House prices rose faster than incomes during the late 90s and early 2000s
Why not take the stats back to 2000 instead of your cherry picked fantasy
Last time I checked, 2000 was during the early 2000s. You should have another look at your calendar Ted.
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Wages are dropping all throughout the western world
Last week you told us house prices were crashing all around the world, but it turns out you actually meant house prices crashed in 2% of countries in the world nearly a decade ago.
The volatility is called the property cycle. House prices don't rise every year. Sometimes they fall or stagnate, but wages do tend to rise every year.
So over the short term we get periods of a few years where prices move ahead of incomes, and then a few years where prices fall back while incomes catch up.
The net result is that Australia's house price to income ratio is roughly the same as it was over a decade ago.
Prices have been sustained around this level for more than a decade.
Sometimes the ratio rises slightly and sometimes it falls slightly, but it has basically been tracking within 10% above/below the same ratio since 2003.
Firstly, I'm talking about the PE ratios from the previous chart, which is the golden metric you were championing, and not house prices, which you've now magically switched to. PE ratios are stickier than actual house prices, ergo we expect *less* volatility. So leave your just-part-of-the-cycle-buy-now-and-get-a-free-set-of steak-knives crap out of this please.
Secondly, look at Japan's PER on that chart again. Then look at ours again. What conclusions can we draw about the differences in volatility? Hmmmm?
"It were not best that we should all think alike; it is difference of opinion that makes horse races." - Mark Twain on why he avoids discussing house prices over at MacroBusiness. "Buy land, they're not making any more of it." - Georgist Land Tax proponent Mark Twain laughing in his grave at humourless idiots like skamy that continually use this quip to justify housing bubbles.
Yes, but the bulk of superannuation contributions are put into equity markets, which is private credit. So superannuation contributions ARE growing private credit, just not from the banking system.
I find this a really strange comment. Putting capital into the equity market is not private credit. It is generally a swap between an owner of a liquid security (i.e. deposit) and an owner of shares. What is really happening in the background is the super system ensures wage earners can not spend what they earn. To supplement their income, the difference has been borrowed. That is why super assets have increase in step with household debt. (now I know I am not strictly comparing like with like, but you get the point).
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I agree with your metaphor, but disagree with who you label as the junkie. It is the banking system that needs the credit growth, not the borrowers. The banks are the junkies, and the RBA is their pimp.
In the absence of a sufficient government deficit, it is the economy which needs the credit growth. New credit = new money. This new money offsets the leakage in income via the structural savings from superannuation contributions & the CAD.
The Banking system certainly does not "need credit growth". Aust banks already have large sustainable loan books where they take a very nice margin in an environment of limited competition. No need for more credit - thats just being greedy. In fact, I would argue more credit growth from here begins to become dangerous for banks as they start to "run out" of credit worthy borrowers.
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Monetary tools become useless before you hit zero. They tend to become useless after the point where you pass a debt to GDP ratio of 100%. When your debt to GDP ratio goes over 100%, lowering interest rates is deflationary, and raising them is inflationary, the opposite of what the interest rate lever is supposed to do.
Again a strange comment. What debt exceed 100% of GDP? Household debt? Private debt? Foreign debt? Government debt? Total debt?
If you are suggesting private debt or total debt, then I think we have already past that point, and monetary policy still works fine.
But you are correct suggesting monetary policy may become useless before ZIRP. It basically becomes useless when the private sector has no more appetite for debt. Central banks then push cash rates to ZIRP in a vain attempt to encourage more credit growth (when you only tool is a hammer, everything looks like a nail).
You are also correct suggesting at that point, low interest rates as a mild deflationary impact on the economy via the interest income channel. Similar to QE.
prices don't rise every year. Sometimes they fall or stagnate, but wages do tend to rise every year
years where prices move ahead of incomes, and then a few years where prices fall back while incomes catch up
net result is that Australia's house price to income ratio is roughly the same as it was over a decade ago
I'm talking about the PE ratios from the previous chart, which is the golden metric you were championing, and not house prices, which you've now magically switched to
Huh? Your reading comprehension is even worse than Ted.
Yes, but the bulk of superannuation contributions are put into equity markets, which is private credit. So superannuation contributions ARE growing private credit, just not from the banking system.
I find this a really strange comment. Putting capital into the equity market is not private credit. It is generally a swap between an owner of a liquid security (i.e. deposit) and an owner of shares. What is really happening in the background is the super system ensures wage earners can not spend what they earn. To supplement their income, the difference has been borrowed.
What a load of twaddle. Of course shares are private debt. You are loaning the corporation your savings and the money is secured by a stake in the company. The dividends you receive are the interest they pay on the loan. Just because it isn't called a "loan" doesn't negate the obvious financial dynamics of it all.
Companies, banks etc are very good at masking the debt they peddle by changing a few names and modes of distributing it. RMBS for instance have morphed into Bank Bonds and instead of the properties being the security behind the debt it is now the bank that holds the mortgages. Which is the same thing in essence since the only serious assets the Australian banks hold are their mortgages anyway.
The bulk of our superannuation has been used to prop up corporations that are largely becoming unprofitable and the only reason their share prices have not plummited is because of the steady influx of superannuation dollars that bids them up. It's a total farce when you look at it.
Shadow was hopelessly wrong about the Gold Bull Market. What else is he wrong about?
The fact is Australians wages are in a bubble and need to correct much much more than the US or euro or UK
"Fact"?
Did someone at Macrobusiness tell you, so it's a "fact" Australian wages are in a bubble?
He is a "fact" for you. Australian wages relative to economic output have been falling - consistently every year for 30 odd years.
