Tag Archives: FHOB

The Clinching Argument In The “Private vs Public Debt” Debate

5 Jul

“He’s pretending that he’s elected by the people, and he’s actually elected by the banks”

In the following interview, Professor Steve Keen discusses how government “stimulus” or “help” programs that hand out borrowed (by the government) money to entice prospective house buyers, are actually Ponzi schemes.

But the most important truth of all is revealed from 10:14sec onwards:

INTERVIEWER: The Chancellor of the Exchequer, George Osborne, says he wants to reduce debt in Britain, while simultaneously launching the “Help To Buy” scheme which is an increase in debt. So my simple question is, Is the Chancellor lying?

KEEN: I think the Chancellor, like most politicians, is focussing on the level of government debt, not on the level of household and private debt, and they think that’s the real problem. The cause of this crisis was an out of control private banking sector lending to the private sector to encourage it to speculate on assets….

INTERVIEWER: (interrupts) Let me, let me, let me jump in for a second, because what we have found out in 2008 and going forward is that there really is no such thing as private debt, because when these private debts become unsustainable the private sector simply gives them to the government. So ultimately taxpayers always end up footing the bill for this debt, all the combined debt of household debt, bank debt, government debt, it’s all the same debt, that’s all underwritten by the same abused taxpayers, and the Chancellor — by ignoring this — is pretending that the UK people are brain dead!

KEEN: Well, what he’s pretending is that he is elected by the English people and he’s actually elected by the English banks. All this happens because the banks have got the politicians by the intellectual balls. They believe that the economy has to have a growing banking sector to be healthy, and that’s just like believing that you have to have a growing cancer to be a healthy human being. Past a certain stage the financial sector becomes a parasite. But it becomes such a strong and powerful parasite that the politicians think that if they let it die the economy will die. That’s precisely the opposite of the case — you’ve got to get the financial sector to shrink, you’ve got to cut it down, say in England, by a factor of at least 2 — and then in terms of abolishing debt, writing it off, not honouring the stuff, and standing up for the debtors, rather than standing up and voting for the creditors which, unfortunately, is what the politicians around the world have been doing this time around…

Unfortunately, Steve sidestepped the critical observation made by the interviewer — that because banksters simply palm off their out-of-control debt problems to the government, aided and abetted by compliant politicians, what this means is that, in the end, private debt and public debt must be considered in sum, not separately.

This is why Barnaby is right.

Although relatively “low” compared to that of “other advanced economies”, nevertheless Australia’s ever-rising public debt trajectory does matter a helluva lot.

Why?

Because — even though (sadly) Barnaby never points this out — Australia’s private debt levels are the highest in the world.

Our Household Debt sits around 150% of household disposable income.

6tl-hhfin

Our government-guaranteed banking sector is massively leveraged to Australia’s world-leading house price Ponzi.

So, simply stated, because of our massive private debt problem, our nation absolutely cannot afford the added risk of an ever-rising public debt level too.

The Chart That Proves RBA House Price Policy Is Doomed

14 May

The RBA’s surprise decision to cut the official interest rate earlier this month has re-energised the housing-debt-spruiker community, who have begun forecasting house price rises of 8 – 12% per annum on the back of more interest rate cuts to come (they presume):

Stephen Koukoulas - economist and ALP apologist

Stephen Koukoulas – economist and ALP apologist

Close examination of just one chart — one drawn directly from RBA statistics — is enough to debunk those who still cling to the belief that the RBA’s cutting interest rates must inevitably result in rising house prices:

Click to enlarge

Click to enlarge

This chart shows the all-important annual growth rate in credit for “Owner-occupied” and “Investor” housing, for the period July 1992 to March 2013. As we saw in January’s very popular “The Easy Way To Know Where House Prices Will Go”, anyone can visit the RBA’s website and use their monthly updated Chart Pack to see the true reason why house prices rose so strongly for over twenty years. It was all about the annual growth rate in “credit” for Housing, which is presently five (5) times lower than the peak seen in February 2004.

In that January article, we used the RBA’s own data to discover that the twenty year boom in house prices was largely due to a stunning annual growth rate in so-called “Investor” housing credit…

Clearly then, house prices in Australia were not driven up over the past 15-20 years by “demand” from “population growth”, from people who needed somewhere to live (Owner-occupiers). On the contrary, by far the strongest rates of growth have – during the bubble phase – been driven by so-called “investors”.

… and that is where a closer examination of that one chart above demonstrates that the RBA’s house price policy — trying to pump up the housing bubble again, now that their recently preferred “make room for the mining boom” policy has proven to be seriously short-sighted — is doomed to failure.

Why?

