The Great Australian (ponzi) Scheme

Back in February 2008, while the so-called GFC was taking hold I posted at length stating several reasons why I believed the Australian Housing (bubble) market was destined to burst. This post will extend on previous thoughts.

Raise your hand if your living the Great Australian Dream?

In past decades the Great Australian Dream became reality for many who rode the debt wave of the 1970s, 80s and 90s. The dream was an expression of financial security as nothing was "as safe as houses". Fast forward to today and Generations X, Y, and Z have little more than a pipe-dream of affordable living and affordable mortgages. We have to try to keep up with the Jones (Baby Boomers), or complain from outside (like i'm doing here). For now, some younger Australians may do well in the short term by embracing government first-home owner handouts, multi-decade low interest rates and other incentives to try to live the dream... and for now Australia is apparently defying gravity. I believe the dream will cause long term indigestion for some, for decades to come if people do not have a backup plan once asset deflation hits Australia on mass. Liquidity on hand will be king (gold/silver not Australian Dollars).


2009 – house prices hesitate and take off again.

Australian house prices ended up rising 1http://scottreeve.blogspot.com/2009/02/beware-australian-housing-debt-bubble.html, the fourth highest growth rate in the world behind Hong Kong, Mainland China, and Israel. However, globally house price deflation continues with house prices falling by 3.8 per cent, led by Ireland, Dubai and Eastern Europe. In my post last month, there is an excellent graph highlighting the next wave of delinquent mortgages on the way (1 in 7 trouble). China will follow, and i'll post more extensively on its problems.

Chart 1:
source: Australian Financial Review, March 2010

Chart 2: Australian house prices by city
source: ABS

Chart 3: The dip and the rebound...
source: ABS

The great Australian ponzi scheme continues upwards again. The combination between unprecedented population growth, low housing starts, government handouts, very low (central-bank manipulated) interest rates, and double-digit M3 inflation growth in the system (during the GFC period) ensured that there would be enough fuel to get more buyers into the Australian housing market. Externally, more and more money is coming from businessmen in China, India and elsewhere whom currently see Australia as a place to invest their savings for a return.

Lets examine each of these issues more closely.

A) unprecedented population growth

Chart 4: 300,000 to 400,000 net new people each year now... lets make the aging population problem (and hospitals) worse.
source: ABC News

Chart 5: Govt: "Even if there wasn't a "real" shortage... lets create one"...
source: ABC News

That's a lot more people that need to consume and a roof over their head. A lot more people that might be bringing valuable skills to Australia right now (a quick fix? ...), but eventually will also add to the hospital cues (and potentially unemployment ques when the economy goes pear shaped). The aging population is still aging!

B) Housing Starts manipulation

As the following graph demonstrates, the three levels of government have successfully been manipulating the supply-side of the housing market, by staging land releases. Arguably, the three levels of government in Australia are the most addicted to keeping Australian housing prices upright, and the most to loose when asset-deflation sets in. Primarily, strong price growth in housing equates to overall consumer confidence in the market, and ultimately confidence in government economic management. Further, local governments remain fixated on housing rates to raise revenue to spend on local roads, while revenue-deprived state governments grow increasingly reliant on land and stamp duty taxes. A blow in confidence in the housing market is a blow to government revenues (direct taxation), but ultimately a total decline in confidence will flow through to less employment (income tax), business profitability etc.

Chart 6: It's in Government interest to not flood the market with too much land...
source: ABC News (RBS data)


C) Government handouts – 1st homer owner loans

In the first stimulus package (A$10.4bn) announced in October 2008, the Rudd Government introduced a First Home Owners Boost to go onto of the First Home Owners Grant. With interest rates cut to four decade lows, this just added further candy to the honey pot to entice young Australians into the housing market. I'm a graph person, and I found the following interesting to decipher. Government's throwing money at problems just disrupts market behaviour. When the Government intervention is removed, the market goes back to levels before their intervened.

