in my understanding, the bet was made 26th November 2008, and the First home owners boost was introduced on 14 October 2008. (clarification needed please)
Given that Keen insists that there is a lag time between the government intervention and the credit impluse, and then between the credit impulse and housing prices that would seem to account for him not anticipating the credit impulse correctly.
I do think it a leap of faith to assume that the increase in the First home owner boost was the reason the credit impulse turned positive again, but can you deny completely the link (not causation but link) between what has been identified as the credit impulse / credit accelerator and house prices?
The rate of change of credit growth turned positive because interest rates were cut making it easier for people to buy houses. The demand for houses existed. The rate cuts enabled that demand to be effected into purchase. It's not rocket science. You don't need a new term like credit impulse to understand it. As I wrote in another post today, credit growth has slowed many times and house prices continued to rise. There are many factors.
It's disingenuous of Keen to claim credit for the credit accelerator. As noted by Rory Robertson:
Quote:
Bernanke was publishing serious papers on "The financial accelerator and the credit channel" and "Credit, money and Aggregate Demand" more than two decades ago. Check out the references at http://www.bis.org/review/r070621a.pdf
in my understanding, the bet was made 26th November 2008, and the First home owners boost was introduced on 14 October 2008. (clarification needed please)
Given that Keen insists that there is a lag time between the government intervention and the credit impluse, and then between the credit impulse and housing prices that would seem to account for him not anticipating the credit impulse correctly.
I do think it a leap of faith to assume that the increase in the First home owner boost was the reason the credit impulse turned positive again, but can you deny completely the link (not causation but link) between what has been identified as the credit impulse / credit accelerator and house prices?
If house prices crash over the next 5 years...do you think it matters one iota whether Rory Robertson beat Keen in a silly bet??
You bulls cling to that stupid bet not realising Keen did it to raise publicity and to make sure everyone knows what his opinion is.
He is holding to his opinion because he knows that all geniuses are vindicated over time...Gallileo, Darwin etc...(all were laughed at by their peers).
i assume that statment is directed at me cos you quoted me yes? that's how this forum works?
i'm not sure i've said anything that sounds even remotely bullish. I am actually defending Keen on the basis that economic modelling etc. takes time, and there are lead times involved and so to claim keen's theory wrong because the FHOB was introduced just over a month before the bet is not a fair claim. at the same time though, i do question some elements of Keen's theory - namely that he jumps from the fact that becuase there is a correlation between the credit impulse and house prices, that does not prove causation, as keen believes (in my understanding).
in my understanding, the bet was made 26th November 2008, and the First home owners boost was introduced on 14 October 2008. (clarification needed please)
Given that Keen insists that there is a lag time between the government intervention and the credit impluse, and then between the credit impulse and housing prices that would seem to account for him not anticipating the credit impulse correctly.
I do think it a leap of faith to assume that the increase in the First home owner boost was the reason the credit impulse turned positive again, but can you deny completely the link (not causation but link) between what has been identified as the credit impulse / credit accelerator and house prices?
If house prices crash over the next 5 years...do you think it matters one iota whether Rory Robertson beat Keen in a silly bet??
You bulls cling to that stupid bet not realising Keen did it to raise publicity and to make sure everyone knows what his opinion is.
He is holding to his opinion because he knows that all geniuses are vindicated over time...Gallileo, Darwin etc...(all were laughed at by their peers).
i assume that statment is directed at me cos you quoted me yes? that's how this forum works?
i'm not sure i've said anything that sounds even remotely bullish. I am actually defending Keen on the basis that economic modelling etc. takes time, and there are lead times involved and so to claim keen's theory wrong because the FHOB was introduced just over a month before the bet is not a fair claim. at the same time though, i do question some elements of Keen's theory - namely that he jumps from the fact that becuase there is a correlation between the credit impulse and house prices, that does not prove causation, as keen believes (in my understanding).
so strinberg, are you agreeing that there is a correlation between the credit impulse or whatever you want to call it (by the way Keen doesn't take credit for the work - he merely takes credit for changing the term credit impulse to credit accelerator because he thinks it fits better) and house prices? If so, would you agree that, due to the lag time and current stats we are seeing for the credit impulse, we are in for at least another quarter of slightly falling house prices?
in my understanding, the bet was made 26th November 2008, and the First home owners boost was introduced on 14 October 2008. (clarification needed please)
Given that Keen insists that there is a lag time between the government intervention and the credit impluse, and then between the credit impulse and housing prices that would seem to account for him not anticipating the credit impulse correctly.
I do think it a leap of faith to assume that the increase in the First home owner boost was the reason the credit impulse turned positive again, but can you deny completely the link (not causation but link) between what has been identified as the credit impulse / credit accelerator and house prices?