"Wages bubble" is just another tortured argument from the bubblists when trying to explain why they have been wrong on house prices for so long.
goldbug
22 Jul 2014, 10:44 AM
What a load of twaddle. Of course shares are private debt. You are loaning the corporation your savings and the money is secured by a stake in the company. The dividends you receive are the interest they pay on the loan. Just because it isn't called a "loan" doesn't negate the obvious financial dynamics of it all.
As an investor you are either 1. Buying existing shares from another investor. The seller of the share gets the money, and the company get no money at all (i.e.: 99.999% of all share trades) 2. Participating in a primary or secondary issue.
Either way the money to buy the shares come from a deposit. And each deposit has an associated liability (broadly defined) - so in that sense you are correct. But you missed a step first - which I explained earlier. The borrowing occurs first. This creates the deposit which allows for the purchase of shares.
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Companies, banks etc are very good at masking the debt they peddle by changing a few names and modes of distributing it. RMBS for instance have morphed into Bank Bonds and instead of the properties being the security behind the debt it is now the bank that holds the mortgages. Which is the same thing in essence since the only serious assets the Australian banks hold are their mortgages anyway.
No-one is trying to mask the debt. Everyone knows RMBS and Bank bonds are debt (except maybe you?).
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The bulk of our superannuation has been used to prop up corporations that are largely becoming unprofitable and the only reason their share prices have not plummited is because of the steady influx of superannuation dollars that bids them up. It's a total farce when you look at it.
You are confusing stock (superannuation) versus flow (profits). Profits come from sales minus costs. Superannuation represents capital. No amount of superannuation can "prop up shares" sustainably. We had more super in 2008 than 2004, but shares were lower....it is always about value.
Also, Superannuation contributions deduct from household disposable income and therefore reduce sales (all things being equal). So superannuation crimps corporate profitability in a macro sense. You have this arse about.
House prices rose faster than incomes during the late 90s and early 2000s as a result of financial deregulation, a lower inflation and lower interest rate environment, and increased willingness of banks to lend based on dual incomes. That process had played out by 2003, after which prices just started tracking income growth over the medium-long term again.
The boom in WA didn't get legs until 02/03.
Perhaps Financial Deregulation and interest rate cuts didn't come into effect there until then?
There must be something else at work here. Hmmmm....
Anyway, your net point seems to be that the price/income ratio hit the sweet spot in 2003 after the structural shift caused by financial deregulation and other stuff affecting the price and availability of money and that's about it.
Who knew that the market for housing could deviate from other economic fundamentals so radically. Its nothing short of miraculous!
Property acquisition as a topic was almost a national obsession. You couldn't even call it speculation as the buyers all presumed the price of property could only go up. That’s why we use the word obsession. Ordinary people were buying properties for their young children who had not even left school assuming they would not be able to afford property of their own when they left college- Klaus Regling on Ireland. Sound familiar?
The evidence of nearly 40 cycles in house prices for 17 OECD economies since 1970 shows that real house prices typically give up about 70 per cent of their rise in the subsequent fall, and that these falls occur slowly. Morgan Kelly:On the Likely Extent of Falls in Irish House Prices, 2007
I find this a really strange comment. Putting capital into the equity market is not private credit. It is generally a swap between an owner of a liquid security (i.e. deposit) and an owner of shares.
That is the first order effect yes. However, there is a second order effect if the rate of capital entering the equity market is greater than the rate at which new equity is being created/issued. i.e. it makes equity cheap relative to debt. This result of which is that corporations will borrow less from credit markets, which we have seen since superannuation was introduced. Non-financial borrowing has decreased. There should also be a third order effect from the second order effect of equity becoming cheap relative to credit, and that is a capital deepening in the industrial base leading to high productivity growth.
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What is really happening in the background is the super system ensures wage earners can not spend what they earn. To supplement their income, the difference has been borrowed. That is why super assets have increase in step with household debt. (now I know I am not strictly comparing like with like, but you get the point).
Yes, unfortunately, that is what has happened. In a technologically advanced economy you would expect to see the productivity increases exceed the loss of disposable income, which would mean the consumer would not have to supplement their income with borrowing as the increase in their purchasing power from productivity gains would have been sufficient.
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In the absence of a sufficient government deficit, it is the economy which needs the credit growth. New credit = new money. This new money offsets the leakage in income via the structural savings from superannuation contributions & the CAD.
In productivity is growing faster than the organic growth of the economy (i.e. population increases and household formation), the economy will not need new money as the existing monetary base will be sufficient, and in fact growing in value. That is, money will be increasing in value, and prices will be decreasing. This is great for the both the economy and the consumers in the economy, but it is bad for bankers and rent seekers because they are no longer extracting an economic rent from assets for no effort or work on their part.
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The Banking system certainly does not "need credit growth". Aust banks already have large sustainable loan books where they take a very nice margin in an environment of limited competition. No need for more credit - thats just being greedy. In fact, I would argue more credit growth from here begins to become dangerous for banks as they start to "run out" of credit worthy borrowers.
Yes and no. Banks buy and sell money, that is their entire business. If they are not growing their business, then they are going backwards relative to the economy, which has valuation and other implications that are well known and not worth spending much time on. On the other hand, the banking system does need the value of the securities underlying their loan assets not to decrease. If the value of the security decreases (e.g. in a deflationary environment), the risk increases, and the regulators tend to demand higher capital reserves when the exposure on the banks assets increases, leading to lower profits. It is in the banking system's interest to maintain an inflationary environment and credit growth.
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Again a strange comment. What debt exceed 100% of GDP? Household debt? Private debt? Foreign debt? Government debt? Total debt?
I've run out of lunch hour. I will reply to the second half this evening.
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