The key to blowing up a successful asset bubble is that you must constantly attract new money into the asset class you’re trying to inflate.
By that standard, recent Australian housing finance figures were better than expected but worse than required. The numbers were up. But new home buyers have not yet been bullied into the market by lower rates.
The value of home loans for owner-occupied housing rose 5.8% to $14.9 billion in March, according to the figures from the Australian Bureau of Statistics.
This was a firm rejection of our prediction that the numbers would suck. To be more specific, let’s put it in the form of a question: have rate cuts put a housing-led recovery back on the cards?
The numbers would have been welcome news to Glenn Stevens and the team at the Reserve Bank of Australia. They know Australia needs lower rates and more business investment to compensate for lower commodity prices and China’s shift to a consumption model. But there’s more to this housing data than meets the eye.
First, new home buyers aren’t convinced. New home buyers made up only 14.2% of demand. That’s the lowest percentage in nine years. What does it tell you?
Low interest rates are nice. And lower interest rates may be even nicer. But no matter how often a brain-damaged economist repeats it, lower interest rates don’t make a $600,000 house more affordable for someone on a $60,000 income. They just mean you’ll have to borrow more money now and repay it for longer in order to have a roof over your head.
What WAS interesting about the data is the big jump in new construction loans. They were up over 10% on the month and over 21.4% from the same time last year. This is a result of state governments creating incentives for new home buyers to actually build rather than buy. As public policy, it’s designed to increase housing stock, which should eventually actually lead to lower house prices.
That bit caught our eye because it suggests that some people are a lot more interested in building houses than, say, buying stocks. We’ve been working with our friend Phil Anderson on a project that explains and forecasts Australian property prices. The latest bit of data may confirm Phil’s view that Australia is actually on the verge of an 18-year boom in property prices.
That view certainly came as a shock to us when Phil first articulated it. But it’s based in part on the idea that land values move in cycles. Those cycles are determined by the availability of credit created by the banks and the willingness of people to borrow money. Phil has put the argument together in a presentation you can view here.
Look Out For This
In the meantime, we have to say it’s certainly not our view. In Austrian economic terms, more investment in Australian property at these prices is simply a continued misallocation of resources based on an irrational view that property always goes up.
There’s also the usual myth that Australians value housing more highly as a social goal than other countries, which has nothing to do with how ridiculously unaffordable prices still are.
But in a red pill/blue pill way, Mr Anderson’s views may make sense. That is, if you’re giving up on shares as an asset class to grow or preserve your wealth, you still have to do something with your money. Investment in land is really the only viable option for the middle class. At least it’s tangible.
And let’s consider what would happen if Australian interest rates were zero-bound. If the RBA lowers rates to around 2% in order to spur business investment, you’d expect to see a surge in non-bank lenders offering low-rate, high loan-to-value mortgages to anyone with a pulse.
You can argue whether it’s a good idea to be deliberately imitating the US-subprime boom, given how disastrous that was for everyone involved. But it doesn’t mean it won’t happen anyway.
In any event, even though we find Phil’s ultimate conclusions controversial, we were impressed with the depth of his work on property cycles. Phil brings in the work of Nickolai Kondratiev and WD Gann as well. As a publisher, this is exactly the type of well thought out market research we’re keen to publish in Australia.
no matter how often a brain-damaged economist repeats it, lower interest rates don’t make a $600,000 house more affordable for someone on a $60,000 income. They just mean you’ll have to borrow more money now and repay it for longer in order to have a roof over your head
Fundamental lack of basic numeracy skills, and misunderstanding of how mortgages work here.
1. Lower interest rates do make a $600K home more affordable by reducing the interest repayments.
2. Lower interest rates don't increase the amount you need to borrow for a $600K house.
3. Lower interest rates don't increase the repayment term - in fact the opposite is true if the interest savings are directed towards the principal.
4. Someone on an income of $60K probably shouldn't be buying a $600K house in the first place. A $300K-$400K house or unit would be more appropriate.
Fundamental lack of basic numeracy skills, and misunderstanding of how mortgages work here.
Do you refute this - "new home buyers aren’t convinced. New home buyers made up only 14.2% of demand. That’s the lowest percentage in nine years. What does it tell you?"
