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Australia is buggered. Macroprudential policy is coming, so sell housing now.
Topic Started: 24 Jul 2014, 05:16 PM (4,768 Views)
Max
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First, stocks are not on the verge of a crisis. The FOMC is not going to raise interest rates early enough or fast enough to derail the rally. That’s not to say that we won’t see taper tantrums from time-to-time but the bond bears are on the run, inflation is not an issue, US labour markets are showing the same grinding improvement not tearaway growth and the 2016 year is a light on the hill with a new Presidential campaign to splash around the cash. The S&P could rise another 30% from here before hitting previous bubble peaks and popping. The Australian stock market is paralysed by the high dollar and will remain so so long as it stays above 80 cents.

Second, housing markets. The US is fine. With the bond bears on the run it’s recovery is intact. Other Western markets look bubbly, especially the commodity markets of New Zealand, Norway, Canada and Australia. The UK is going through another of its ludicrous London-centric booms. But authorities in all jurisdictions other than Australia are already moving on macroprudential tools to prevent a blowoff forming. They will largely succeed in my view. I’m betting Australia will follow, which is why I think selling housing now makes sense, especially in Sydney, which has had its run.

Third, bond markets. The US is not in imminent danger of a bond crisis. Interest rate normalisation will be paced to prevent it. However, I do think that emerging markets fill enter a bond crisis in the next two years as US policy tightens enough and its stock bubble ultimately bursts. Again, it’s probably not imminent.

Fourth, geopolitical instability. This is the hand-wringers specialty. But of the current round of horrible wars - Gaza, Ukraine, Iraq – only the last is dangerous. Markets don’t care about Gaza. Ukraine is ostensibly problematic in that it brings the great powers of Europe, the US and Russia into superficial conflict but that’s all it is. The real politik of energy inter-dependence means Europe is paralysed. Germany is hard-nosed about these matters and won’t jeopardise its manufacturing sector. The US will snipe from the fringe but what can it really do beyond the usual proxy war supports and why would it even bother? Put simply, Ukraine is in Russia’s sphere of influence not that of the US. Iraq is a real problem if ISIS can make further territorial gains and threaten open civil war spilling into oil districts. It is also the plaything of the US and increasingly Russia, as well as various regional middle powers with serious military hardware and hegemonial ambitions that aren’t obviously secular. That’s why the US is surreptitiously pouring support into Iraq. Even so, the most likely scenario is strategic stalemate.

Fourth, China. This is the big one in the next two years as we wait for the US bubble to pop. China’s housing market is in trouble even if its very successfully managed to offset the slide with stimulus elsewhere. I’m on record with the guess that it will be China that brings the global business cycle to an end before the US, on the basis that the housing correction turns disorderly. The time frame is impossible to know but if Chinese authorities are not prepared to unleash another round of mortgage credit (they might be of course) then by late next year it’s hard to see China growing above 6% with a distinct risk of a short term drop lower. This is one of the key planks in my iron ore uber-bearishness, which is the one risk in all of this that I remain most comfortable with.

Lastly, Australia. Are we buggered? Yes, for a goodly while. While the rest of the world has been competing through means fair and foul for a global production base that is shrinking relative to struggling demand, we’ve been busy patting ourselves on the back for being so awesome. Six years after the GFC, our developed economy competitors in much of Europe, the US and Japan has drastically improved their competitiveness while we’ve fattened and slowed. Over the same period, our developing economy competitors have used all sorts of tricks to keep a lid on their costs while we’ve used the same old paradigm of leveraging commodity income into houses (or land more to the point) to fatten our input costs to point of life-threatening obesity. The real exchange rate depreciation ahead will lower the dollar and wages in real terms and will hit asset prices too. It may come a little bit at a time or all at once but it will come. That’s not all bad news, of course, such structural adjustments are replete with opportunities for those that know where to look.

In fact, there are opportunities throughout these various risks, so long as you’re not wedded to the dead bullish hope that things always go up. Hopefully that helps clarify for you what’s a real risk and what’s not.
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skamy
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Anybody who advises you to gamble with your home is an utter charlatan IMHO. The transaction and sales costs of buying and selling are so high that the chances are huge that you will lose money.



Never sell your home gambling on lower prices, it is about as stupid a thing you could possibly do, especially a good Sydney home.

