Confidence in housing falls to lowest level in 40 years

From Eryk Bagshaw & Peter Martin at SMH:

Confidence in the housing market has collapsed, with the number of Australians describing property as the wisest place to put their savings falling to its lowest level in more than 40 years.

The Melbourne Institute of Applied Economic and Social Research has been asking about the wisest place to store savings since it began its consumer confidence survey in 1974. Real estate has been one of the most popular answers, often eclipsing bank deposits and paying down debt as the wisest place for savings.

Australian Housing Confidence

Westpac’s Bill Evans: “There is no doubt nervousness about the sustainability of prices.”

Lack of confidence is a vulnerability rather than sign of an imminent collapse. It may also reflect consumer nervousness about record low interest rates (lowest in more than 40 years) and the impact on affordability, and house prices, when rates eventually rise.

Source: Confidence in housing collapses to lowest level in 40 years: survey

Chinese real estate bubble “slows”

Elliot Clarke at Westpac reports that home price growth in tier-1 cities “slowed materially” in January 2017:

From 29%yr in September 2016, tier-1 new home price growth has slowed to 23%yr. Similarly for the tier-1 secondary market, price momentum has slowed from 33%yr to 26%yr since September.

Tier-2 and tier-3 cities have far lower annual growth rates: 12% and 9% respectively for new homes and 9% and 6% for existing dwellings.

When we compare tier-1 price growth to Sydney and Melbourne, the Chinese bubble is in a different league. From CoreLogic: “Sydney home prices surged 15.5 per cent and Melbourne’s 13.7 per cent over the year [2016]”.

It is hard to imagine a soft landing when property prices have been growing at 30% a year.

Even 15%….

Australia & Canada in 4 charts

RBA governor Phil Lowe recently made a speech comparing the experiences of Australia and Canada over the last decade. Both have undergone a resources and housing boom. Four charts highlight the differences and similarities between the two countries.

Australia’s spike in mining investment during the resources boom did serious damage to non-mining investment while Canada’s smaller boom had no impact.

Australia & Canada: Mining v. Non-Mining Investment

Immigration fueled a spike in population growth in Australia, adding pressure on infrastructure and housing.

Australia & Canada: Population Growth

Both countries are experiencing a housing bubble, fueled by low interest rates and lately by export of China’s property bubble, with capital fleeing China and driving up house prices in the two countries.

Australia & Canada: Housing

Record levels of household debt make the situation more precarious and vulnerable to a correction.

Australia & Canada: Household Debt

Hat tip to David Llewellyn-Smith at Macrobusiness

Seven Signs Australians Are Facing Economic Armageddon

Economics advisor John Adams warns that Australia faces “economic Armageddon” because of “significant structural imbalances” not seen since the lead up to the Great Depression in the 1920s.

Here are his seven signs:

Seven Signs Australians Are Facing Economic Armageddon

Sign 1: Record Australian Household Debt

According to the Reserve Bank of Australia, Australia’s household debt as a proportion of disposable income now stands at a record high of 187%.

The two closest episodes were the 1880s and the 1920s, which both preceded the only two economic depressions ever experienced in Australian history in 1890 and 1929.

Sign 2: Record Australian Net Foreign Debt

Australia’s net foreign debt now stands at more than $1 trillion and as a proportion of Gross Domestic Product was at a record high of 63.3% in June 2016.

This makes Australians much more vulnerable to international economic developments such as higher global interest rates, international financial crises or major government or corporate bankruptcies.

Sign 3: Record Low Interest rates

Australia has its lowest official interest rates on record with the Reserve Bank of Australia’s cash rate sitting at 1.5%. The current low rate of interest is not sustainable over the medium term and will inevitably rise.

Australians, particularly in Sydney and Melbourne, who have borrowed record amounts of money are very susceptible to higher interest rates.

4: Australian Housing Bubble

The expansion of credit by the Reserve Bank of Australia has been pumped into the Australian housing market over the past 25 years. Credit, which has been directed to Housing as a proportion of Australia’s GDP, has exploded from 21.07% in June 1991 to 95.06% in June 2016.