Chart 7:
source: Australian Financial Review (analysis added)


D) Very low interest rates

Unfortunately, the four decade low interest rates set by the Reserve Bank of Australia has encouraged more and more Australian to take on ever larger mortgages. Lowering interest rates has had a very significant influence on keeping Australia’s housing prices upright during the GFC and post-GFC period. If the RBA did not intervene in the market to lower interest rates (essentially adding more liquidity, more Dollars to the market), than many Australian’s would not have entered the housing market, or bought addition properties. The RBA is nothing more than a market manipulator, to manipulate investors decisions and to disrupt real market information.


E) Double-digit M3 inflation growth

In one of my first posts in September 2008, I talked about money supply growth and that it was growing at the fastest annual rate since the 1970s. This was in part due to the housing bubble that has continued. But the dip in housing between March 2008 and March 2009, the drop in confidence during the GFC period, the rise in unemployable and underemployment,, and the reduction in bank lending in Australia cooled M3 growth. Right now the annualised rate is back to 5.7 per cent. So the volatility continues. I expect M3 to grow strongly once again (similar to 1970s), and ultimately will go crazy as Government's get desperate to bail out certain industries... Inflation always has a 12-18 month time lag... so even though it may be growing more slowly now, the overall costs of living continue to rise. I don't see milk or rents going down..


Other interesting tid bits:

Steve Keen walks to Kosciuszko from Canberra


Where to from here?

May 2010, the sharemarket is looking shaky with the Dow Jones breaking back below 10,000 point level. Housing market quarterly growth continues in Australia for now... But I ask, what has structurally changed from 2-3 years ago? Structurally nothing has changed in the world since before, during and after the GFC. The United States only continues to live beyond its means because it has the world reserve currency, and can print its way out of trouble for now. Europe, Japan and others have held up until now because confidence in private and government debt has been suffice to keep the current ponzi-fiat-monetary system going. People are waking up to this, and volumes of gold, silver and other so-called "relics" sales are going through the roof (mint-door sales). Real estate markets worldwide continue to fall in local-currency prices - Hong Kong, Mainland China, Israel and Australia are still the exception... for now. Deleverage of over-inflated asset prices will continue (derivatives....), and many more AIG, Lehman's are around the corner - this time Government names will be added to the list (just not officially). Australia looks good for now, but this can quickly change over night. Putting all our eggs in the one basket - superannuation, real estate and relying on exporting commodities to China will inevitably cause major problems for us (Australia). China's centrally planned economy will blow up, they cannot spend, spend, spend, just like the US tried to do with retail consumption and sub-prime. Populating, (retail) consumption and inflating our way through the GFC appears on face-value to work, but it is only postponing our problems: Aging population, consuming the future today (we have no private savings), and increasing our costs of living by diluting our money supply. Now is the time to find value in markets....... I don't think the next 20 yrs will be like the last 20 yrs. Printing money can only cover up so much for so long...

The great Australian dream will turn out to be nothing more than the Great Australian Ponzi Scheme.

Scott

House Price Expectations – May 2009

The latest Westpac–Melbourne Institute Sentiment Survey asked an extra question this month on consumer expectations for house prices over the next 12 months.

All in all, across all categories consumers are currently balanced between those expecting a fall in price, those expecting a rise, and those who think prices will stay around the current levels.

What is most interesting from the survey:

Chart 1:
By State:
- Consumers in NSW and Vic were notably more bullish on prices with a net 6.9% and 2.1% expecting prices to rise respectively.
- Conversely the Resource rich states of Queensland and Western Australia were the most pessimistic. WA had the highest proportion of 'extreme' pessimists with 9.4% of respondents picking a decline of 10%+.


Chart 2:By household income:
- Those on low incomes ($21 to $30K p.a) were the most optimistic of house price increases, while those with an annual income of $81 000–$90 000 were the most pessimistic.


Chart 3:
By Age Group:
- Generation X and Y continue to be the most optimistic age group (those aged 18 to 34 in the survey) expecting house prices to rise.
- Those aged 45 to 54 on balance expect house prices to decline in the next 12 months.

Concluding statement from survey:

“Despite record low interest rates and rising rental yields, demand from investors has remained subdued to date. Price expectations appear to have been the crucial 'missing ingredient' with potential buyers in this segment still clearly very wary about the potential for significant price declines.”

