Welcome Guest [Log In] [Register]


Reply
Christopher Joye turns bear - Australian housing bubble is now here; House prices have inflated at a 9.5% annualised pace (triple wages growth)
Topic Started: 19 Jul 2014, 01:12 PM (21,422 Views)
Sydneyite
Member Avatar


szokolay
22 Jul 2014, 10:41 PM
I don't think anyone has ever argued that those things are not fundamental drivers of particular property markets have they? Except for maybe some hardcore housing bears who insist that nothing else matters except "easy credit".... :re:

I never claimed it did. I simply pointed out that it is all debt. When you buy US bonds you are making a bet basically that the $US dollar will rise in value against other currencies, and or, the yield on them will keep you ahead of the inflation rate. When you purchase shares in a company you are doing the exact same thing but the risk is greater.

At the end of the day the company has borrowed money off you and agreed to pay you an interest rate for the privelige. Even savings accounts at banks are a loan to the bank, look up the fine print and that is what it states. They pay you interest on the loan don't they?
This is just the old "all money is debt" line. Which from a narrow perspective is certainly true, but I think it get's us away from the original points being discussed.
For Aussie property bears, "denial", is not just a long river in North Africa.....
Profile "REPLY WITH QUOTE" Go to top
 
b_b
Default APF Avatar


Part 2
22 Jul 2014, 09:05 PM
Household debt, because households in general are consumers not producers. 100% is my personal number. For the sake of argument, let's call it 'some percentage at which the following occurs'.
Fair enough. My view is it depends upon income equality. The more "fair" wages, the high the debt threshold. Countries with low minimum or unskilled wages (like USA / South America) the debt limit is lower than 100%. For Australia - probably a bit higher.

Quote:
 
Leaving aside endogenous money for a minute, interest receipts are split (roughly) between savers with deposits, and lenders who charge a spread between savers and borrowers. As interest rates decline, deposit holders see their receipts decline, but lenders spreads don't change much. So as interest rates go down, lenders receive an increasingly large slice of the interest pie. As interest rates decline and debt increases, a larger and larger financing drag on the economy develops, as depositors income falls faster then borrower's costs.

If you assume the private sector includes;
- Depositors
- Borrowers
- Bank shareholders
- Bank employees

Then lower interest rates have zero net financial impact on the private sector (leaving endogenous money aside). The pie gets sliced in slightly different ways (bank shareholders get more than depositors for example), but the net effect is still zero.

The real problem is the private sector is a net receiver of interest income, because governments have net bonds on issue. Lower rates means zero impact between the private sector participants, but lower net interest from government transfers. So in effect, lower rates (leaving endogenous money aside), is a form of austerity.
Quote:
 
New credit is not exactly equal to new money. When a bank buys (for example) a mortgage and creates a deposit, more often than not, the seller of the property extinguishes their own mortgage (closing out of both the mortgage and the corresponding deposit). The difference between the credit/deposit/new money created and the debt/deposit/old money destroyed is the actual new money created. The more debt the seller carries, the smaller the creation of new money through mortgage lending (for example).

Yeh - i get it. :re:

To be clear, when I said new credit - I was referring to the macro sense "net" credit. I agree extinguishing credit with credit is not new money. That is why the RBA looks at the aggregates. The economic transmission from lower interest rates come from an increase in NET credit.

Quote:
 
Let's say the lender's spread is 2.5% and the outstanding houdsehold debt is $100, and there is $5 of nett new money created each year. So, after the interest is paid, there is $2.50 of new money created each year

This is incorrect. You are assuming that bank shareholders and employees are not part of the economy. They are. The 2.5% spread does not disappear into outer space. It goes into the pockets of Bank shareholders or employees. In your example, above $5 of net money is still create.
Quote:
 
Now, let's ramp up household debt to $1000. The financing drag is now $25, and there is $10 of nett new money created each year. The balance is now -$15, which initially will come from savings.

