Tag Archives: FHOG

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.

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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.

How Wayne “Franked” Another $20 Billion

27 May

It’s long past due time that Wayne Swan formally adopted the name of his alter ego, Frank Spencer.

From ceiling insulation to school halls to “green” loans to computers in schools to set-top boxes, every “investment” that our Treasurer touches, ends up totally ‘Franked’.

From the SMH:

Arrears on mortgage repayments spiked to a record high in the first three months of 2011, as more Australians struggle with rising costs, Fitch ratings agency says.

Arrears on prime residential mortgage-backed securities (RMBS) of 30 days or more hit a record high of 1.79 per cent in the first quarter, from 1.37 in the final quarter of 2010, the group said, as Christmas spending and the Queensland floods forced more Australians to struggle in repaying their mortgages.

RMBS are home loans which are bundled together and sold to institutional investors by banks and mortgage lenders. Misrated RMBS were at the heart of the subprime crisis in the US which lingers to today.

As we have seen previously (How Australia Will Look When The SHTF), Wayne has “invested” $20 billion of borrowed money into Australian RMBS since the GFC, to prop up our housing bubble.

Including an extra $4 Billion which he approved in April – (ie) after the period of increasing arrears that is mentioned in the SMH article.

This news gets much worse though:

The increase in arrears for the most fragile band of mortgage borrowers, low-doc loans, with payment delays of 30 days or more hit 6.74 per cent in the first quarter, up from 5.7 per cent in the final quarter of 2010, a higher level than December 2008 quarter, when the financial crisis hit and the Reserve Bank began rapidly lowering rates.

Low-doc mortgages are written for riskier borrower than prime mortgages, which are written for customers who have a reasonably safe ability to borrow.

Delinquencies of three months or more on conforming low-doc mortgages, which are used by people who are self-employed for example, soared past 5 per cent in the March quarter, from about 3 per cent the December 2010 quarter.

Would our Wayne have “invested” any of that borrowed $20 Billion in low-doc RMBS?  Or, did he stick with “prime” RMBS?

From the AOFM website:

Purchase of RMBS – Program Update

Minimum Eligibility Requirements

* Low documentation loans, that is loans underwritten using alternative income verification procedures, may be included in mortgage pools.

Oooooooooo!

Wayne’s ‘franked’ another $20 Billion.

Some Mothers Do ‘Ave ‘Em

UPDATE:

Another ‘franked’ “stimulus” program from Wayne. Remember the doubled First Home Owners Grant, that also helped to prop up our housing bubble?

The Reserve Bank has warned many first home owners who bought into the market with the help of generous federal government assistance may now be vulnerable to rising interest rates.

RBA deputy governor Ric Battellino said today there were concerns that buyers who bought into the market in 2009, when the federal government grant was increased, may have over-committed themselves.

Are any of those hundreds of thousands of “vulnerable” first home owner mortgages actually “low doc” loans, Wayne?

Are any of them packaged up in the $20 Billion worth of RMBS that you “invested” borrowed money in … Wayne Frank?

Fitch’s: Residential Mortgage-Backed Securities “Negative”, Threat To Banks

21 May

Uh-oh.

Haven’t we already had enough worrying announcements over this past week?

To top things off, Fitch’s ratings agency has reclassified 54 tranches of Australian residential mortgage-backed securities (RMBS) from ratings watch “stable”, to “negative”:

Cash-strapped borrowers and tight-fisted mortgage insurers are a greater threat to Australian banks than previously thought, says a major ratings agency.

New information shows that Australian mortgage insurers, which secure loans for banks and other lenders, do not always pay the full outstanding amount of mortgages when they fall over which can leave banks out of pocket, according to ratings agency Fitch.

Based on its findings, Fitch moved 54 tranches of residential mortgage backed securities (RMBS) from ratings watch “stable” to “negative”. Mortgage backed securities are home loans which are bundled together and sold to institutional investors by banks and mortgage lenders.

Banks fund mortgages through issuing RMBS, which are rated by credit ratings agencies like Fitch, Moody’s and Standard & Poor’s for their quality and likelihood of being repaid. RMBS lay at the heart of the subprime crisis in the US, when major banks and investors poured billions of dollars into mortgage debt which turned out to be lower quality than thought.

The new ratings account for about half of Australia’s national securitised mortgage market. Each transaction is made up of multiple tranches that attract a different rating based on their underlying credit quality.

“Rating watches indicate that there is a heightened probability of a rating change and the likely direction of such a change,” according to data from Fitch’s website, with “negative” denoting a potential downgrade.

Commonwealth Bank chief executive Ralph Norris recently noted a 11 per cent increased in delayed payments on mortgages in the March quarter following the big rise in lending for first home buyers around the time of the financial crisis. ANZ Bank and Westpac have reported similar upticks.

We have been covering the other, even greater risks to Australia’s banks in recent posts (here, here, and here).

What concerns most about this announcement, is the implications for the $20 Billion worth of RMBS’ that the Labor government has purchased, and continues to purchase, in their efforts to keep propping up our housing bubble.

It’s been quite a week.

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