What can be drawn from this?

This closing statement (above) from the Westpac–Melbourne Institute survey is spot on. I have been arguing about this “missing ingredient” for some time. It is the elephant in the room which many would-be home buyers have not been taking into consideration. More importantly, I would go further and say that purchasing power expectations is the missing ingredient with potential home buyers. I expect both price and purchasing power (relative to other investments) to continue to decrease for Australian houses.

Unsurprisingly the younger generations are those who continue to be most optimistic about future house prices. After all, we are the generation which has been offered free home owner grants on a platter from the Federal and State Governments. Most of us under 35 are too young to remember the last recession in the early 90s. Why would we expect the future to be worse? We have been conditioned to believe the economy will always get bigger and better.

The Baby Boomer generation, those who have a lot more of the property, have more buying power than the younger generations (due to nearing their working life as opposed to starting) and are more pessimistic about house prices. This should be of considerable concern. This demographic has a lot more financial leverage than the X & Y generations. When sellers outnumber buyers (just on demographics) there is a long-term problem for properties and business prices.

I also discussed previously on my blog in more depth on the great Australian housing bubble (see here). I stated that the resource states would be the first to really feel housing price pain. I used the example of a person earning over $100,000 per annum driving a truck at a fly-in fly-out iron ore mine in Western Australia. This person took on a large mortgage in inner Perth on the expectations that they would continue to work in the $100K job for many years to come. As expected, just like the mining bust, Perth is now out in front leading the housing crash (in both actual house price falls and future price fall expectatiosn). Over the longer term, I believe Canberra will be the last capital city to experience the worst of the falls due to it’s reliance on Government jobs, rather than business-oriented jobs, which is what the economy really needs. It is by no means immune. All house prices have a common denominator - debt.

- Scott

But house prices are supposed to always go up…

The latest ABS quarterly House Price Index (March 2009) for established houses show continued falls in five of Australia’s eight capital cities.

• The average decline across the eight cities for the 12 months till March 09 was – 6.7 per cent.
• The House Price Index has now fallen for the past four consecutive quarters.
• On an annual basis, only Darwin and Hobart prices have increased in price.
• Perth continues to be the worst performing market with a quarterly fall of – 3.6 per cent, with an annual fall of – 10.1 per cent.

Chart 1: Year on year and quarterly established house prices by capital city
The following graph gives a better picture of what has been happening to Australian house prices in the last 5 years.

Chart 2: Year on year Australian established House Prices
Source: ABS

But housing prices are always supposed to go up… right?
They said, "Buy now, or be priced out... FOREVER"

Cheers
Scott

Australian house prices fall average $150K at auction

The strongest signs yet of the popping of the largest housing bubble in Australian history are gaining traction. The Australian reported yesterday (ABS data):

HOME prices have crashed across the country, with the number of properties sold at auction falling dramatically in the first three months of the year.

The Australian Property Monitors group says Sydney and Perth showed the sharpest falls, with average prices dropping by more than $150,000.

The top end of the market has been labelled as "dead".

The falls are based on 1st quarter 2009 vs. the 1st quarter 2008 and are based on auction values.

Average price changes by city (1st Qtr 2009)

Sydney – $616,237 (from $786,682),
Down 22%
(1742 homes sold vs. 2230)

Melbourne - $476,677 (from $513,304),
Down 8%
(2251 homes sold vs. 3211)

Brisbane - $439,000 (from $596,000),
Down 26%
(195 homes sold vs. 350)

Adelaide - $372,000 (from $452,000),
Down 18%
(123 homes sold vs. 598)

Perth - $372,000 (from almost $572,000),
Down 49%
(34 homes sold at auction over last 3 months)

The above figures are based on auctions. As the following numbers show, liquidity has fallen out of the auction market. The above data may not represent what many houses are selling for at the lower end of the market as they tend to be sold through private treaty.

Hello asset deflation!