Quote:
1. Lower interest rates do make a $600K home more affordable by reducing the interest repayments.
I thought a key bull argument was that low interest rates have in part resulted in larger property prices? If this is true, then they don't necessarily make homes more affordable
Quote:
2. Lower interest rates don't increase the amount you need to borrow for a $600K house.
See point one. Low rates have resulted in higher values which invariably equal higher deposits required - hence, an increase in the amount required to take out a mortgage.
Quote:
3. Lower interest rates don't increase the repayment term - in fact the opposite is true if the interest savings are directed towards the principal.
If low interest rates have increased average property prices, then you could quite possibly pay back your home over a longer period of time than otherwise. Would come down to income inflation and future rates.
Quote:
4. Someone on an income of $60K probably shouldn't be buying a $600K house in the first place. A $300K-$400K house or unit would be more appropriate.
True, but a lot of first home buyers don't want to live where there are 300k houses. So many wont buy at all, but they will continue to use their money for lifestyle pursuits in appealing inner city areas.
If low interest rates have increased average property prices...
The statement was in relation to a $600K house being purchased by someone on a $60K income...
'lower interest rates don’t make a $600,000 house more affordable for someone on a $60,000 income. They just mean you’ll have to borrow more money now and repay it for longer in order to have a roof over your head'
At no point does Denning say he's not talking about a $600K house any more.
A $600K house is more affordable at a 5% mortgage rate than a $600K house at a 10% mortgage rate.
Dan raises some good food for thought here but fails to make any compelling arguments again.
He appears to have gained a couple of kilos but I think it suits him. Lookin' good Dan.
The fundamental error in this report is the assumption that house prices rises are irrational. House prices are determined in the main by supply and demand which is entirely rational. Sydney is more expensive that Woolongong because more people want to live in Sydney , it is simple and it is rational. If more people want to live in Melbourne than Melbourne prices will rise.
This is classic doom and gloom with a rather lightweight analysis. It could be right out of the 70s. It suffers from the fundamental outdated philosophies of the Austrian School of economics with their fish and fishermen and other misguided assumptions as to what this modern society thinks is productive. Listening to an Austrian economist is like being in a time warp.
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.
The fundamental error in this report is the assumption that house prices rises are irrational. House prices are determined in the main by supply and demand which is entirely rational. Sydney is more expensive that Woolongong because more people want to live in Sydney , it is simple and it is rational. If more people want to live in Melbourne than Melbourne prices will rise.
This is classic doom and gloom with a rather lightweight analysis. It could be right out of the 70s. It suffers from the fundamental outdated philosophies of the Austrian School of economics with their fish and fishermen and other misguided assumptions as to what this modern society thinks is productive. Listening to an Austrian economist is like being in a time warp.
BS Houston has grown 20% in the last 10 years and house prices have not raised above inflation. Makes a mockery of your point. Please do not use examples from your cherry picked past. Maybe you just are not typical.
The fundamental error in this report is the assumption that house prices rises are irrational. House prices are determined in the main by supply and demand which is entirely rational. Sydney is more expensive that Woolongong because more people want to live in Sydney , it is simple and it is rational. If more people want to live in Melbourne than Melbourne prices will rise.
The fundamental error here (aside from your ongoing issue of not being able to argue coherently) is that you justify absolute pricing with a comment about relative pricing. Of course it costs more to live in Sydney than bumfuck, that's were the 100k+ jobs and sandy beaches teeming with pretty women are. That doesn't ipso facto make prices rational.
(Cue a bunch of cherry picked charts and a 2bit doom and gloomer rant)
"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.
BS Houston has grown 20% in the last 10 years and house prices have not raised above inflation. Makes a mockery of your point. Please do not use examples from your cherry picked past. Maybe you just are not typical.
Houston Texas has expensive property taxes, around 1.8% on memory. That means that a $200K home attracts $3600 per annum in tax ($300 per month) and that tax is indexed via rising values. A $300K home will cost you $450 per month in tax also indexed to house price rises. On the other hand we pay our property tax upfront. The last 10 years contain the GFC period, house prices fell but are rising again in Houston - still not expensive but rising.
Supply in Houston is much better than here, and that makes a big difference.
In a comparison in what is paid over a lifetime of house occupation the difference won't be as great as the sticker price indicates. It would be an interesting exercise to do the math for a buyer at 25 who dies at 85 and pays tax over 60 years.
