of the sector of our economy which has actually kept us from the jaws of recession – the mining sector. This is something that would be more appropriate for Hugo Chavez or Evo Morales or Castro in Cuba. Australia hasn’t experienced this sort of insanity since the failed approach by the Labor party when they decided to nationalise the banking industry in 1949.

The actions of our Government of late have been quiet bizarre – ceiling insulation, resource tax, BER, 2020 summit, fuel watch, grocery watch, war on obesity and the response to the Henry tax review that only accepted a few of the 138 recommendations.

The government has labelled these measures as a “revolution” or a “war” but really, it’s just been pandemonium.

People are genuinely getting worried that the Government has gone rogue and lost the plot.

Anyway, back to the debt. When will the Government come to the conclusion that as it keeps borrowing in excess of $1 billion a week that inevitably something is going to go “snap”?

The Government no doubt will tell us we should say “hip hip hooray” that our record deficit is not quite as big as they thought it was going to be.

Then they are going to tell us that at sometime in the future, when they cannot be pinned down, it will all get better, like the child who is going to clean up their room in three years’ time.

If there is one thing that Australians can do for themselves, it is not to get into excessive debt. There are no tricks in how you pay it off – it is just very hard work and lots of sacrifices and pain, where pain never needed to happen.

It’s always the same – the pain of paying it off is five times the joy of getting it and when you look at what the Labor Party has got us, they’ve really got us nothing, except for getting us into a lot of trouble. The resource profit tax looks like the last pill of insanity after a huge night on the town.

This budget will determine that either the Labor Party are going to start turning around the debt or it is going to confirm our worst fears about them. I clearly spelled these out at my National Press Club speech where I stated that the Labor Party has no respect for money, no capacity to handle money, and no knowledge of money.

All these fears have crystallised in their inability to grasp the nettle and immediately start turning around the debt – not in two or three years’ time, but now.

Barnaby Is Right.

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House Prices Tipped To Implode

3 May

While Barnaby may not have spoken about private debt, it is arguably the great threat to Australia’s economy.  The first to suffer from excessive debt burdens are the thousands of overextended First Home Buyers.

From The Australian:

Australia is in the midst of an unsustainable housing bubble that could burst at any time, warns the man who predicted the global credit bust of 2007.

Edward Chancellor, of US investment bank GMO, says the Australian economy is yet to emerge from the global financial crisis, despite the widespread belief it has escaped the worst of it ahead of the rest of the world.

Mr Chancellor, whose Crunch Time for Credit? was published in 2005, estimates Australian house prices are more than 50 per cent above their fair value – a once in 40-year event. “If house prices were to revert to their historic long-term average (ratio of average price to average income) they would fall quite considerably,” he told The Australian.

He described Australia’s banking system as a “cartel” and said luck rather than skill had allowed the Australian economy to fare better in the global financial crisis than other developed economies.

“My view is Australia had a private sector credit boom just like the US and the UK and it had a real estate boom,” he said.

“Those are the facts and you can’t paper over them.

“In this environment, house prices rose last year and that seems to me to actually have exacerbated the problem.

“The problem is the bubble and that hasn’t gone away.”

A key area of concern for Mr Chancellor was first-home buyers. As interest rates rose, the ratio of their mortgage repayments to their income would rise to very high levels, he said.

“It’s the rising interest rates, particularly with real estate bubbles, that tend to generate the collapse,” he said.

Another potential trigger was China, particularly if the demand for iron ore, coal and liquefied natural gas were to collapse.

“We would see the Chinese demand for Australian commodities as being potentially vulnerable,” Mr Chancellor said.

UPDATE:

The latest housing data says that our housing bubble – fuelled by years of easy credit, the First Home Owners Grant, and propped up during the GFC by Rudd Labor’s doubling of the FHOG – is now running out of control.

From The Australian:

Australia’s established house prices soared 20 per cent in the 12 months to March, deepening fears that a house-price bubble would emerge, and at the same time clearing the decks for a further rise in interest rates tomorrow.

The annual rise in house prices was the fastest ever recorded by the Australian Bureau of Statistics data series, which began in mid-2002. A rise of 4.8 per cent over the fourth quarter of 2009 was the second-biggest quarterly increase.

“This is a shocker,” said Rob Henderson, head of Australian economics at National Australia Bank. He added that the Reserve Bank of Australia now needed to get more aggressive, and acknowledge the need for a restrictive policy stance.

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An Incredible Experience

28 Apr

Well, the KeenWalk is over. And what an incredible experience it was! I can honestly say that I have never before had the pleasure of meeting so many truly wonderful, warm-hearted, intelligent, fascinating people in one place and time.