Expectations have changed. Sellers are becoming more desperate. Buyers are drying up. This is asset deflation at its best. When the market is booming, buyers are in control and there is very small spreads (the difference between the buyers price and the sellers price). Indeed, buyers outbid each other which pushes the housing prices higher and higher each year. We have now hit reverse. The spreads have widened by $100,000s. People in Sydney may think their house is worth $800,000 – but the nearest buyer is around $600,000. Your house is only worth what the nearest buyer is willing to pay!

The lower end

The lower end of the housing market has also been very receptive to the extension of the first home owner grant in the last 12 months. Statistics show that first home buyers have been using the grant to lift their mortgage (DEBT) in many cases by more than the grant itself to secure the properties they really want. In a large amount of cases, over 90 to 95 percent of a purchase has been tied to a mortgage.

Chart 1: In February 2009, first home buyers accounted for 27 percent of all loans, with the average loan up 23 percent from a year ago.source: ABC News

Government Incompentance

Essentially the Government (Federal and States) and the banks have orchestrated a perfect storm. A sub-prime for young Australians. Young Australians who are at the start of their working life, have very little savings and tend to spend heavily on credit. It is also the generation more likely to be laid off in the current economic environment.

Wake up! About a month ago the Federal Labor Government shouted out across the chamber in Question Time preaching the success of the extension of the first home owners grant. The Prime Minister was first, followed by the Housing Minister, and the Treasurer. One by one they put on the record how proud they were at getting young Australians into the great Australian Dream. What they failed to mention was that added and abetted young Australians to acquire a life long debt burden. There are two tiers to the manipulation. A) let the RBA artificially lower interest rates (this is how the US got sub-prime remember?) B) Making the carrot bigger (First home grant). Governments worldwide are doing the same. In the end the market will win once again. Government's can't fight the market.

In addition, the May budget is almost here, and my bet is the first home owner grant will stay in place (possibly extended..) – just to try to keep the bubble going that little bit longer…

The Federal and State Governments will come to regret their words and actions. They have added more fuel onto Australia's largest housing bubble. Now the grants and the indebted mortgages will sink into the (asset) deflation black hole. There are lessons to be learnt here... Didn't anyone pay attention to the housing problems in the US, UK, European housing markets?

Australian media cover up?

Today and yesterday the media was more interested in a 27-year old entrepreneur from Melbourne who took on BrisConnections and gained a nice $4.5 million in only 5 months. However, there is next to nothing on this housing price/auction data in any of the major newspapers. It hasn't even made the top headlines in the evening news. What the hell is going on here? Auction prices have fallen 22% in Sydney in 12 months – and we've heard almost nothing… Is this selective censorship?

Regardless of the games of the Govt and media, the tide has well and truly turned on Australian property. Monetary policy and carrots have not and will not work this time.

~ Scott

Beware Australian Housing - the debt bubble will burst

(*Note: this post is a rough draft and will be edited/added to in the coming weeks. More new posts will come around mid March)

Australian Housing Bubble?

Almost no other economic topic right now, is as hot and contentious as the direction of Australian housing.

I have come to the conclusion that Australian housing prices must fall, indeed all property prices (commercial, industrial, rural). Demographics, low interest rates, "a housing shortage", historically low interest rates, first home owner grants - cannot stop the direction of the market forces. Both debt and lending are now imploding.

Housing prices, just like the sharemarket go through cycles between boom and bust. However, in Australia I believe we have become very complacent. We think property is a sure fire way to wealth. We believe its normal for prices to increase 5 percent or 10 percent per annum (just like we believe we are recession proof because we haven't had one since 1991). Throughout history house prices have always busted after times of major credit (debt) expansion. A crash will come to Australia soon - its just a matter of timing. Timing is everything.

As Warren Buffett once said,

"You only find out who is swimming naked when the tide goes out."

The tide is well on its way out. Full employment is the key for most individuals on whether they can weather the storm. For others the size of total debts will prove the Achilles heal.


Unaffordable Housing

Australia right now has amongst the most expensive and unaffordable housing in the developed world. The reason it's so unaffordable is that four letter word, D-E-B-T. As we have had economic good times since the early 1990s, individuals and banks have felt more and more comfortable to take on my risk and more debt. With such a long period of job security (for most), we foresee our future to be bigger and better than the past.