Incorrect - as per above.
Quote:
 
This is a balance sheet transfer from private savings to bank earnings.

Yes - just transfers between the private sector. No net gain or loss anywhere.
Quote:
 
If these earnings are then re-lent (creating even greater debt), there is a feedback loop. If the earnings are payed out as dividends into superannuation accounts, spending will be deferred

That's not necessarily true. The economy is more than spending. It includes net investment (which is a big driver of the economy). As Super accounts received these dividends it is encourages re-investment which may boost economic performance.
Quote:
 
if payed to wealthy individuals as income, tax receipts will increase, but spending will, on average decline (as poor people spend 110% of their income and wealthy people spend 85% of their income). In any case, spending decreases and deflation ensues.

I agree there is a different spending multplier between the rich and poor. Not sure there is a big difference between shareholders and depositors (which is what really happens when bank spreads change).

As I said earlier - I agree low interest rates are deflationary (ignoring endogenous money), but not for the reasons you state.

You have given this topic a lot of though - so good for you. But you need to alter your model to recognise
- The interest spread (no matter how wide) still goes into the private sectors hands. Money does not disappear in this process.
- The Private sector is always a net recipient of net interest income because of ongoing government deficits. That is why low interest rates are deflationary.
Edited by b_b, 23 Jul 2014, 10:12 AM.
(S – I) + (T - G) + (M - X) = 0
Profile "REPLY WITH QUOTE" Go to top
 
Veritas
Default APF Avatar


Quote:
 
Yes, the cycle does not follow exactly the same dates in every city.


Why not? Financial deregulation and changes in the cash rate was the same in every city.

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
Profile "REPLY WITH QUOTE" Go to top
 
zaph
Default APF Avatar


Veritas
23 Jul 2014, 12:49 PM


Why not? Financial deregulation and changes in the cash rate was the same in every city.
Oh dear!
Profile "REPLY WITH QUOTE" Go to top
 
Sydneyite
Member Avatar


Veritas
23 Jul 2014, 12:49 PM


Why not? Financial deregulation and changes in the cash rate was the same in every city.
Great! You have *finally* figured out that credit availability and interest rates are not the only factors that influence housing markets. Well done! You have learnt something at last during your time here! :re:
For Aussie property bears, "denial", is not just a long river in North Africa.....
Profile "REPLY WITH QUOTE" Go to top
 
Some clarifications
Unregistered

b_b
23 Jul 2014, 10:06 AM
Fair enough. My view is it depends upon income equality. The more "fair" wages, the high the debt threshold. Countries with low minimum or unskilled wages (like USA / South America) the debt limit is lower than 100%. For Australia - probably a bit higher.


I would agree with that. It has been a while since I looked at the exact figures/dates, but I recall credit growth starting to struggle when household debt was around 110% of GDP. There were some changes to the national award wages/minimum wages in around 2010 I believe and that appeared to have an accelerating effect.
Quote:
 
Then lower interest rates have zero net financial impact on the private sector (leaving endogenous money aside). The pie gets sliced in slightly different ways (bank shareholders get more than depositors for example), but the net effect is still zero.

The net balance sheet effect is zero, but not all participants in the private sector are economic equals. Some spend more, some save more, some invest more. Saving money (should) have a deflationary effect, spending it should have an inflationary effect, and increase the velocity of money.
Quote:
 
To be clear, when I said new credit - I was referring to the macro sense "net" credit. I agree extinguishing credit with credit is not new money. That is why the RBA looks at the aggregates. The economic transmission from lower interest rates come from an increase in NET credit.

Sorry, I wasn't clear on that. The point I was making is that if the seller of the asset is highly leveraged (and one would assume that as total household debt increases, the seller's leverage will also on average increase), that it becomes increasingly difficult to create new money in the economy through the creation of new credit. So as the total debt grows larger, the banking system finds it increasingly difficult to expand their balance sheet, so interest rates are sent lower to counteract this.
Quote:
 
That's not necessarily true. The economy is more than spending. It includes net investment (which is a big driver of the economy). As Super accounts received these dividends it is encourages re-investment which may boost economic performance.