You can find some of my thoughts about the journey – and the reasons and purpose behind it – on the KeenWalk website, along with those of other fellow travellers.

And now, after a couple days to catch up on essentials, it’s back to the “business” of debt. So much of importance has happened in world markets while I’ve been away – Goldman Sachs, Greece, the IMF, Rudd Labor’s backflip on Foreign Investment rules for property purchases – one hardly knows where to begin!

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KeenWalk To Kosciuszko

15 Apr

From today through April 23rd, I am joining Professor Steve Keen on his 230km “Keenwalk” from Parliament House to Mount Kosciuszko, in protest against Australia’s property (and debt) mania that has been driven directly by the ill-conceived policies of successive Federal Governments, the RBA, and Australia’s high risk, mortgage-loaded banking system.

Please consider joining us for an afternoon section of the walk.

If you’d care to assist a genuinely worthy cause, then please consider sponsoring Professor Keen, or indeed myself. Funds raised are supporting the wonderful charity Swags For Homeless.

On my return – hopefully still upright and with all joints intact! – I will be back here collating more news stories from around the world, showing that Barnaby Is Right.

Thanks!

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Aussie Banks To Cut Lending, High Risk

11 Apr

From the Sydney Morning Herald:

Banks could be forced to curb sales of mortgages after a feeding frenzy on housing over the past 18 months has seen their exposure to the property market hit record levels.

Last month, BHP Billiton’s outgoing chairman and former head of the National Australia Bank, Don Argus, likened the big banks to ”giant building societies”, accusing them of neglecting business lending to chase the mortgage market.

Of the big banks, the Commonwealth has the most concentrated exposure to the property market – 65 per cent of its lending book is tied up in mortgages. For Westpac and St George combined it is 62 per cent.

ANZ and NAB, which traditionally have a bigger exposure to business lending, have pumped up their mortgage exposure – it accounts for more than 50 per cent of their Australian loans books.

Could Australia experience a property crash, just like those in the USA, UK, Ireland, Spain … in fact, like most of the Western world?

Professor Steve Keen, the only Australian economist to forecast the Global Financial Crisis, believes our property bubble must burst too. It is just a matter of time.

Thanks to the Rudd Government’s doubling of the First Home Owners Boost, tens of thousands of (mostly) younger Australians were suckered into huge mortgages when interest rates were at their lowest.  Now, with household debt levels at an all-time high, the experience of so many other nations says that our bubble will burst too.

“If you do not manage debt, debt manages you”.

Barnaby is right.

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How Long Has The Lucky Country Got?

31 Mar

Edward Chancellor is the author of the classic text on financial manias, Devil Take the Hindmost. In 2005 he wrote Crunch time for credit: An enquiry into the state of the credit system in the United States and Great Britain, in which he correctly predicted the GFC. His recent report for Boston-based GMO outlined ten signs of a mania in progress, and showed that the Chinese economy meets all ten of those signs. He has also written recently about the Australian housing mania.

From the Financial Times:

Between 1996 and 2006, US home prices rose by nearly 90 per cent in real terms. Australian home prices rose by roughly the same amount.

Over this period, the US private sector increased its indebtedness by two-thirds of GDP. Australian private debt increased by a similar magnitude. Over the past three years, US home prices have fallen by 30 per cent, according to the S&P/Case-Shiller Composite Index. American households have started to deleverage. By contrast, Australian home prices have climbed 30 per cent since 2006 and households continue to pile on debt.

There are a number of explanations for this divergence…

While other governments expended their resources on shoring up busted banks, the Australian stimulus went straight to consumers. Fiscal transfers increased personal disposable incomes by 4 per cent, according to Professor Steve Keen of the University of Western Sydney. Canberra also bolstered the housing market, raising the subsidy for first-time home buyers to a maximum of A$21,000 (£12,200, €14,000, $18,600). Rising home prices arrested incipient deleveraging by Australian households. Outstanding mortgage debt has actually grown by 6 per cent of GDP since February 2009.

Australia may have been fortunate. But it is not out of the woods. For a start, the real estate market remains in bubble territory. Australian home prices are currently some 70 per cent above their long-term trend level. A recent survey by Demographia International finds that all of Australia’s major housing markets were valued at more than five times average incomes, and defines them as “severely unaffordable.” Initial mortgage payments for a home in Sydney or Melbourne are likely to exceed half of your disposable income, claims Demographia. The Australian housing market looks vulnerable to further rate rises.