Over the same period, credit which has been directed at the business sector or to other personal expenses has remained relatively steady as a proportion of GDP.

5: Significant Increases in Global Debt

The General Manager of the Bank for International Settlements stated on 6 February 2017:

“Total debt in the global economy, including public debt, has increased significantly since the end of 2007 … Over the past 16 years, debt of governments, households and non-financial firms has risen by 63% in the United States, the euro area, Japan, the United Kingdom, Canada and Australia, 52% in the G20 and 85% in emerging economies. Heavy debt can only leave less room for manoeuvre in responding to future challenges.”

Sign 6: Major International Asset Bubbles

There are significant asset bubbles in bonds, stocks and real estate in major economies such as the United States and China, which has been fueled by the significant increases in global debt.For example, the Shiller PE Index in the United States which measures the price of a company’s stock relative to average earnings over the past 10 years is now at 28.85. This is the third highest recorded behind the Tech Bubble in 1999 and “Black Tuesday” in 1929.

Sign 7: Global Derivatives Bubble

According to the Bank for International Settlements, the value of the over the counter derivatives market (notional amounts outstanding) stood at US$544 trillion.

Much of these derivatives contracts are concentrated on the balance sheets of leading global financial and banking institutions such as Deutsche Bank. The concentration of complex derivative contracts on bank balance sheets poses significant risks to both individual institutions and the global financial system.

Veteran Investor Warren Buffet has repeatedly warned that derivatives are “financial weapons of mass destruction” and could pose as a “potential time bomb”.

Household debt is too high. Rising foreign debt and record low interest rates are fueling a housing bubble. Global debt is too high and rising, while stocks are over-priced. Throw in the global derivatives “bubble” with some truly terrifying numbers just to scare the punters out of their wits.

Nothing new here. Nothing to see. Move along now. The global economy is in good hands…..

Or is it? Aren’t these the same hands that created the current mess we are in?

John Adams is right to warn of the dangers which could have a truly apocalyptic effect, that makes the global financial crisis seem like a mild tremor in comparison.

Some of the risks may be overstated:

The derivatives “bubble” is probably the least of our worries as most of these positions offset each other, giving a net position a lot closer to zero.

Defensive stocks like Consumer Staples and Utilities are over-priced but there still appears to be value in growth stocks. And earnings are growing. So the stock “bubble” is not too alarming.

Global debt is too high but poses no immediate threat except to countries with USD-denominated debt — or Euro-denominated debt in the case of Greece, Italy, etc. — that cannot issue new currency to repay public debt (and inflate their way out of the problem).

But that still leaves four major risks that need to be addressed: Household debt, $1 Trillion foreign debt, record low interest rates and a housing bubble.

From Joe Hildebrand at News.com.au:

Mr Adams called on the RBA to take pre-emptive action by raising interest rates and said the government needed to rein in tax breaks like negative gearing as well as welfare payments.

This, he admitted, would result in “a mild controlled economic recession” but would stave off “uncontrolled devastating depression”.

The problem is that the Australian government appears to be dithering, with one eye on the next election. These are not issues you can “muddle through”.

If not addressed they could turn into the four horsemen of the apocalypse.

Source: Apocalyptic warning for Australian families

Why the establishment were clean-bowled by Trump

Forget private email servers and sex tapes. Forget men versus women. This election was decided on the following three issues:

1. Globalization.

Currency manipulation by emerging economies like China and consequent offshoring of blue-collar jobs has gutted the US manufacturing sector. Accumulation of $4 trillion of foreign reserves enabled China to suppress appreciation of the Yuan and maintain a competitive advantage against US manufacturers.

China Foreign Reserves ex-Gold

Container imports and exports at the Port of Los Angeles (FY 2016) highlight the problem. More than 57% of outbound containers are empty. Container shipping represents mainly manufactured goods, rather than bulk imports or exports, and the dearth of manufactured exports reflects the trade imbalance with Asia. Even the container statistic understates the problem as many outbound containers contained scrap metal and paper rather than manufactured goods, for processing in Asia.