Buy and sell when you need to. but trying to predict and preempt the market is a fools game IMHO.
Definition of a doom and gloomer from 1993
The last camp is made up of the doom-and-gloomers. Their slogan is "it's the end of the world as we know it". Right now they are convinced that debt is the evil responsible for all our economic woes and must be eliminated at all cost. Many doom-and-gloomers believe that unprecedented debt levels mean that we are on the precipice of a worse crisis than the Great Depression. The doom-and-gloomers hang on the latest series of negative economic data.
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stinkbug
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skamy
24 Jul 2014, 05:36 PM



Never sell your home gambling on lower prices, it is about as stupid a thing you could possibly do, especially a good Sydney home.

Buy and sell when you need to. but trying to predict and preempt the market is a fools game IMHO.
Agreed.
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Admin
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Australia mustn't jump the gun on macro-prudential policy

Stephen Kirchner
25 Jul, 7:16 AM

The Financial System Inquiry’s interim report recognised that the Reserve Bank and the Australian Prudential Regulatory Authority have considerable scope to manage risks to financial stability without greater reliance on so-called macro-prudential policies. It noted that the effectiveness of such measures is not well established and that there are practical difficulties in their implementation. The inquiry largely echoes the views of the Reserve Bank and other Australian regulators on this issue.

At the same time, the report argued that household sector leverage and the financial system’s exposure to housing posed risks to financial stability. In Britain, New Zealand and some countries in Asia, these risks have seen the introduction of new macro-prudential policies.

These policies are partly based on a false narrative about the causes of the recent global financial crisis that fails to recognise the central role played by the politicisation of housing finance in the US as a causal factor. For financial institutions in Britain and much of the rest of the world, it was their exposure to a politicised credit allocation process in the US that caused problems, rather than home-grown excesses.

There are good reasons for Australia not to follow other countries in making greater use of counter-cyclical, macro-prudential policy instruments.

The term ‘macro-prudential’ regulation has its origins in the Bank for International Settlements in the late 1970s, although has assumed much greater prominence in the wake of the global financial crisis. It refers to regulation that has as its objective the stability of the financial system as a whole, as opposed to micro-prudential regulation, which is focused on the stability of individual financial institutions. This recognises that risks to financial stability can emerge at a macro level that might otherwise fall outside the scope of micro-prudential regulation.

While the term has only recently come into widespread use, there is nothing new in the policy instruments designed to give effect to macro-prudential policies. These tools have a long history, although their use mostly pre-dates the financial deregulation seen since the early 1980s. Macro-prudential policy instruments were part and parcel of the apparatus of financial repression used to regulate financial markets and credit allocation before deregulation, although often as permanent features of the financial system rather than counter-cyclical policies.

Policymakers have yet to establish how greater counter-cyclical use of quantitative controls over the supply and demand for credit based in part on macroeconomic conditions can be effectively reconciled with a more deregulated financial system in which financial market prices now play the dominate role in allocating capital.

In the wake of financial market deregulation, changes in official interest rates have been the main instrument through which authorities have sought to promote price stability and, at least indirectly, financial stability. This influence over the price of credit has always been partial in a deregulated environment, because the wholesale and retail interest rates at which people actually borrow are market-determined. This is especially true for a small, capital importing country like Australia, for which interest rates are determined in global markets.

Moreover, monetary policy is a blunt instrument, making it unsuitable for addressing what are seen to be excesses in credit growth tied to specific asset classes. Central banks have a poor track record when it comes to taking an activist approach to changes in asset prices. It was Milton Friedman who showed how the Great Depression had its origins in an all-too-successful attempt by the Federal Reserve to pop a stock price bubble, an assessment former Federal Reserve chairman Ben Bernanke subsequently endorsed.

The danger is that monetary policy becomes miscalibrated for the broader economy when central banks seek to manage prices in asset markets that are viewed as disconnected from economic fundamentals. That disconnect is itself a strong argument against such activism. When it comes to asset price booms and busts, central bankers can be divided into asset price ‘poppers’ and ‘moppers’, but the weight of historical experience strongly favours the mopping-up approach.

Macro-prudential policies are seen as providing policymakers with a more targeted set of policy instruments that might complement or even substitute for changes in official interest rates. However, these instruments also implicate policymakers in making much finer judgements about risks to financial stability as well as the more traditional concern of monetary policy with price stability.

A blunt instrument like monetary policy encourages caution in making such judgements. By contrast, more targeted counter-cyclical quantitative controls are a standing invitation to micro-manage credit allocation, but do not in themselves improve the ability of policymakers to make appropriate judgements about the implications of such policies. It can also create a false impression that a central bank’s price stability mandate has been subordinated to other objectives, such as house price inflation.