Then there are the waning effects of the government’s stimulus to consider. The extra subsidy for first-time home buyers ended last year. The removal of this grant could have a similar effect on Australian real estate as the UK government’s reduction in mortgage interest relief in 1988, which killed off the frenzied Lawson housing boom. Prof Keen claims the first-homeowner’s grant has sucked people into the housing market who would not otherwise have bought. One report suggests many recent first-time buyers in Australia are already struggling to meet payments. This is eerily reminiscent of early stage delinquencies on subprime loans in the US back in late 2005. Australia is also exposed to the removal of China’s stimulus measures. China’s actions boosted commodity prices and improved Australia’s terms of trade. Now, Beijing appears more concerned about inflation and potential bad loans from uneconomic investments.

Aussie house prices have not fallen since the early 1950s. A certain complacency is therefore understandable. Yet not long ago many Americans also believed that domestic home prices could never fall. So far Australia has avoided its day of reckoning. But how long will the lucky country’s luck last?

Not long at all.

A recent survey of 26,000 mortgage borrowers showed that:

Almost half of first-home buyers lured into the market by the Rudd Government’s $14,000 grant are struggling to meet their mortgage repayments and many are already in arrears on their loans.

Thousands of young home buyers are using credit cards or other loans to meet obligations, while those in “severe stress” are missing payments.

Just weeks after the grant was withdrawn, a survey of more than 26,000 borrowers conducted by Fujitsu Consulting has found 45 per cent of first-home owners who entered the market during the past 18 months are experiencing “mortgage stress” or “severe mortgage stress”.

On Monday, RBA Governor Glenn Stevens appeared on commercial TV – an unprecedented act by an RBA official – to warn the public about the dangers of the property market.

On the same day, I came across the following comment by a reader of The Australian newspaper:

Waiting for the “correction” Posted at 1:22 PM Today

Now here’s something interesting. My “relationship manager” at Westpac says the housing market is heading for a “significant correction” because the major banks are about to insist on much higher deposits because of their alarm at the amount of questionable loans on their books. This guys says the word is that the Commonwealth will soon insist on a 30 per cent deposit for new purchases and then only to existing customers. “When that kind of thing happens, the heat will immediately go out of the market so stay out of it till the dust settles”. This bloke says Westpac is especially worried about the impact of the first home buyers grant and they’re already seeing significant loan defaults as interest rates rise. “These people took their $14-thousand, then got Mum and Dad to throw them the rest of their deposit because they were led to believe they’d miss the boat. Kevin Rudd has used taxpayer funds to entice a whole lot of young people into buying places they couldn’t afford and going bankrupt as interest rates rise”. That’s a direct quote from a guy at Westpac who used to be in the business of throwing money at you. God’s honour. Maybe the South Seas bubble IS about to pop?

To learn more about the dangers of debt, and how it has fueled the Australian housing bubble, visit the website and blog of Professor Steve Keen.

Special Note:

On April 15th through 23rd, I will be joining Professor Keen in his 230km “Keenwalk” from Parliament House to Mount Kosciuszko, in protest against Australia’s property (and debt) mania that has been driven directly by Federal Government and RBA policies.

Please consider joining us, for the whole trek or even just for an afternoon section of the walk.

If you’d care to assist a genuinely worthy cause, then please consider sponsoring Professor Keen, or indeed myself. Funds raised will support the wonderful charity Swags For Homeless.

Thanks!

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Australia’s Property Bubble: It’s Here

27 Mar

From the Sydney Morning Herald:

It’s official: 60 per cent of investors believe Australia has a property bubble. A confluence of housing shortages, low interest rates, speculative fervour and last year’s move by the Rudd Government to relax foreign ownership rules on real estate have turbo-charged house prices.

This is all scary stuff.  Investors played a key role in expanding the property bubble through the late 90s. In 1990 investment loans represented 16 per cent of Australian mortgages at $13 billion. By 2008 that figure had ballooned 2400 per cent to $310 billion, or 31 per cent of total mortgages. Investor attitudes matter.

The survey revealed, however, that moral hazard may be much larger than investors themselves admit, with 42 per cent expecting the Rudd Government to introduce another round of first home buyer grants if the current boom shows signs of ending.

The increase in foreign purchases also cannot be under estimated, following the decision last March by the federal government to relax its rules on property ownership. This abolished mandatory reporting of such acquisitions in a bid to ”enhance flexibility in the market”.

Before the change, foreign investment in Australian residential property had already started increasing, up 33 per cent to $20.4 billion. It is not known what the figures stand at in 2010 but there are suggestions that more than 30 per cent of homes auctioned are purchased by foreign speculators. If this is the case, it will dramatically add to the property bubble.

It is a potential political time bomb. Numerous readers have written in complaining that they are being priced out of the market by overseas bidders…

Another Investor Pulse reader wrote: “So much for Rudd’s ‘working families’. Australians should get priority over foreign investors for what limited housing we have. How can Australians compete when Chinese borrow at home at 1 per cent? The Australian property market is strong and doesn’t need to be propped up. The Government should act now to stop this misguided and UN-Australian policy. Shame on you, Mr Rudd, for selling out on Working Families.”