Net investment and re-investment will only drive the economy if they lead to a deepening of the capital base in industry. What appears to have happened in Australia is that the bulk of capital investment (other than mining) appears to have gone to employee remuneration and shareholder dividends.
Quote:
 
You have given this topic a lot of though - so good for you. But you need to alter your model to recognise
- The interest spread (no matter how wide) still goes into the private sectors hands. Money does not disappear in this process.
- The Private sector is always a net recipient of net interest income because of ongoing government deficits. That is why low interest rates are deflationary.

Food for thought. Thank you for your replies.
"REPLY WITH QUOTE" Go to top
 
Veritas
Default APF Avatar


Sydneyite
23 Jul 2014, 01:31 PM
Great! You have *finally* figured out that credit availability and interest rates are not the only factors that influence housing markets. Well done! You have learnt something at last during your time here! :re:
No, I knew that all along.

Shadow consistently leaves fundamentals out in terms of describing the great cycle.
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
Profile "REPLY WITH QUOTE" Go to top
 
Shadow
Member Avatar
Evil Mouzealot Specufestor

Veritas
23 Jul 2014, 07:04 PM
Shadow consistently leaves fundamentals out in terms of describing the great cycle.
I frequently discuss the fundamentals - population growth, construction activity, sentiment, clearance rates, rental vacancy rates, government support, interest rates, unemployment etc. These are the factors that influence the cycle. I discuss them often.
1. Epic Fail! Steve Keen's Bad Calls and Predictions.
2. Residential property loans regulated by NCCP Act. Banks can't margin call unless borrower defaults.
3. Housing is second highest taxed sector of Australian Economy. Renters subsidised by highly taxed homeowners.
4. Ongoing improvement in housing affordability. Australian household formation faster than population growth since 1960s.
Profile "REPLY WITH QUOTE" Go to top
 
Veritas
Default APF Avatar


Shadow
23 Jul 2014, 07:13 PM
I frequently discuss the fundamentals - population growth, construction activity, sentiment, clearance rates, rental vacancy rates, government support, interest rates, unemployment etc. These are the factors that influence the cycle. I discuss them often.
With the conclusion that they are immutable.

Remember, the price to income ratio hit in 2003, in your view, is sustainable because it has been sustained for 10 years.

I would argue that is only true if you believe the fundamentals for the next ten years will be the same as the last ten years.

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
Profile "REPLY WITH QUOTE" Go to top
 
Shadow
Member Avatar
Evil Mouzealot Specufestor

Veritas
23 Jul 2014, 07:21 PM
Remember, the price to income ratio hit in 2003, in your view, is sustainable because it has been sustained for 10 years.

I would argue that is only true if you believe the fundamentals for the next ten years will be the same as the last ten years.
The fundamentals are constantly changing. They have changed many times over the past decade, yet the current price/income ratio has been sustained.

So no, I don't think it's necessary for all the fundamentals to remain the same. I expect them to keep changing as they have done over the past decade.
1. Epic Fail! Steve Keen's Bad Calls and Predictions.
2. Residential property loans regulated by NCCP Act. Banks can't margin call unless borrower defaults.
3. Housing is second highest taxed sector of Australian Economy. Renters subsidised by highly taxed homeowners.
4. Ongoing improvement in housing affordability. Australian household formation faster than population growth since 1960s.
Profile "REPLY WITH QUOTE" Go to top
 
1 user reading this topic (1 Guest and 0 Anonymous)
Go to Next Page
« Previous Topic · Australian Property Forum · Next Topic »
Reply