Port of Los Angeles (FY 2016) Container Traffic

Manufacturing job losses were tolerated by the political establishment, I suspect, largely because corporate profits were boosted greatly by offshoring jobs and low-cost imports. And corporations are the biggest political donors. Corporate profits as a percentage of GDP almost doubled over the last two decades.

Corporate profits as a percentage of GDP

2. Immigration

This is a similar issue to that highlighted by the UK/Brexit vote. Blue collar workers, losing jobs to globalization, felt threatened by high levels of immigration which, among other problems, stepped up competition for increasingly-scarce jobs.

3. Wall Street

Wall Street bankers with their million-dollar bonuses were blamed for the global financial crisis and collapse of the housing market, the primary store of wealth for middle-class families. While there is no doubt Wall Street had their snouts in the trough, the seeds of the GFC were laid years earlier when Bill Clinton repealed the Glass-Steagall Act with backing from a Republican congress. Failure to prosecute or otherwise punish even the worst offenders of the sub-prime mortgage debacle was seen by the public as collusion.

The Democrats in 2015 recognized that Hillary had been damaged by the private email server controversy and did their best to maneuver the election into a Trump-Clinton stand-off. Their view was that Hillary would be beaten by either Rubio or Kasich. Even the reviled Ted Cruz was seen as a threat. Hillary was seen as having the best chance against a flawed Trump who would struggle to unite the Republican party behind him.

Hillary Clinton and Donald Trump

Hillary Clinton was presented as the ‘safe’ candidate in the election, representing the status quo and stability. But that set her up for a fall as their strategy underestimated the anger of American voters and the risks they were prepared to take to bring about change.

While I am relieved that we can “close the history book on the Clintons”, to use Trump’s words, I viewed him as a lame-duck candidate, too flawed to hold the office of President. Fortunately there are many checks and balances in the US political system. It survived Nixon and should be able to survive this too. Especially if Trump takes a hands-off approach, along the lines of Reagan who was reputed to doze off in cabinet meetings. A lot will depend on his appointees and the next few months will be critical in setting the direction for his presidency. Expect financial markets to remain volatile until they have grown accustomed to the change. It could take a year or even longer.

Australia weeks from a housing collapse, US report warns

Washington-based International Strategic Studies Association warns that Australian banks’ crackdown on foreign investor lending may precipitate a collapse in the apartment housing market:

“The banks clearly believe Australian real estate values will decline, so they are attempting to avoid that risk. They’ve learned from the US collapse that seizing real estate collateral is a no-win scenario when the volume is great and the market slow.”

“In so doing, they precipitate the market collapse but are less exposed to it.”

It comes after Australia’s richest man, billionaire property developer Harry Triguboff, warned that a “very significant” number of Chinese buyers were now failing to settle their off-the-plan units and urgent action was needed.

But Mr Triguboff, founder of Australia’s biggest apartment builder Meriton, warned the real risk was looming in the new wave of developments. As apartment price growth stalls or goes backwards, the risk of buyers walking away from their deposits grows.

Source: Real estate: Property price crash ‘six weeks’ away, US report warns

Hat tip to Macrobusiness.

The high-rise boom is over

From The AFR:

Macquarie Bank is planning to hit the brakes on lending to high rise and high density apartment dwellings in up to 120 postcodes around the nation amid growing fears about falling demand and oversupply. A confidential memo from the bank to brokers announces that from May 23 it will require a maximum loan to value ratio of 70 per cent, which means buyers will have to stump-up another 10 per cent deposit…

Leith van Onselen:

Macquarie’s latest actions, of course, also follows curbs by other major lenders aimed at mitigating exposure to high-rise developments, including:

  • tightening of lending criteria….
  • increased mortgage rates for investors; and
  • refusing to lend to overseas buyers…..

Every tightening of criteria by Australia’s mortgage lenders represents another nail in the high-rise apartment boom’s coffin.

Source: Macquarie joins high-rise lending crack-down – MacroBusiness

APRA gives the RBA some wiggle room | Business Spectator

Robert Gottliebsen predicts further rate cuts from the RBA:

Given that Australian interest rates are higher than other countries of similar standing, money is now flowing Down Under which works to boost the currency and some are forecasting that the exchange rate could rise as high as US80c.