Barnaby Joyce is the only Australian politician who has been brave enough to endure smears and criticism, by daring to question the Rudd Government’s relaxing policies on foreign investment.

Here’s just one of Senator Joyce’s press releases on the topic from last year,  “FIRB Changes – Australia’s Sovereignty At Risk“:

Senator Joyce today called on Treasurer Wayne Swan to re think his undermining of the present system of reviewing foreign investments and takeovers.

Mr Swan’s announcement should sound very loud alarm bells to anyone concerned with maintaining Australia’s sovereignty over its resources and business interests given that  Mr Swan plans to remove  Foreign Investment Review Board supervision of over 20 percent of all business applications currently reviewed by the board.

This effective sidelining of the FIRB relating to a substantial number of applications is deeply troubling as it removes a long standing and much needed level of accountability and transparency of foreign investment in Australia particularly by individual investors from countries such as the Peoples Republic of China.

It is astounding Mr Swan would seek to punch such a big hole in Australia’s foreign review processes, leaving the back door wide open for foreign interests to buy Australia paddock by paddock, business by business without any accountability to the Australian people.

Unfortunately for Australia each of the announced measures will allow that hole to get bigger to the detriment of Australia’s sovereignty and its national interest.

Yet again, Barnaby is the only one who is on the ball.

UPDATE:

From The Age:

Foreign buyers inflating market

Reserve Bank governor Glenn Stevens says foreign buyers are a factor in rising house prices.

Mr Stevens said the bank was monitoring how much the federal government’s decision last March to relax its rules on foreigners owning property had contributed to surging prices for housing.

He said the role of foreign purchases was ”an important one and it’s one we’re giving some attention to”.

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Household Finances Deteriorate

20 Mar

From the Sydney Morning Herald:

The Australian economy is set to grow further in 2010, but household financial conditions are deteriorating to the extent the nation could experience a W shaped economic recovery, a report shows.

Melbourne Institute bulletin of economic trends shows the domestic economy is set to grow by 0.8 per cent in the March quarter and by 0.6 per cent in the June, September and December quarters.

But the report’s household financial conditions index fell 16.6 per cent to 28.8 index points in the March quarter of 2010.

It was the first fall in the index after four consecutive quarters of improvement.

More than half of the 14.4 per cent households who consider themselves to be financially stressed, are employed while employed people with a household income of over $80,000 are the most financially stressed out of all income groups.

The report said part of the deterioration in financial conditions was due to the increased need to service household debt, in particular mortgage debt.

This report indirectly highlights the very real danger of Australia’s unprecedented level of private debt. And in particular, mortgage debt.

Economist Steve Keen, who predicted the GFC in 2005, is Australia’s leading proponent of the argument warning against high private debt levels, and against government policies which have dangerously inflated Australia’s private debt, such as the First Home Owers Boost.

Visit Professor Keen’s ‘Debtwatch‘ website to learn more.

Special Note:

On April 15th through 23rd, I will be joining Professor Keen in his 230km “Keenwalk” from Parliament House to Mount Kosciuszko, in protest against Australia’s property (and debt) mania that has been driven directly by Federal Government and RBA policies.

Please consider joining us, for the whole trek or even just for an afternoon section of the walk.

If you’d care to assist a genuinely worthy cause, then please consider sponsoring Professor Keen, or indeed myself. Funds raised will support the wonderful charity Swags For Homeless.

Thanks!

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Europe’s Banks Brace For UK Debt Crisis

14 Mar

From the UK’s Telegraph:

UniCredit has alerted investors in a client note that Britain is at serious risk of a bond market and sterling debacle and faces even more intractable budget woes than Greece.

“I am becoming convinced that Great Britain is the next country that is going to be pummelled by investors,” said Kornelius Purps, Unicredit’s fixed income director and a leading analyst in Germany.

Mr Purps said the UK had been cushioned at first by low debt levels but the pace of deterioration has been so extreme that the country can no longer count on market tolerance.

Sound familiar?

Our economy too, was once cushioned by low debt levels. Not any more.

In my view, the only really fundamental difference between the UK’s dire economic situation and Australia’s, is this: as happens so often, with so much in Australia, we are simply running a couple of years behind on the major international trend.

The UK property bubble has already burst. Ours hasn’t … yet.  Only because the Government had cash in the bank to prop up our property bubble – and thus, our banking sector – by doubling the First Home Owners Boost.

When another wave of the GFC rolls in, we no longer have a “low debt” position to cushion the blow.

The only question seems to be, from which direction will the next wave come?  From Europe?  From the UK? From the USA? Or, from China?

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