Because using interest rates to influence demand for housing “credit” — especially with “Investors” — has lost its effectiveness. And we can see this clearly, simply by zooming in on the above chart to look at the period November 2007 through to March 2013…

Click to enlarge

Click to enlarge

… and then adding in the actual interest rate rises, and cuts, and rises, and cuts during this period immediately before and since the GFC:

HousingFinanceGrowth_07-13_InterestRates

Take careful note of the change in the growth rate of housing “credit” for “Investors”, as compared to “Owner-occupiers”, as interest rates moved.

As you can see, the three (3) interest rate increases in late 2007 through early 2008 tipped both “Investor” and “Owner-occupied” housing credit growth over the cliff. By October 2008, when the RBA began taking a chainsaw to interest rates, housing credit growth was practically in free fall, plummeting from 12% per annum (Total) to 6.3% per annum, before the total 4.25% in “emergency” interest rate cuts halted the decline.

Interestingly, you can see that both the rate of fall and the total decline in housing credit growth was greater for Investors than for Owner-occupiers. As we saw in our January article, this is also what happened in the brief early 2000’s recession:

The rate of growth in “credit” for housing “Investors” was, until early 2004, far in excess of that for “Owner-occupiers”, with the notable exception of the early 2000′s global recession that only briefly affected Australia. At that time, “credit” growth for “Investor” housing plummeted to the same level as the “Owner-occupier” rate, before recovering spectacularly to reach a whopping 30.7% annual growth in Feb 2004.

What prompted the recovery? John Howard’s introduction of the First Home Owners Grant in 2000, and in particular, his doubling it in early 2001. With a rush of newly-enslaved borrowers bidding up house prices, “investors” too rushed back into the welcoming arms of the bankers, as ever only too eager to lend “credit” at interest to willing borrowers against the “security” of “their” house.

We see a similar, though far smaller effect largely repeated in the post-GFC period. The Rudd Government further doubled the First Home Owners Grant. A modest influx of new “First Home Owner” buyers rushing out with their government-debt-financed mortgage deposit to bid for a house, drew the “investors” back into the market as well. By July 2010 the “Investor” housing credit annual growth rate once again overtook that of “Owner-occupied” housing.

But not for long.

As you can see from the chart, the annual growth rate in credit for “Investor” housing had already peaked in August 2010, and had begun to fall, 2-3 months before the RBA’s final 0.25% interest rate increase in November 2010.

“Owner-occupied” housing credit growth, by contrast, had peaked back in October 2009 — the very same month in which the RBA first began to raise interest rates again, from their GFC “emergency low”. The First Home Owners Grant helped keep “Owner-occupied” housing credit growth relatively steady through to March 2010, when it resumed its long, steady post-2004 and pre-GFC decline. It has only now begun to flatline, in the first quarter of 2013.

The important observation to make about this chart, is that since the GFC “peak fear” in late 2008 and early 2009, things have changed. The world has gone past a point of no return, and the old “rules” of monetary and economic policy do not necessarily apply anymore.

While RBA interest rate increases still have the effect of reducing annual growth rates in housing credit, cutting interest rates no longer appears to have much effect in boosting housing credit growth back up again. Since November 2011, the RBA has cut interest rates seven (7) times — the most recent (May) not shown on this chart — to what are now lower than “emergency lows”, without causing an overall increase in the housing credit annual growth rate. Indeed, the RBA’s own Housing Credit growth chart in its Chart Pack confirms this:

9br-cgbys

The RBA now has the official interest rate at 2.75%. They have cut a full 1.5% since November 2011, without managing to “stimulate” a “recovery” in the growth rate of  house prices housing debt.

There are many more knowledgeable observers than I who have argued that 2% is as low as the Australian official interest rate can go; that 2% is effectively ZIRP (Zero Interest Rate Policy) for us.  The reason given sounds plausible enough; the Australian economy is essentially financed by borrowing “capital” from abroad, so with the rest of the West operating on ZIRP, we need a +2% interest rate difference in order to have any hope of continuing to attract foreign “capital”.

If the RBA is indeed “lower bound” by the 2% level, then the above chart makes one thing pretty clear.

At the present 2.75% cash rate, even another 0.75% in possible interest rate cuts is unlikely to “stimulate” much if any additional growth in Housing credit.

And with annual housing credit growth now running five (5) times lower than the February 2004 peak, and barely two-thirds the level when interest rates hit the 3% “emergency low” in April 2009, the RBA’s policy of trying to re-stimulate the housing bubble to support the economy after the mining boom … is doomed.

Simply, the RBA is pushing on a string:

This is the crux of the “pushing on a string” metaphor – that money cannot be pushed from the central bank to borrowers if they do not wish to borrow.