Thanks to APRA, the Reserve Bank can now attack the currency with lower rates without the risk of putting a rocket under house prices.

Source: APRA gives the RBA some wiggle room | Business Spectator

Hat tip to David Llewellyn-Smith at Macrobusiness

Axe negative gearing for a healthier property market | Saul Eslake

Thanks to Ody for posting this on IC forum. I feel it is worth repeating here because of the current debate around negative gearing.

Axe negative gearing for a healthier property market
Apr 25, 2011: Saul Eslake

The property market would look a lot healthier without it, writes Saul Eslake.

For almost a quarter of a century, successive Australian governments have, with varying degrees of enthusiasm, sought to promote higher levels of participation in employment, and higher levels of personal saving.

These are both worthy objectives, ones which public policy should seek to promote. It’s therefore surprising that successive governments have not merely been content to maintain a tax system that taxes income from working and saving at higher rates than those at which it taxes income from borrowing and speculating, but have either increased the extent to which income from borrowing and speculating is treated more favourably by the tax system, or explicitly rejected sensible proposals to balance incentives between the two as Wayne Swan did in May last year when ruling out recommendations made by the Henry Review.

Under the taxation system, income from working – that is, wages and salaries – is taxed at higher marginal rates than any other kind of income: 31.5 per cent for most Australians with full-time jobs (earning between $37,000 and $80,000 a year), 38.5 per cent for those earning over $80,000 a year and 46.5 per cent for those earning over $180,000 a year.

Income from deposits in banks, building societies and credit unions is taxed at the same marginal rates.

For those contemplating entering, or re-entering, paid employment (say, after a period of caring for children or aged parents) the impact of tax on income from work can result in effective marginal tax rates of close to, or even over, 60 per cent, on what are quite modest levels of income. The Henry Review concluded that ”some people [are] likely to reduce their level of work as a result” of these very high effective marginal tax rates. This may be one reason why the workforce participation rates of women with children, and older people, are lower here than in other OECD countries.

By contrast, income from most forms of investment, other than interest-bearing deposits, is typically taxed at lower rates than similar amounts of income derived from working. Income from saving through superannuation funds, and from ”geared” investments (that is, the purchase of assets funded by borrowing) is especially lightly taxed.

The review calculated that, for a top-rate taxpayer, the real effective marginal tax rates (after taking account of inflation assumed to average 2.5 per cent per annum, and the time at which tax is payable) on income earned from superannuation savings or highly-geared property investments are actually negative, while the real effective marginal tax rate on interest income from deposits can be as high as 80 per cent.

Very few other ”advanced” economies are as generous in their tax treatment of geared investments as Australia is. In the United States, investors can only deduct interest incurred on borrowings undertaken to purchase property or shares up to the amount of income (dividends or rent) earned in any given financial year; any excess of interest expense over income (as in a ”negatively geared” investment) must be ”carried forward” as a deduction against the capital gains tax payable when the asset is eventually sold.

In Australia, by contrast, that excess can be deducted against a taxpayer’s other income (such as wages and salaries) thereby reducing the amount of tax otherwise payable on that other income.

The Howard government’s decision in 1999 to tax capital gains at half the rate applicable to wage and salary income, converted negative gearing from a vehicle allowing taxpayers to defer tax on their wage and salary income (until they sold the property or shares which they had purchased with borrowed money), into one allowing taxpayers to reduce their tax obligations (by, in effect, converting wage and salary income into capital gains taxed at half the normal rate) as well as deferring them.

As a result, ”negative gearing” has become much more widespread over the past decade, and much more costly in terms of the revenue thereby foregone. In 1998-99, when capital gains were last taxed at the same rate as other types of income (less an allowance for inflation), Australia had 1.3 million tax-paying landlords who in total made a taxable profit of almost $700 million.