As an example I once used, during the mining boom, Perth had a stella rise in housing prices. Miners were flying in and out of Perth and getting paid over $100,000 p.a. to drive a truck. With more and more people on higher incomes, inevitably the housing prices in Perth rose strongly against all the other major cities. To secure their dream home close to the city, buyers out bid each other and took on larger mortgages. Now that the mining boom has come crashing down, where is a mine truck driver going to find a $100K job to meet their mortgage repayments?

Right across Australia, how can the retrenched workers keep their mortgages?
Banks whom are tightening who they lend to... would they now give a mortgage to a low-wage metals factory worker in Western Sydney?
All of a sudden in the last 6 months, Australian individuals and banks have changed their outlook from that of increasing wealth to a complete reversal. Alarm bells are ringing. Some are asking questions about the future. Too many think things won't get bad here. Just like the patriotism we see on US news networks, many Australians think "everything will be different for this time, the Australian economy is strong and resilient!"...

As chart 1 shows below. Real house prices have vastly outrun real wages for the last 25 years. Even more startling is rental yields have just been so low. Negative gearing is one of the big reasons why rents have remained much lower than where they should be (but I will save rent discussion for another time).

Chart 1: Australian Real house prices, wages, construction costs and rents.

Australian housing vs the world

Australia has the most unaffordable housing – study confirms

A group called Demographia released a 'Performance Urban Planning' report ranking property affordability across various countries. The report concluded that Australia has the most unaffordable housing of all the nations surveyed. The report simply used a ratio of Median House Price to Median Household income. A house is "Affordable" if the ratio is 3.0 or less. It's "Moderately unaffordable" if the ratio is 3.1 to 4.0. It's "Seriously Unaffordable" if the ratio is 4.1 to 5.0. And it's "Severely Unaffordable" if the ratio is 5.1 or more.

Results: Australia sports a ratio of 6.3, which is both "Severely Unaffordable" and "Seriously Daloob." New Zealand comes in next t 5.7, followed by Ireland at 5.4 and the U.K. at 5.3. Owing to its large number of metropolitan areas in which there is a wide variety of median prices and incomes, the U.S. nationwide ratio is just 3.2.

On a city basis: The Sunshine Coast in Queensland is the least affordable. The Gold Coast came third, behind Honolulu, and Sydney was fifth, behind Vancouver. Melbourne and Adelaide were equal 12th and were still less affordable than New York (14th), London (16th) and Dublin (32nd).

(More on this survey, including a table of least affordable cities can be seen at Daily Reckoning)


Graphs of concern:

To put more of a perspective on Australia's housing bubble the following graphs compare Australia to some of the other developed countries, which have seen large declines in recent years.

Chart 2: Compared to the United States, Australian households are much more weighed down by household debt.

Chart 3: House Index - Aus, US, UK

Chart 4: Like Japan?


And the big daddy of all graphs (also seen on Chris Martenson's economic crash coarse series)

Chart 5: The history of US housing (in inlfatoin-adjusted terms) since 1890.
The picture speaks for itself. The recent housing boom and crash in the US has been like no other before it. Notice the 1970s and 1980s bubbles came back to pre-bubble levels when it burst. The US is in completely uncharted waters. A graph of Australian housing would look worse than this chart.
Chart 6: This is what WhoCrashedtheEconomy worked out
Australian household debt

If we think subprime was a mess in the US, things could potentially get much worse in Australia when housing prices come down. Indeed, a recession (an ultimately a depression) in Australia is tied to Australian housing (more than anything else). We just have too much debt tied to housing (inflated mortgages)!

Household debt as a percentage of disposable income

Household debt in Australia is alarmingly bad as Alan Kohler pointed out late last year.

In Australia the total debt to GDP ratio is at 160 percent, compared to 100 percent in 2000 and 50 percent in 1980. Household debt to disposable income is over 150 percent, compare to 50 percent in 1990.

Chart 7: Australian vs US household debt
The US reached a height of around 130. Australia has gone over 160. It doesn't matter if we don't have a high level of sub-prime loans in Australia - we are up to our ears in debt.