Don’t Buy Now.

The Easy Way To Know Where House Prices Will Go

19 Jan

Want to know whether Australian house prices will rise or fall?

The RBA has the answer.

Just go to their website, and click on “Chart Pack” under “Key Information” –

RBA_chartpacklink

Then click on “5. Credit and Money” –

RBA_chartpacklink2

… where you will see this chart –

9tl-cmg

This chart tells us the growth rate in the amount of “credit” and “money” in the economy.

As you can see, the growth rate in “credit” has plummeted to less than 5% per annum.  In the period where Australian house prices rose the most in history, the annual growth rate in “credit” was three to four times higher than the present rate.  Without strong growth in new “credit” issued to borrowers, house prices can not rise much.  If at all.

Indeed, unless there are enough new buyers – armed with enough newly-issued “credit” – out and about and actively purchasing houses, then house prices must eventually fall.

For over twenty years, housing in Australia has been a banker-profit-driven “bubble mania” scheme, you see.  To drive up prices, the #1 and absolutely essential ingredient is more and ever more new “credit” – debt – with which bright-eyed and dull-brained buyers – debt slaves – can outbid each other to buy a house.

The RBA has another chart that shows this.  It will help you to see more clearly exactly why Australian house prices rose so much … until the GFC struck.

In the main menu of the Chart Pack, select “3. Household Sector” –

RBA_chartpacklink3

Then select “Household Finances” –

RBA_chartpacklink4

… where you will see this chart –

6tl-hhfin

As you can see, Household Debt (ie, “credit” offered by banks) as a percentage of disposable income rose dramatically for nearly twenty years.

Until the GFC.

It turned down sharply as Australians wisely responded by tightening their belts, and paying down their debts.  Then began to climb again – but only a little – thanks to the Rudd government offering “free money” in the form of a doubling of the First Home Owners Grant.  This handout of what amounted to a free home loan deposit kept the bubble from collapsing.  It encouraged thousands of new buyers – mostly young people with little or no savings – to go to their bank and borrow hundreds of thousands in “credit” to go and bid up the prices of houses again.

Unfortunately for them – and the bankers – this could only last for as long as the government was willing, and able, to find more “new home buyers” – new debt slaves – to dangle “free” money in front of.  As you can see from the chart, the level of Household Debt to disposable income has now bounced off the ceiling for a second time.

And so, as most Australians know, house prices in most areas of Australia have basically gone nowhere in the past year or two.  Some rises here.  Some falls there.  But overall, house prices have simply mirrored the Household Debt level … falling as debt levels fell, and rising (briefly) to bounce off the underside of that invisible private debt ceiling, thanks to that brief inflow of new “credit” that was borrowed by the government, and then handed out to First Home Buyers as deposits enabling them to apply for new mortgage “credit” from banks.  And yes, the RBA has another chart that confirms this –

6bl-dwelpri

Now, it might interest you to know exactly when Australia’s private debt-fuelled, bankster-enriching house price bubble scheme actually hit the ceiling.

No, it was not when the GFC struck; when many Australian households began to wake up, and realise that paying down their debts might just be a good idea.

Our housing bubble actually hit the ceiling first in early-to-mid 2004.  That is when the all-important rate of growth in housing “credit” topped out, and began to fall.

Unfortunately, the RBA does not make it easy for you to see this critical economic parameter.  The Chart Pack only gives you “Credit” growth in aggregate – that includes other forms of borrowing like business loans and credit card “credit”.  They even give you a chart for the number of “housing loan approvals”. But they do not give you a chart specifically for that all-important rate of growth in housing credit.  You have to dig into their statistics, and construct the chart yourself (click to enlarge) –

Click to enlarge

Click to enlarge

As you can see, the rate of growth in “credit” for both “Owner-occupier” and “Investor” housing peaked in Feb-Mar 2004, and has been falling ever since.

It is particularly interesting to consider the magenta line showing “Investor” housing “credit”. The rate of growth in “credit” for housing “Investors” was, until early 2004, far in excess of that for “Owner-occupiers”, with the notable exception of the early 2000’s global recession that only briefly affected Australia.  At that time, “credit” growth for “Investor” housing plummeted to the same level as the “Owner-occupier” rate, before recovering spectacularly to reach a whopping 30.7% annual growth in Feb 2004.

What prompted the recovery?  John Howard’s introduction of the First Home Owners Grant in 2000, and in particular, his doubling it in early 2001.  With a rush of newly-enslaved borrowers bidding up house prices, “investors” too rushed back into the welcoming arms of the bankers, as ever only too eager to lend “credit” at interest to willing borrowers against the “security” of “their” house.