By 2008-09, the latest year for which statistics are available, the number of landlords had risen to just under 1.7 million: but they collectively lost $6.5 billion, largely because the amount they paid out in interest rose almost fourfold (from just over $5 billion to almost $20 billion over this period), while the amount they collected in rent only slightly more than doubled (from $11 billion to $26 billion), as did other (non-interest) expenses. If all of the 1.1 million landlords who in total reported net losses in 2008-09 were in the 38 per cent income tax bracket, their ability to offset those losses against their other taxable income would have cost over $4.3 billion in revenue foregone; if, say, one fifth of them had been in the top tax bracket then the cost to revenue would have been over $4.6 billion.

This is a pretty large subsidy from people who are working and saving to people who are borrowing and speculating. And it’s hard to think of any worthwhile public policy purpose which is served by it. It certainly does nothing to increase the supply of housing, since the vast majority of landlords buy established properties: 92 per cent of all borrowing by residential property investors over the past decade has been for the purchase of established dwellings, as against 82 per cent of all borrowing by owner-occupiers.

For that reason, the availability of negative gearing contributes to upward pressure on the prices of established dwellings, and thus diminishes housing affordability for would-be home buyers.

Supporters of negative gearing argue that its abolition would lead to a ”landlords’ strike”, driving up rents and exacerbating the existing shortage of affordable rental housing. They point to ”what happened” when the Hawke government abolished negative gearing (only for property investment) in 1986, claiming that it led to a surge in rents, which prompted the reintroduction of negative gearing in 1988.

This assertion has attained the status of an urban myth. However it’s actually not true. If the abolition of ”negative gearing” had led to a ”landlords’ strike”, then rents should have risen everywhere (since ”negative gearing” had been available everywhere). In fact, rents (as measured in the consumer price index) actually only rose rapidly (at double-digit rates) in Sydney and Perth. And that was because rental vacancy rates were unusually low (in Sydney’s case, barely above 1 per cent) before negative gearing was abolished. In other state capitals (where vacancy rates were higher), growth in rentals was either unchanged or, in Melbourne, actually slowed.

Notwithstanding this history, suppose that a large number of landlords were to respond to the abolition of negative gearing by selling their properties. That would push down the prices of investment properties, making them more affordable to would-be home buyers, allowing more of them to become home owners, and thereby reducing the demand for rental properties in almost exactly the same proportion as the reduction in the supply of them. It’s actually quite difficult to think of anything that would do more to improve affordability conditions for would-be home buyers than the abolition of ”negative gearing”.

There’s absolutely no evidence to support the assertion made by proponents of the continued existence of ”negative gearing” that it results in more rental housing being available than would be the case were it to be abolished (even though the Henry Review appears to have swallowed this assertion). Most other ”advanced” economies don’t have ”negative gearing”: yet most other countries have higher rental vacancy rates than Australia does.

I’m not advocating that ”negative gearing” be abolished for property investments only, as happened between 1986 and 1988. That would be unfair to property investors. Personally, I think negative gearing should be abolished for all investors, so that interest expenses would only be deductible in any given year up to the amount of investment income earned in that year, with any excess ”carried forward” against the ultimate capital gains tax liability. But I’d settle for the review’s recommendation, which was that only 40 per cent of interest (and other expenses) associated with investments be allowed as a deduction, and that capital gains (and other forms of investment income, including interest on deposits) be taxed at 60 per cent (rather than 50 per cent as at present) of the rates applicable to the same amounts of wage and salary income.

This recommendation would not amount to the abolition of ”negative gearing”; it would just make it less generous. It would be likely, as the review suggested, ”to change investor demand towards housing with higher rental yields and longer investment horizons [and] may result in a more stable housing market, as the current incentive for investors to chase large capital gains in housing would be reduced”.

Sadly, these recommendations were among the 19 that the Treasurer explicitly ruled out when releasing the review last year. That makes it hard to believe that this government (or indeed any alternative government) is serious about increasing the incentives to work and save – or at least, about doing so without risking the votes of those who borrow and speculate, in effect subsidised by those who don’t, or can’t.


Saul Eslake is a Program Director with the Grattan Institute. The views expressed here are his own.