Question - are the state coffers of Texas boosted by the oil revenue? I don't know but perhaps you do, if so then any change to that oil income will push up future house taxes, and oil is gradually running out.
Any expressed market opinion is my own and is not to be taken as financial advice
Houston Texas has expensive property taxes, around 1.8% on memory. That means that a $200K home attracts $3600 per annum in tax ($300 per month) and that tax is indexed via rising values. A $300K home will cost you $450 per month in tax also indexed to house price rises. On the other hand we pay our property tax upfront. The last 10 years contain the GFC period, house prices fell but are rising again in Houston - still not expensive but rising.
Supply in Houston is much better than here, and that makes a big difference.
In a comparison in what is paid over a lifetime of house occupation the difference won't be as great as the sticker price indicates. It would be an interesting exercise to do the math for a buyer at 25 who dies at 85 and pays tax over 60 years.
Question - are the state coffers of Texas boosted by the oil revenue? I don't know but perhaps you do, if so then any change to that oil income will push up future house taxes, and oil is gradually running out.
Be careful, Peter. Texas' tax base is structured differently from most US states. There is no state income tax, so property taxes shoulder more of the burden for core local government services, notably primary/secondary education, and emergency services.
A median Houston household has a gross income of $58,567 (2011), faces a marginal income tax rate of only 15% (jointly filed), and gets to deduct PPoR mortgage interest from income. Sales tax in Houston is 8.25% and applies to goods only (plus there are intermittent sales tax holidays, e.g. Aug 9-11 this year), so has a lower bite than our GST.
Throw in the USD PPP advantage over the AUD, and $3600 per annum in total state/county/city/school-district property taxes on a $200K home doesn't seem so bad, especially considering what $200K will buy you in Houston.
[edit] I think one can also argue the toss on Houston property taxes vs the combination of local council rates and stamp duty in Australia. The latter drops out only if one assumes that the household never moves. But that's not plausible, is it?
Houston Texas has expensive property taxes, around 1.8% on memory. That means that a $200K home attracts $3600 per annum in tax ($300 per month) and that tax is indexed via rising values. A $300K home will cost you $450 per month in tax also indexed to house price rises. On the other hand we pay our property tax upfront. The last 10 years contain the GFC period, house prices fell but are rising again in Houston - still not expensive but rising.
Supply in Houston is much better than here, and that makes a big difference.
In a comparison in what is paid over a lifetime of house occupation the difference won't be as great as the sticker price indicates. It would be an interesting exercise to do the math for a buyer at 25 who dies at 85 and pays tax over 60 years.
Question - are the state coffers of Texas boosted by the oil revenue? I don't know but perhaps you do, if so then any change to that oil income will push up future house taxes, and oil is gradually running out.
Be careful, Peter. Texas' tax base is structured differently from most US states. There is no state income tax, so property taxes shoulder more of the burden for core local government services, notably primary/secondary education, and emergency services.
A median Houston household has a gross income of $58,567 (2011), faces a marginal income tax rate of only 15% (jointly filed), and gets to deduct PPoR mortgage interest from income. Sales tax in Houston is 8.25% and applies to goods only (plus there are intermittent sales tax holidays, e.g. Aug 9-11 this year), so has a lower bite than our GST.
Throw in the USD PPP advantage over the AUD, and $3600 per annum in total state/county/city/school-district property taxes on a $200K home doesn't seem so bad, especially considering what $200K will buy you in Houston.
I acknowledge those points, but if you load any tax on any item you depress the desire to own that item. Coupled with plentiful supply of land courtesy of much more liberal development and subdivision regulations, and you have cheap housing.
We don't have property tax on PPOR's and we don't have liberal development regulations, plus we have sizeable input costs that developers have to pay to local authorities, so the comparisons whilst interesting are not valid, unless we can make wholesale changes to several taxation systems. That to me appears unlikely, so what's the point of the comparison?
In addition, the property tax in Texas isn't factored into a direct sticker price comparison, and it should be.
Perhaps the Texas model is the one that we should all be using, but it's not and I think that it's simply too late to introduce it here. The introduction of the GST in 2000 was the last nail in that coffin. I note that California doesn't seem interested in emulating Texas, and their prices are at least as high as ours in better areas.
Are any other states in the USA making noises about copying Texas, or is this simply what Texas has to do to attract labour and capital to the state?
Any expressed market opinion is my own and is not to be taken as financial advice
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.
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