If house prices crash over the next 5 years...do you think it matters one iota whether Rory Robertson beat Keen in a silly bet??
You bulls cling to that stupid bet not realising Keen did it to raise publicity and to make sure everyone knows what his opinion is.
He is holding to his opinion because he knows that all geniuses are vindicated over time...Gallileo, Darwin etc...(all were laughed at by their peers).
i assume that statment is directed at me cos you quoted me yes? that's how this forum works?
i'm not sure i've said anything that sounds even remotely bullish. I am actually defending Keen on the basis that economic modelling etc. takes time, and there are lead times involved and so to claim keen's theory wrong because the FHOB was introduced just over a month before the bet is not a fair claim. at the same time though, i do question some elements of Keen's theory - namely that he jumps from the fact that becuase there is a correlation between the credit impulse and house prices, that does not prove causation, as keen believes (in my understanding).
Sorry davel...wasnt aimed at you. Hit reply to the wrong comment. Aimed at Bulls that love having a dig at Keen for a lost bet to an RBA insider that knows how rigged the game is and knew the bubble would be dragged out.
"Alan Greenspan needs to create a housing bubble to replace the Nasdaq bubble." - Paul Krugman 2002
so strinberg, are you agreeing that there is a correlation between the credit impulse or whatever you want to call it (by the way Keen doesn't take credit for the work - he merely takes credit for changing the term credit impulse to credit accelerator because he thinks it fits better) and house prices? If so, would you agree that, due to the lag time and current stats we are seeing for the credit impulse, we are in for at least another quarter of slightly falling house prices?
You can always show correlation, especially if you jiggle around with lags until you get a correlation. You can even change a negative correlation into a positive one that way. I don't see it is very informative to say that credit growth changes are correlated with house price changes. We have had house price rises associated with big falls in the credit growth rate. What causes the credit growth changes? A lot of things - interest rates, incomes, population, government policies etc. But interest rates are currently the main factor in Oz. I stated here, back in November when the RBA raised rates, that I expected National house price falls of 5-10%. So, I'm not surprised at the recent data and falls may continue. However, incomes are still rising quite strongly so I'm not expecting big falls. Falls of 5-10% are quite minor in the context of the 2009 boom.
so it's clear, i'm not trying to prove anyone wrong or right here, just converse!
you said there's a correlation, but it's not useful. Does that mean you think all correlations are not useful? i think the correlation would be useful for estimating price movements in the near future. No?
Can you show me some stats if you have them when the credit impulse is positive (accelerating) when house prices are falling?
so it's clear, i'm not trying to prove anyone wrong or right here, just converse!
you said there's a correlation, but it's not useful. Does that mean you think all correlations are not useful? i think the correlation would be useful for estimating price movements in the near future. No?
Can you show me some stats if you have them when the credit impulse is positive (accelerating) when house prices are falling?
Thanks!!
I showed the many periods since 1977 (as far as the RBA data goes) where the credit growth rate fell whilst house prices rose here:
We have almost no data to make a case for correlation between credit growth rate rising and falling house prices. All the current excitement is based on the 2008 falls. There are no, zero, years in Stapledons data that show house prices falling since 1977. The ABS (8 cap city average) shows some very brief times, mostly single quarters, with very small falls.
For example, the ABS shows house prices falling 1.5% between Dec 2003 and June 2004. The monthly and annual credit growth figures for that period were: 12/2003 - 1.7% (20.9% ann) 3/2004 - 1.6% (22.0% ann) 6/2004 - 1.1% (20.7% ann)
The credit growth rate then proceeded to fall until March 2006 whilst house prices rose.
Shadow totally lied about a set of data and the way I analysed it.
you guys are dangerous wankers
Post a link to the evidence of these 'lies' please? Are you talking about the time you asserted that slowing credit growth equals falling house prices, and then I (and Strindberg) provided data to show that you were completely wrong, and then you changed your story to something completely different?
Mmmm . Below is the RBS take on this change.....they seem to also agree with Master Steve. Note the last sentence....I personally feel that we will have a bottom at 2018, a sleigh rise for a year or two then continued declines.....