Saul’s suggestion of carrying forward losses rather than writing them off against other income is a good one. But I would go a lot further with tax reform:

  • a 10% flat rate of tax on all income;
  • 10% corporate tax rate;
  • 10% tax rate for super funds;
  • no capital gains discount and no inflation adjustment;

While a comprehensive 10% tax on all income and capital gains would raise a substantial sum, there is bound to be a shortfall compared to the current system. My solution would be a land tax (similar to local council rates), excise taxes (alcohol, petrol and tobacco), and a flat rate of GST on all goods (including basic foods and medicine) to balance the budget.

Some would argue that this would increase the tax burden for the poorest families, but that could easily be addressed through food stamps or “rent stamps” for families on welfare. Land tax is a highly progressive (the opposite of “regressive”) tax that is closely correlated to wealth rather than income. The overall aim would be to encourage GDP growth by removing the burden of a complex income tax system with high marginal rates that serve as a disincentive to create additional income. Simplicity would improve fairness, minimize avoidance and reduce the cost of reporting and administration.

….Don’t hold your breath.

Can ‘New’ Keynesianism Save the Chinese Economy? | The Diplomat

Excellent summary of China’s growth dilemna by Dr Yanfei Li, Energy Economist at the Economic Research Institute for ASEAN and East Asia (ERIA) [emphasis added]:

To conclude, national capitalism, which aims to help the Chinese economy move up the global value chain through technological catching up, can be considered part of the essence of the “new” Keynesianism – in other words, the Chinese approach to intervention in the current economic downturn. It will certainly continue to make significant progress in certain well-targeted areas, given enough time. However, there are two key dimensions to measuring how successful the strategy will be. One is the timeline: how long it takes for such efforts to be translated into significant productivity gains for the whole economy. Second, whether or not these selected areas, especially AI and robotics, can bring about a major productivity boost as seen with the IT boom in the 1990s and early 2000s.

In addition, national capitalism, a centralized strategy, is an intrinsically high-risk approach to technological development. Even with well-informed decisions, such as the case of Japan in developing HDTV, there are always surprises. The Chinese government can only hope that it has chosen the right technologies to pursue.

Finally, it is worth mentioning that the other part of China’s “New” Keynsianism, namely the One Belt One Road initiative, which is about exporting the products and services of over-capacity, infrastructure-related industries overseas, also seems riskier than usual. Put another way, if these proposed infrastructure projects in targeted developing countries were attractive and low risk, they would have been financed and done. The fact that they are not itself implies higher risks are involved.

At this point, policymakers must look inward: They must identify and implement all necessary reforms to improve the micro-level efficiency of the Chinese economy. And this always implies the importance of truly open, competitive, transparent and fair markets for all industries. That is a vastly superior approach to the Ponzi game of emphasizing ways to manipulate the property market to keep prices climbing ever higher.

Source: Can ‘New’ Keynesianism Save the Chinese Economy? | The Diplomat

Australia exports its “growth” model

…..recent economic policies in China appear to have overlooked “productivity” – the essence of economic growth – entirely and focused instead on encouraging the sale of more houses and apartments at steadily rising prices.

Australia has finally exported its economic “growth” model 😉

Source: Can ‘New’ Keynesianism Save the Chinese Economy? | The Diplomat

Australia: Housing slowdown

From Westpac’s Red Book:

….the situation around housing does appear to be shifting. We highlighted a sharp fall in the ‘time to buy a dwelling’ index as last month’s most significant development, warning that unless there was an equally sharp reversal in Aug it would likely mark the beginning of a further leg to the housing slowdown. The Aug update posted a solid but insufficient reversal. Home buyer sentiment does appear to be breaking lower and a further weakening in activity is now likely towards year end…..

Falling retail sales and freight activity: Cause for concern?

The rally in bellwether transport stock Fedex was short-lived and it is once again testing primary support at $164. Declining 13-week Twiggs Momentum, below zero, warns of a primary down-trend. Breach of support would confirm, suggesting a broad slow-down in US economic activity.

Fedex

The Freight Transportation Services Index reinforces this, declining since late 2014.

