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Christopher Joye aka Bubble Boy, is back!; CJ says this is an investment and speculative driven housing boom!
Topic Started: 8 Oct 2014, 10:18 AM (1,914 Views)
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One of the scariest business writers in town, Christopher Joye of the AFR and Smarter Money Investments, is here to give his take on the “so-called” housing bubble, among other things! Has he changed his tune?



According to Joye:

“This is an investment and speculative driven housing boom and we are seeing a higher share of investor home loans approved than we even saw back in 2003. And what is most concerning, 55% of investor loans are interest only”.

“The market is about 20% overvalued at the national level”… “The concern is if prices continue shooting higher, which I think they will until the RBA raises rates”.

“If house prices continue to appreciate at 3-4 times the rate of income growth, that’s a problem”.

“If you overlay foreign buyers with SMSFs… [and] record low borrowing rates, I think we are in uncharted waters”.

People say housing fared well during the early-1990s recession. But during the last recession (1991), the household debt to income ratio was 50%. Today it’s 150%. And it’s about to breach the previous peak in 2006. “The issue is, household leverage is increasing again. Housing credit growth is running at 6%-8%, so twice incomes”.

“I think we’ll see a 10% to 20% correction… [even] in the absence of a big increase in unemployment”.

“The capital [banks] hold against home loans is way too low… The banks only hold $1.50 of capital for every $100 bucks of home loans they lend… It’s ludicrous. And the first recommendation David Murray made in his 450-page interim report was we need to look at increasing risk-weightings. That is, we need to increase that $1.50 to something that is more reasonable”.

“Banks are assuming that 85% of home loans are completely risk-free!”.

“[Bank] leverage has actually increased [from 20 times to 22 times] and capital has decreased”.
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Dr Watson
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He does look a bit scary with that beard and all. What's the deal with the caveman look, Chris? I liked you the way you were.
The trouble with the world is that the stupid are cocksure and the intelligent are full of doubt — Bertrand Russell
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Barista
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The RBA can't raise rates as the economy heads-off the mining investment cliff, commodity prices are falling, and unemployment is trending-up.

While raising rates would undoubtedly cool housing, it would also put upward pressure on the Australian dollar and stymie the RBA’s attempts to re-balance the economy away from the mining sector.

And that in a nutshell sums up the economic conundrum Australia has placed itself in courtesy of an unknown decision maybe ten years ago to crush the tradables side of the economy to fit in a mining investment boom, and then to rely on stimulating housing construction to support demand as that mining investment boom unwinds.

Once that was the path we were on it was always going to reach a point where we were going to need to support the globally exposed side one way or another as the mining investment came off.

The weird thing for me is that in a world awash with housing markets going boom Australia watched the proceeds of the mining investment boom get ploughed into real estate (mainly) as debt from the FIRE world was channelled through banks borrowing overseas to support borrowing demand here as Australian economic decisionmakers took the option of pricing Australia out of a competitive position – for the most part while telling us we had never had it so good.

Now we have a choice.

We can have a housing collapse lead us to a productive economy over the longer term by wiping out demand, the financial system, and 24 years of built up resource misallocation in the short term, or we can wring the very last dregs from every institutional support for debt, borrowing, and the misallocation of resources to fend off making the adjustment to having a globally competitive employing sector, being a globally competitive economy. We can load up on more debt to sustain the present for as long as the world will lend us the dough, but the world knows that we have made a decision to be a one trick mining pony and will ultimately charge us market rates for that many future lifetimes worth of accumulated private debt we will need to pay back.

Should be a hoot!
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Switzerooo
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Would have been a better view if Switzer didn't constantly interrupt and try and guide the conversation to positives where there aren't any! Soon as it mentioned Boomers wealth being enhanced with these massive run ups in price it was as if he got as excited as a child going into Willy Wonkas Factory...
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Elastic
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Dr Watson
8 Oct 2014, 10:33 AM
He does look a bit scary with that beard and all. What's the deal with the caveman look, Chris? I liked you the way you were.
It's all part of the bear transmutation. If it looks like a bear and talks like a bear...
Black Panther has a 3 day growth in progress.
Only a rat can win a rat race.

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Chris
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Or maybe the whole thing is sustainable? This is where I fail to fully comprehend the rhetoric in housing at the moment. Is there any thought given to the fact that this is all viable and that housing fundamentals are not what we perceive they are (perception based on framework of the 80's and 90's).

I say this because the 'fundamentals' have been off the charts for a decade or more maybe it's a new world with new fundamentals and we're just taking to long to readjust.

Sucks for me if it true given my position but we also need to be realistic. Housing has not shown any signs of distress even when it is exceeding expectations of the most greedy in our society.