Australian Property Forum is an economics and finance forum dedicated to discussion of Australian and global real estate markets and macroeconomics, including house prices, housing affordability, and the likelihood of a property crash. Is there an Australian housing bubble? Will house prices crash, boom or stagnate? Is the Australian property market a pyramid scheme or Ponzi scheme? Can house prices really rise forever? These are the questions we address on Australian Property Forum, the premier real estate site for property bears, bulls, investors, and speculators. Members may also discuss matters related to finance, modern monetary theory (MMT), debt deflation, cryptocurrencies like Bitcoin Ethereum and Ripple, property investing, landlords, tenants, debt consolidation, reverse home equity loans, the housing shortage, negative gearing, capital gains tax, land tax and macro prudential regulation.

Forum Rules: The main forum may be used to discuss property, politics, economics and finance, precious metals, crypto currency, debt management, generational divides, climate change, sustainability, alternative energy, environmental topics, human rights or social justice issues, and other topics on a case by case basis. Topics unsuitable for the main forum may be discussed in the lounge. You agree you won't use this forum to post material that is illegal, private, defamatory, pornographic, excessively abusive or profane, threatening, or invasive of another forum member's privacy. Don't post NSFW content. Racist or ethnic slurs and homophobic comments aren't tolerated. Accusing forum members of serious crimes is not permitted. Accusations, attacks, abuse or threats, litigious or otherwise, directed against the forum or forum administrators aren't tolerated and will result in immediate suspension of your account for a number of days depending on the severity of the attack. No spamming or advertising in the main forum. Spamming includes repeating the same message over and over again within a short period of time. Don't post ALL CAPS thread titles. The Advertising and Promotion Subforum may be used to promote your Australian property related business or service. Active members of the forum who contribute regularly to main forum discussions may also include a link to their product or service in their signature block. Members are limited to one actively posting account each. A secondary account may be used solely for the purpose of maintaining a blog as long as that account no longer posts in threads. Any member who believes another member has violated these rules may report the offending post using the report button.

Australian Property Forum complies with ASIC Regulatory Guide 162 regarding Internet Discussion Sites. Australian Property Forum is not a provider of financial advice. Australian Property Forum does not in any way endorse the views and opinions of its members, nor does it vouch for for the accuracy or authenticity of their posts. It is not permitted for any Australian Property Forum member to post in the role of a licensed financial advisor or to post as the representative of a financial advisor. It is not permitted for Australian Property Forum members to ask for or offer specific buy, sell or hold recommendations on particular stocks, as a response to a request of this nature may be considered the provision of financial advice.

Views expressed on this forum are not representative of the forum owners. The forum owners are not liable or responsible for comments posted. Information posted does not constitute financial or legal advice. The forum owners accept no liability for information posted, nor for consequences of actions taken on the basis of that information. By visiting or using this forum, members and guests agree to be bound by the Zetaboards Terms of Use.

This site may contain copyright material (i.e. attributed snippets from online news reports), the use of which has not always been specifically authorized by the copyright owner. Such content is posted to advance understanding of environmental, political, human rights, economic, democratic, scientific, and social justice issues. This constitutes 'fair use' of such copyright material as provided for in section 107 of US Copyright Law. In accordance with Title 17 U.S.C. Section 107, the material on this site is distributed for research and educational purposes only. If you wish to use this material for purposes that go beyond 'fair use', you must obtain permission from the copyright owner. Such material is credited to the true owner or licensee. We will remove from the forum any such material upon the request of the owners of the copyright of said material, as we claim no credit for such material.

For more information go to Limitations on Exclusive Rights: Fair Use

Privacy Policy: Australian Property Forum uses third party advertising companies to serve ads when you visit our site. These third party advertising companies may collect and use information about your visits to Australian Property Forum as well as other web sites in order to provide advertisements about goods and services of interest to you. If you would like more information about this practice and to know your choices about not having this information used by these companies, click here: Google Advertising Privacy FAQ

Australian Property Forum is hosted by Zetaboards. Please refer also to the Zetaboards Privacy Policy