Freight Transportation Services Index

But the LoDI Index contradicts, continuing its climb.

LoDI Index

The LoDI Index uses linear regression analysis to combine cargo volume data from rail, barge, air, and truck transit, along with various economic factors. The resulting indicator is designed to predict upcoming changes in the level of logistics and distribution activity in the US and is represented by a value between 1 and 100. An index at or above 50 represents a healthy level of activity in the industry.

Growth in retail trade (excluding Motor Vehicles, Gasoline and Spares) also declined for the last two quarters but remains above core CPI.

Retail Trade ex-Gasoline, Motor Vehicles and Spares

On a positive note, however, light motor vehicle sales are climbing.

Light Motor Vehicle Sales

New building permits for private housing retreated in July but the trend remains upwards and new housing starts are increasing.

Housing Starts and Building Permits

Overall construction spending is also rising.

Construction Spending

Solid growth in spending on durables suggests further employment increases. This makes me reasonably confident that retail sales and freight/transport activity will recover. All the same, it would pay to keep a weather eye on Fedex and the transport indices.

[August 19th – This post was updated for Fedex and today’s release on Housing Permits and New Building Starts]

Dad’s Army fumbles housing affordability | Macrobusiness

By Leith van Onselen — Published with kind permission from Macrobusiness.

Broken Window

After his shoddy effort yesterday defending Australia’s giant superannuation rortDad’s Army’s Robert Gottliebsen (“Gotti”), has backed Treasurer Hockey’s proposal to allow young home buyers to raid their superannuation accounts to purchase their first home:

Joe Hockey’s idea to allow first home buyers to use their superannuation to break into the housing market is not stupid…

Most young people in Australia are finding it impossible to gain a first home… we are watching a fundamental shift in the Australian landscape with huge implications for the intergenerational problem…

[Last weekend]…I found myself in the company of a typical first home buyer in today’s market… They can just manage a house or larger apartment but they are saddled with a huge mortgage…

So why would we not say to that couple: “you can invest up to $50,000 of your superannuation in your first home…

A whole generation of Australians could retire without a house because they are unable to get into the market…

A question, Gotti: What do you think the extra demand from first home buyers (FHBs) accessing their super would do to house prices? That’s right, it would raise them, making the scheme self-defeating, much like FHB grants did.

Meanwhile, young people’s retirement nest eggs would be put at risk, potentially increasing their reliance on the Aged Pension (increasing the burden on future taxpayers).

Thankfully, Business Spectator’s young gun, Callam Pickering, understands these issues, penning the following rebuke today:

Australia’s approach to housing is full of misguided policies and dumb ideas…

Australian housing policy can best be viewed as a remarkably successful anti-Robin Hood scheme. We take from the poor (usually those under 40) and give it to the wealthy (often but not always ‘baby boomers’).

Over the years we have introduced all sorts of dodgy schemes to continue this rort…

Allowing younger Australians to use their superannuation for a housing deposit would have a similar effect to the FHOG… It certainly did nothing to boost home ownership…

Exactly. How about policy address the root causes of unaffordable housing – tax lurks, supply constraints, loose capital rules, and over-investment by super funds – rather than applying a band aid solution that will impoverish young people further and fill the coffers of Gotti’s rent-class?

Colin’s Comment: In 1850 Frédéric Bastiat wrote an essay Ce qu’on voit et ce qu’on ne voit pas (That Which Is Seen and That Which Is Unseen) which describes the common mistake of politicians, economists and the general public when devising or assessing economic policy. They focus on the immediate, visible benefit and fail to consider the unseen, hidden costs.

Here is a simple video by Sam Selikoff that explains Bastiat’s Broken Window fallacy:

Irrational Exuberance Down Under | Bloomberg View

From William Pesek:

Lindsay David’s new book on Australia deserves a medical disclaimer: Reading this will greatly raise your blood pressure.

In “Australia: Boom to Bust” David sounds the alarm about an Australian housing bubble he argues makes the 12th-biggest economy a giant Lehman Brothers. His thesis can be boiled down to the number 9 — the ratio of home prices to income in Sydney. The multiple compares unfavorably to 7.3 in London, 6.2 in New York and 4.4 in Tokyo. Melbourne is 8.4.