Once Australia's unemployment rate reverses from around 4% (if you believe that number) and heads towards 6 or 10 percent, housing prices will come down. Australian's are over leveraged to their houses, by taking out huge mortgages to pursue the Australian dream. Few people have taken into consideration that they may loose their job along the way. With no sound income, many Australian's will have no choice but to foreclose on their mortgage. Banks won’t want to hold empty houses, so an avalanche effect can take place when the banks flood the market with discounted homes.

Housing market tends to crash after the sharemarket.........

Sell the holiday house first?

Last year just before Xmas, I was holidaying on the southern coast of New South Wales. The town was, Tuross Heads, a small beach house/fishing town near Bateman's Bay with a population of about 2,000 people. I have never seen so many houses for sale in one spot. In some streets it was nearly every second or third home with a "For Sale" sign on the front lawn. If people expect house prices to come down, is it plausible that people will sell their beach house/investment property first? Is this a sign of the top of the bubble? With one in every 2 or 3 houses for sale in the street, the first couple of sales would impact the selling price for all the other houses in that street. Perhaps this is one reason why property prices (like shares) can fall so quickly if sellers are massing at the front gate. It's better to get out early, then to get out after everyone else.

Since this trip, 'For Sale' signs have become common place around many towns and suburbs. When I went home for Xmas, I noticed nearly 1 in 3 homes/BnB's/holiday houses along a river stretch was for sale. This is a visual sign that things are shifting...

But Australia has record demand for housing!

Some argue that Australian household prices will continue to hold its ground or gain in value in the coming years because we have record immigration levels and demand for housing.

Chart 8: Alan Kohler ABC News 28 November 2008

For a while I felt this argument had some traction. I've come to realise that this will probably not be. If anything, strong housing demand will mean much higher rent prices in Australia. Strong demand does not mean higher prices. For instance, world silver prices are falling right now, but there is now a 10 to 16 week wait to take delivery of silver from a bullion dealer. Silver demand has never been stronger. Prices can disguise real value. There are always market manipulators at play trying to influence under-educated investors, and one of the worst in the housing market is the Australian Government.

2007: The falls have started

Despite record high immigration levels and strong support from first home buyers, Australian housing prices fell in all states except South Australia and the NT.

Chart 9: House Prices 2008
Chart 10: Doesn't matter how you measured it - Australian housing prices will continue to fall.

Australian Government encouraging first home buyers

The Australian Government continues to encourage (through handouts and stimulus packages) Australians to jump into the property market. Buying a property is big investment decision, and unfortunately many buyers do very little due diligence.

I believe the first home buyers grant is extremely irresponsible. (Will add more on this soon)


Housing Deflation - The key ingredient is bank lending (more to come on this section)

There must be liquidity of buyers in the market who can absorb selling pressures. If buyers dry up and widen their spread, price deflation will take hold. Once buyers expect prices to come down $100,000 or so, they will sit back and not participate. In effect you get price deflation (prices fall quickly because you only need a few sellers in the market
without liquidity - home financing + willing buyers (who can absorb selling pressures) - the market falls

In a housing bull market, buyers compromise to the seller. For example is a home is advertised as $500,000, but the nearest buyer is at $490,000 (the spread is $10,000), the buyer is more likely going to raise their offer to $500,000 to get in before someone else.

However in a housing bear market, sellers start to outnumber buyers. Price spreads widen because buyers are no longer willing to take on increased amounts of debt because of uncertainty in the job market and wider economic conditions (ie. what we have today). But the key is expectations. If buyers and sellers start to expect prices to go down (such as selling lots of for sale signs and data which shows this), sellers start compromising and sell to the nearest buyer. eg. if the seller wanted to sell for $500,000, but the nearest buyer is $450,000 ($50,000 spread), they they are likely to do so, particularly if they are forced to because they have no job and the bank repossesses the house. In effect we end up with price deflation (asset destruction) - buyer liquidity dries up and prices fall rapidly (like in the US housing market today).