The baby boomers’ boom has ended It appears the attitude of Australian households to saving and borrowing has changed dramatically since 2007. In the past three years, the household saving rate has surged, housing loan growth has slumped, home equity withdrawal has stopped and non-housing lending has flattened. This is in stark contrast to trends after the baby boomers started working and buying houses. The ageing of the population will now be one of the biggest sources of change for Australian bank balance sheets in the long term. We use demographic forecasts to better understand how the boom might unwind In this note, we review demographic and financial trends to gauge how Australian households’ balance sheets will evolve over the next 15 years. Our work suggests that the recent mortgage growth slump and savings-rate spike are predominantly structural changes and not cyclical fluctuations and these changes are directly tied to the ageing of the population. In the 15 years to 2025, we now expect average growth of 4.9% for mortgages (versus 6.1% previously) and we have adjusted our bank earnings forecasts and valuations to reflect this. Stronger wealth performance should offset some of this lending slowdown and we expect 8.0% for household deposit growth versus our previous assumption that deposit growth would track lending growth. These issues are more than reflected in sector valuations For the sector, we believe our base-case scenario is more than reflected in current valuations. We note that the sector’s implied terminal growth rate is currently more than 2% below the 2001-07 average, versus the 1% discount our analysis implies (see Page 3). ANZ and NAB the best placed of the banks Given their focus on Asia and business lending respectively, we believe that ANZ (#1 pick) and NAB (#2 pick) are better positioned than CBA and WBC for the structural headwind we expect housing volumes to face over the medium term. This is reflected in the moves in our valuations that result from the changes to our medium-term mortgage growth forecasts (NAB -0.9%, ANZ -1.0%, WBC -1.6% and CBA -1.7%). That said, we believe this will be somewhat offset by the improvement in the sector’s loan-to-deposit ratio over the medium term, which will reduce the sector’s exposure to perceived funding risks.
Household balance sheet forecast Demographics likely to be a long-term drag on mortgage volumes After more than two decades of running down savings and taking on debt, Australian households have become much more conservative in their spending and borrowing habits since the global financial crisis started in 2007. Our long-run forecasts of asset values and volume growth will mostly depend on two variables: 1) the availability of finance (the main supply variable); and 2) demographic changes (the main demand variable). In this note, we focus on the demographic impact on the balance sheets of Australian households over the next 15 years. We think demographics will have the greatest impact on the long-term prospects for three business lines: mortgages, deposits and wealth management. We exclude business lending growth from our analysis because it is influenced more by trends in corporate balance sheets, although we concede that corporate health is directly related to household spending.
The ‘baby boomers’ boom appears to have peaked In the two decades to 2007, the business mix of the major retail banks has reflected the following changes to household balance sheets: • a big rise in mortgage debt relative to income and assets; • a big fall in deposit balances relative to financial assets; and • the rise of superannuation as a form of managed investment. Changes to the financial system, such as deregulation and new products, were important drivers of these changes. However, we note that these trends were emerging before financial deregulation and the rise of compulsory super. For example, mortgage debt started to rise in the early 1970s, well before deregulation. So, we think that a large part of the change to banks’ balance sheets and product mix can be traced to demographics. In common with other English-speaking countries, Australia’s demographic profile featured a ‘bulge’ as the baby-boomer generation reached its peak earning and spending years in the 1990s and 2000s. Although the resources boom from 2004 gave some support to the housing market, we note that housing actually reached a major peak in 2004 (especially in Sydney), before higher resources prices really kicked in.
We gauge prospects for a ‘boomer bust’ The first baby boomers are due to retire in 2011. After several decades of building assets and taking on debt, they will now need to buy financial assets and reduce debt. We review the available data on the asset and debt profile of Australian households by age group to better understand the effect of changing demographics on the prospects for growth in three banking product segments, namely: • mortgages, based on the demand for housing; • deposits and household liquidity; and • superannuation and wealth management. Our work suggests that the recent mortgage growth slump and savings-rate spike are predominantly structural changes and not cyclical fluctuations and that these changes are directly tied to the ageing of the population. In the 15 years to 2025, we now expect average growth of 4.9% for mortgages (versus 6.1% previously) and we have adjusted our bank earnings forecasts and valuations to reflect this. Stronger wealth performance should offset some of this lending slowdown and we expect 8.0% for household deposit growth versus our previous assumption that deposit growth would track lending growth.
Demographics’ impact on future housing demand In view of the BIS’s demographic analysis (see Appendix) and the differences by age group in Australian households’ asset holdings and debt appetite, we think demographic trends will have a large effect on Australian asset prices. The biggest single demographic shift will be the baby boomers entering retirement. The baby boomers’ entry into the housing market coincided with the first stirrings of the Australian housing boom in the early 1970s. Baby boomers now hold 47% of Australia’s owner-occupied dwellings and c52% of other dwellings (mainly investment property and holiday homes) (Chart 7). The surge was underpinned by the underlying demand from the boomer generation, along with a sluggish equities market, the fall in the effective mortgage rate, the general price inflation of the 1970s and 1980s, and the tax-free status of housing at a time of rising personal tax rates. The capital gains tax cut in 2001 underpinned the demand for investment housing.