Or houses.  How many people do you know who (used to) boast about their “investment property portfolio”?

From early 2004, the well began to run dry.  The rate of growth in “credit” for “Investor” housing began to fall steeply.  It fell well below the “Owner-occupier” rate, which was also declining.  This overall decline in the growth rate for housing credit has continued ever since.

However, thanks to the “stimulus” provided by Kevin Rudd’s further doubling of the First Home Owner’s Grant in 2009 – again, using borrowed money – aided and abetted by the RBA slashing interest rates in response to the GFC, both “Owner-occupier” and “Investor” credit growth bounced briefly.  Indeed, “Investor” credit actually overtook “Owner-occupier” credit again for a very short time in 2010, before both continued falling together.

Clearly then, house prices in Australia were not driven up over the past 15-20 years by “demand” from “population growth”, from people who needed somewhere to live (Owner-occupiers).  On the contrary, by far the strongest rates of growth have – during the bubble phase – been driven by so-called “investors”.

Speculators, in other words.  People who have come to believe that borrowing money to “invest” in property is a guaranteed path to riches, because house prices “always go up”.  Meaning, they believe that if they can only buy now, they can sell later for an easy profit.

Sadly, it is not just “investors” who have come to believe this.  Most Australian owner-occupiers have come to believe the same thing.  It is the very definition of a “bubble mania”, when most people have come to believe they can profit from buying and later selling an “asset”.

Who benefits most from a “bubble mania”?  Who has the most powerful vested interest in ensuring that the bubble does not burst … that is, not until they are positioned to profit from the “downside” as well?

The banks.  The same World’s Most Immoral Institution that has been given the power to create “money” – digital book-keeping entries – and lend it to others in the form of “credit”, at interest.

And so, dear reader, I suggest that you bookmark this post.  In the weeks and months ahead, the powerful banking and property (sales) industry will undoubtedly ramp up the propaganda – and the pressure on government and the RBA to “do more” to support “home buyers”.

Meaning, do more to prop up the Ponzi scheme that keeps them all in caviar, Bollinger, and the latest Aston Martin.

You will hear all kinds of oh so plausible-sounding reasons and statistics, presented by “experts”, encouraging you to believe that house prices will soon go up, and that now is a good time to buy (meaning, to “borrow”).

Whenever this coming bombardment of propaganda causes you to wonder if what they are all saying might just be true; when the charts and statistics and testimonials from credible-sounding people causes you to start feeling “con-fident” about Australian housing, come back and read this post again.  Or visit the RBA’s website, and click on the Chart Pack to see the Credit and Broad Money Growth chart.

Because the simple truth is this.

Unless the government can find a new source – a BIG source – of new people willing to borrow enough “credit” to keep bidding up house prices, there is only one way for them to go.

Unless the government can find a way to reverse the trend of that last Housing Credit chart, then in time, there is only one way that house prices can go.

And “up” it is not.

Finally, although I am loathe to ever suggest that anyone heed what the RBA Governor says, here is one exception.

In July last year, Glenn Stevens warned that –

It is a very dangerous idea to think that dwelling prices cannot fall,” RBA governor Glenn Stevens said in a speech today. “They can, and they have.”

Indeed.

To quote Mr David Collyer of Prosper Australia

Don’t Buy Now!

UPDATE:

Correction – how careless of me! The RBA does indeed provide a chart in their chart pack that shows the growth rate in “credit” for housing.  Simply select “5. Credit and Money“, then choose “Credit Growth by Sector” –

9br-cgbys

As you can see, the annual growth rate for Housing “credit” is in a long and steady decline.  It is presently less than a quarter of the rate of lending that the bankers achieved at the peak.

So, The Easy Way To Know Where House Prices Will Go, is to visit the RBA’s Chart Pack and look at that particular chart.  If it hasn’t started shooting back up again, to the kind of pre-2004 levels that financed the near twenty-year “boom” period, then you know where house prices will go.

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.

Dr Steve Keen Explains That Our Banks Have Lent Irresponsibly

11 Jun

Dr Steve Keen is one of only 13 economists world-wide who predicted the GFC in advance. And not just on a guess or a hunch … only these 13 advanced reasons why they believed that a GFC was coming.

Indeed, in May 2010 Dr Keen was the winner of the Revere Award – voted by his peers – for being the international economist who first and most cogently forewarned of the coming GFC

Here’s Dr Keen explaining how our “safe as houses” banks have lent irresponsibly. Even moreso than American banks.

Listen and learn, from a rare expert who is still in touch with the real world, and therefore does know more than just useless intellectual “theories”:

‘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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