Macro-prudential policies are also more politically fraught than traditional monetary policy. Quantitative controls designed to be selective in impact are more likely to provoke opposition. In Britain, macro-prudential policies are at cross-purposes with the government’s ‘Help to Buy’ mortgage guarantee scheme. Macro-prudential regulation is often a second-best approach to dealing with the inflationary implications of supply-side rigidities in housing markets. It may also push borrowing and lending activities outside the regulatory perimeter altogether.

Read more: http://www.businessspectator.com.au/article/2014/7/25/leadership/australia-mustnt-jump-gun-macro-prudential-policy
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herbie
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Just curious, but does anyone out there profess to know what "the inflationary implications of supply-side rigidities in housing markets" might be if yakked about in laymen's lingo?
A Professional Demographer to an amateur demographer: "negative natural increase will never outweigh the positive net migration"
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stinkbug
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herbie
27 Jul 2014, 07:09 PM
Just curious, but does anyone out there profess to know what "the inflationary implications of supply-side rigidities in housing markets" might be if yakked about in laymen's lingo?
When demand exceeds supply, and new supply can't be made available, those with the most money get to buy the available stock (ie prices rise).
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While it's true that those who win never quit, and those who quit never win, those who never win and never quit are idiots.

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o2sd
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herbie
27 Jul 2014, 07:09 PM
Just curious, but does anyone out there profess to know what "the inflationary implications of supply-side rigidities in housing markets" might be if yakked about in laymen's lingo?
It means that new houses/apartments take 18 months to 4 years to build, but central bankers and the immigration department can ramp up the demand in a matter of months.

Plus what stinkbug said.

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Dr Watson
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Max
24 Jul 2014, 05:16 PM
First, stocks are not on the verge of a crisis.
Second, housing markets.
Third, bond markets.
Fourth, geopolitical instability.
Fourth, China.
Someone's having trouble counting ..... China should be fifth on your list. It should read: "Fifth, China."
The trouble with the world is that the stupid are cocksure and the intelligent are full of doubt — Bertrand Russell
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Mallard
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Thread killer

It's a copy and paste from Mactobusiness.

/thread
Collecting desperation.
Ex-Bp Golly April 2 2015. "I see with a slight overshoot -70% [fall in Sydney house prices] as being well within possibility"
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Ollie
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So, according to Kirchner, macro-prudential policies should not be enacted because:

Monetary policy (i.e. changes to the official cash rate) is unsuitable for managing asset bubbles, and attempts to use monetary policy in this way poses great risks for the broader economy. So it’s better to just let asset bubbles rip and then clean up the mess after they inevitably burst.

Macro-prudential policies shouldn’t be implemented because they require policy makers to use their brains and make judgments about financial stability risks. Again, better to just let asset bubbles rip.

Monetary policy, although useless in managing asset bubbles, is great because it somehow “encourages caution” in decision making, whereas the same cannot be said for macro-prudential.

In any event, supply-side reform is the be all and end all, and the demand-side of the housing market can be ignored.

Am I the only one who perceives Kirchner’s comments to be nonsensical?

Surely his admission that monetary policy is useless in managing asset bubbles strengthens the case for a more targeted approach, such as loan-to-value or loan-to-income controls, in order to temper the credit cycle and dampen the the likelihood of damaging booms and busts in house prices? Moreover, his view that regulators should simply ignore risks and mop-up busts afterwards is a cop-out and not particularly clever. I am sure if the US, Ireland and Spain could have their time over again, they would have placed controls on housing lending in the lead-up to the GFC.

About the only thing I agree with Kirchner on is that macro-prudential is a second best policy option to supply-side reforms to the land/housing market. Sure, if Australia operated Houston-style housing policies – i.e. liberal planning, minimal artificial restrictions on urban land supply, and adequate provision of housing-related infrastructure – then the opportunities for prices to boom and bust on the back of credit would be reduced significantly, since any extra demand would flow primarily into higher construction rather than increased prices.

But we also have to be realistic. Like it or not, supply-side constipation is, for the foreseeable future, a feature of the Australian housing market. Therefore, it makes absolutely no sense to simply let credit rip and, in doing so, sit back and allow a housing bubble to develop.

To only focus on supply-side distortions, while ignoring demand-side drivers is not particularly sensible from a policy perspective.
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