Boomers are (housing) asset rich and cash poor A superannuation balance of at least A$750k is needed to fund a couple’s comfortable retirement for 20 years (source: Colonial First State, Association of Superannuation Funds of Australia). However, the average superannuation balance in 2005-06 for households in the 55-65 age group was just A$160k. Although this would no doubt be higher now, superannuation balances still look thin for households in the 55-64 age group (refer to Chart 3). We therefore expect the baby boomers will seek to use their assets to fund the most comfortable retirement that they can afford. To this end, at an aggregate level, housing equity release can occur by: • borrowing against the equity in a home, using home equity loans or reverse mortgages; • selling an owner-occupied house and then renting or entering an aged-care home; • downsizing to a smaller primary residence; and • selling an investment property.
Investment housing demand under the most pressure There are two main ways that households in the 55-64 age group could sell their houses to realise cash for their retirement. Many new retirees will seek to trade down to a smaller, cheaper house. For the most part, new retirees who still have mortgages on their prime residence (10%) will have little choice but to downsize their main residence to pay off the remaining mortgage balance. The other step that baby boomers could take (aside from purchasing a dedicated equity-release product like a reverse mortgage) is to sell their investment property. For the older baby boomers, housing was a core asset class in the retirement investment portfolio. These households were net buyers of housing and will soon turn around and become net sellers to fund their retirement, in our view. The ATO estimates 70% of investment property holders are negatively geared. We see a couple of factors underpinning this change. Baby boomers’ superannuation balances are well below the amount that the Association of Superannuation Funds of Australia believes is needed to fund a good retirement, so they need to free up cash. We think these investors are unlikely to hold on to their investment properties given current low yields of 4-5% in the capital cities. Probably most importantly, retirees will usually not be earning enough income to use the full tax deductions from the losses on the properties. In other words, the rent payments alone will not cover the costs of mortgage servicing and property maintenance. All up then, we think demographics will be a drag on long-term housing demand. This should translate into a softer outlook for mortgage growth too. Long-term housing debt outlook Australian housing finance was a stable and restrained business segment from 1950 to 1990. Competition was generally sedate as the savings banks, joined in the 1970s by building societies and credit unions, grew steadily under heavy regulation. The two main drivers of loan demand, ie, price and the underwriting stance, remained quite strict. Mortgage loans were expensive compared to the costs of wholesale interbank funds. The underwriting stance was strict. The banks insisted on a 20% deposit. Borrowers who fell short would usually only borrow using the lawyers’ schemes, which were very expensive. All this meant Australia’s mortgage debt-to-income ratio remained low. In the mid-1990s, Australia’s mortgage debt-to-income started to surge, spurred by the entry of non-bank lenders into the mortgage market. These new competitors lowered the price and the underwriting stance for mortgages. The access of new lenders to wholesale funding markets via securitisation allowed them to undercut the banks' lending margins. This reduced the price of mortgage borrowings, at least relative to the cash rate and deposit interest rates. In the race to write new business and build scale quickly, the non-bank lenders also started to relax deposit requirements for mortgages. They also pioneered the rollout of lo-doc and no-doc loans in Australia, and were starting to build a subprime market in Australia. In recent years, Australia’s housing loan growth has dropped below its 1950-2010 average. The high debt burden suggests a recovery is a long way off.
On the demand side, we note that housing debt, compared to GDP and disposable income, took off as baby boomers reached their peak house-buying years. The explosion in mortgage debt from the mid-1990s coincided with the first of the baby boomers turning 45. Households where the prime earner is 45-54 have the highest penetration of housing (refer to Chart 2) and the highest incomes (refer to Chart 8). So we believe we can narrow the ‘peak buyers’ down to this age group. The ABS Series B population projections can give an insight into the demographic effect on demand for housing and mortgage debt. Chart 11 highlights that this ‘peak buyers’ share of total population peaked in 2005 and will keep falling until the early 2020s. At the same time, the selling pressure on housing will likely rise as the baby boomers enter their retirement years in the 65-74 age group. We believe these are the ‘peak sellers’, and their share of the population is shown in Chart 12. As outlined above, the ‘peak sellers’ are likely to add to housing supply by downsizing their owner-occupied dwellings and selling outright their investment properties. If we deduct the share of the population in the ‘peak sellers’ age group from that in the ‘peak buyers’ age group we should get a measure of the net buying pressure on housing. Chart 13 shows the trend in this net buying pressure, and the combined demographic effects on demand and supply to get a net buying measure for housing. This measure shows continued pressure on housing, and therefore on mortgage demand, out to 2025.
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