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GloomBoomDoom
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Chris
8 Oct 2014, 12:38 PM
Or maybe the whole thing is sustainable? This is where I fail to fully comprehend the rhetoric in housing at the moment. Is there any thought given to the fact that this is all viable and that housing fundamentals are not what we perceive they are (perception based on framework of the 80's and 90's).

I say this because the 'fundamentals' have been off the charts for a decade or more maybe it's a new world with new fundamentals and we're just taking to long to readjust.

Sucks for me if it true given my position but we also need to be realistic. Housing has not shown any signs of distress even when it is exceeding expectations of the most greedy in our society.

Potentially it's only a feedback loop that has gone on long enough to appear self sustaining. If you have to ask the question if there is some kind of new era of fundamentals then it's a pretty good indicator that there isn't and it's just a bubble.
MSE
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Admin
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Quote:
 
Here's Why The Reserve Bank Should Raise Rates To Cool Housing, But Can't

Greg McKenna Today at 12:20 PM 15

The RBA is concerned about the destabilising impact of property prices on the broader economy once the music stops.

As a result the chorus for limits on lending – so called macro-prudential rules – to certain sectors of the borrowing public have risen. But for all his protestations to the opposite, RBA Governor Glenn Stevens’ recent conversion to the ranks of those who think macro-prudential limits on lending are “worth a try”, seem hollow.

Real estate is one of those markets where the last transaction sets the parameters for the next transaction. Say a house in your street goes for $50,000 more than reserve, there is every chance that adjusted for property differences, your house is now worth more.

Likewise, as properties on the water or in close proximity to the city increase (or decrease as may also be the case) we tend to see suburbs close to those suburbs also rise as buyers either see value or can’t quite afford the exact property they want closer in.

It all means that the marginal player – or the last buyer or seller – sets the price.

In other words, given property in Australia is largely purchased with some amount of debt, the reality in Australia is that he who has the biggest borrowing potential, or can carry the largest mortgage, sets the price.

Which is why the RBA is so worried about investors, borrowing under the tax shelter of negative gearing and able to deduct their interest costs from income, driving property prices higher in Sydney and around the country with no net benefit to the economy. Indeed potentially increasing instability.

Macro-prudential rules usually limit lending on higher risk loans which, by a generally accepted definition, are those loans where a larger proportion of the purchase price is financed through debt – high loan-to-valuation (LVR) loans. Investors often have low LVR’s or at least under the 80% level which would attract lenders mortgage insurance.

So they may not work anyway.

Which brings us to the discussion about higher rates in Australia.

On Tuesday AFR journalist Christopher Joye quoted a “senior banker” who believes that the only way to pull things up in the housing market is for the RBA to “simply bite the bullet and lift interest rates by 25 basis points to send a shot across the bows of borrowers to remind them that the lowest home loan costs in history cannot stay with us forever.”

But would that work if the RBA wasn’t really signalling the start of an interest rate cycle?

Probably not and given their assessment is that “most data are consistent with moderate growth in the economy.”

So macro-prudential may not work effectively. The economy can’t bear too many interest rate hikes and if the RBA is only going to tighten once so it won’t really startle the horses then it may be difficult to cool the housing market through these means.

But as Martin Wolf wrote in the Financial Times this morning – more trouble lies ahead for the Australian economy if the RBA and APRA cannot find a way to get through to investors and cool the market.

“These credit booms did not come out of nowhere. They are the outcome of the policies adopted to sustain demand as previous bubbles collapsed, usually elsewhere in the world economy. That is what has happened to China. We need to escape from this grim and apparently relentless cycle. But for now, we have made a Faustian bargain with private sector-driven credit booms. A great deal more trouble surely lies ahead,” Wolf wrote.

All of which leaves the Reserve Bank, Governor Stevens and APRA caught between a rock and a hard place. But the consequences of a misstep now, as Wolf points out, could be dire for the Australian economy.

Read more: http://www.businessinsider.com.au/heres-why-the-reserve-bank-should-raise-rates-to-cool-housing-but-cant-2014-10
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Lef-tee
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Quote:
 
People say housing fared well during the early-1990s recession. But during the last recession (1991), the household debt to income ratio was 50%. Today it’s 150%.


A point I have often made myself.
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Ex BP Golly
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Dr Watson
8 Oct 2014, 10:33 AM
He does look a bit scary with that beard and all. What's the deal with the caveman look, Chris? I liked you the way you were.
Bubblepedia favs were with his penetrating eyes:
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And perhaps best of all
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I suspect Dr. Watson likes him a bit more his rounded bubbly self!
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Edited by Ex BP Golly, 9 Oct 2014, 12:03 PM.
WHAT WOULD EDDIE DO? MAAAATE!
Share a cot with Milton?
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