Read more at Irrational Exuberance Down Under – Bloomberg View.

Houses overvalued by up to 30 per cent, says ex-RBA official

From Christopher Joye:

One of Australia’s top economic experts, Jeremy Lawson, says the ­housing market is 20 per cent to 30 per cent overvalued and has left Australia vulnerable to a big international ­economic shock.

Mr Lawson is the global chief ­economist of Standard Life, a massive British fund manager with $460 billion in assets under management. He was previously a senior economist at the Reserve Bank of Australia and the OECD, and in 2007 advised then ­opposition leader Kevin Rudd…

Read more at Houses overvalued by up to 30 per cent, says ex-RBA official.

GOLDMAN: Here’s The Simple Reason We’re Probably Not About To Have Another Huge Crash | Business Insider

From Joe Weisenthal:

Historical analysis of past big busts done by top economist Jan Hatzius and Sven Jari Stehn shows that while there is growing risk of a stock market drop because of the big rally we’re missing one of the key preconditions needed for a true bust: high credit growth.

They write: “[C]redit growth is the most important predictor of house price busts, especially when we focus on busts that involve a recession. House price busts have also tended to follow periods of high inflation, high equity volatility and large current account deficits, although all of these effects become less pronounced when we focus on recessionary busts….”

via GOLDMAN: Here's The Simple Reason We're Probably Not About To Have Another Huge Crash | Business Insider.

Platinum founder warns on property “act of faith”

ScreenHunter_3505 Jul. 29 08.50

By Leith van Onselen

The founder of Platinum Asset Management, billionaire investor Kerr Neilson, has released an interesting report warning about Australia’s frothy house price valuations and the risks of a correction once “conditions change, [and] a lot of the assumptions are found wanting”.

The report highlights four “facts” about Australian housing:

1. Returns from housing investment are often exaggerated and flattered by inflation.
2. Holding costs of rates, local taxes and repairs are estimated to absorb about half of current rental yields.
3. Long-term values are determined by affordability (wages + interest rates).
4. To be optimistic about residential property prices rising in general much faster than inflation is a supreme act of faith.

It then goes on to examine each of these facts.

On returns, the report notes that “the rise in the price of an average home in Australia…[has] been about 7% a year since 1986. In dollar terms, the average existing house has risen in value by 6.3 times over the last 27 years. No wonder most people love the housing market!”

But rental returns have gotten progressively poor:

…we earn a starting yield of say 4% on a rented-out home or if you live in it, the equivalent to what you do not have to pay in rent. But again, looking at the Bureau of Statistics numbers, they calculate that your annual outgoings on a property are around 2%. This takes the shape of repairs and maintenance, rates and taxes, and other fees. This therefore reduces your rental return to 2%, and what if it is vacant from time to time?

And the prospect for future solid capital growth is low due to poor affordability:

…the last 20 or so years has been exceptional. Australian wages have grown pretty consistently at just under 3% a year since 1994 – that is an increase of about 1% a year in real terms.

Affordability is what sets house prices and this has two components: what you earn and the cost of the monthly mortgage payment (interest rates).

…even though interest rates have progressively dropped, interest payments today absorb 9% of the average income, having earlier been only 6% of disposable income.

ScreenHunter_3506 Jul. 29 09.21

Today, houses cost over four times the average household’s yearly disposable income. At the beginning of the 1990s, this ratio was only about three times household incomes. As the chart over shows, this looks like the peak.

ScreenHunter_3507 Jul. 29 09.22

Finally, the report argues that for Australian home prices to significantly outpace inflation over the next ten years, as they have in the past, “would require a remarkable set of circumstances”, namely a combination of:

1. Continuing low or lower interest rates.
2. Willingness to live with more debt.
3. Household income being bolstered by greater participation in the income earning workforce.
4. Average wages growing faster than the CPI.

The last point is improbable seeing that wages and the CPI have a very stable relationship, while the other points are not very likely.

Reproduced with kind permission from Macrobusiness.