Price deflation has already hit the Australian sharemarket, with many small stocks registering very few trades now, because buyers feel safer to stay on the sideline. Those holding stock also want to exit the market and will sell at almost any cost to get out and switch to an alternate investment. In the housing market, more pressure will come onto the rental market. Rents will continue to inflate, while the underlying asset value of the house will fall. In effect rental yields will become more attractive over time (as they have been historically low).

Chart 11: Interbank Lending



The value of Australian housing prices in Gold and Silver

A few blog posts back I measured the All Ordinaries in terms of Gold and silver which showed that the Australian sharemarket actually peaked in 1999. It has only been going up in fiat currency terms (until the last year). The same applies to Australian housing. Australian housing has peaked and made plateau (stage 3 consolidation) between 2001 and 2005.

Chart 12: Just like the sharemarket, gold gave early warning signs a few years ago.


The data I have (till 2006) shows that Australian housing has fallen by 38 percent in terms of gold.

In 1986 you needed 208 ounces of gold to buy an average Australian home. At the peak of
the cycle, in 2004 you needed 923 ounces of gold to buy an average Australian home.

(silver chart to come shortly)


Conclusions:

- Debt, debt, debt. Australian's have way to much and its tied to our home prices. The world will continue to witness destruction (deflation) of debt ridden assets. We have seen it in the sharemarket. I will ultimately come to property.
- The ability of banks to lend (debt) is paramount.
- On the buyers side – liquidity (amount) of buyers must be outnumber sellers for prices to hold (and continue to go up). If buyers expect prices to fall, they will widen their spreads and price deflation will set in.
- On the sell side – Unemployment levels are the key, however the type of employment in the economy is critical. If people go from full-time to part-time or casual, or no employment whatsoever, they will be most vulnerable to defaulting on their mortgage. These sellers will sell to the nearest buyer regardless of price offered.
- Holiday houses and the most expensive houses in the cities will be most vulnerable.
- Many regional communities that rely heavily on commodities could face dramatic price declines if the commodity prices and shipping movements do not rebound very soon.
- Perth is the capital city most at risk. Canberra is probably the least at risk. In the long run, all areas in Australia are not immune.
- Above all, do not rely totally on what the Government says, the media, or myself. Everyone must do their own due diligence and come to their on conclusions and act accordingly. The free market is emotionless and does not care if you make money or loose money. Take responsibility into your own hands.

Cheers
Scott


[The 4 Corners program had a look at how the financial crisis has hit Australia so far on Monday night. Worth a look]

Australia splurges on Melbourne Cup all the while...

Melbourne Cup & Interest Rate Cut

First Tuesday of Novemeber each year is Melbourne Cup - the race that stops the nation.

Only 30 mins before the race begun, the Reserve Bank of Australia (RBA) cut the official interest rate by 75 basis points to 5.25%. This follows a string of bad news starting to filter out about the fragility of the Australia economy. Despite all signs pointing to a economic recession ahead for Australia, we managed to spend over A$100 million on the Melbourne Cup day, a record amount. The winner of the cup was Viewed - at odds of 41 to 1 - Perhaps the same odds of Australia and the world going through a mild world recession.

It was Only a couple of weeks ago the Australia Government announced a $10.4 billion economic stimulus package, and in doing so, halved the avaliable surplus. Could it be that Australia spent a lot of its stimulus package on the gallops today... and whats left over will help pay for Xmas pressies. Afterall, the Government wanted to stimulate the economy. Perhaps they have helped filled the pockets of the bookies instead, and we all know that will somehow help GDP and employment figures...

Bad news Monday (3rd Nov)

Performance of Manufacturing Index (PMI)

The AiG Performance of Manufacturing Index was released yesterday which showed the worst result for manufacturing in Australia for 16 years (since the PMI started in 1992).

Summary:

- this month’s result reflects a combination of the uncertainties and loss of confidence associated with the worsening of the global financial crisis, slower world growth, particularly in the developed economies, and weaker domestic consumer demand.
- These factors were reflected in declines across all components of the Australian PMI® in October. Production fell for the fifth consecutive month and more strongly than in recent months. This reflected the ongoing decline in new orders, which fell for the sixth consecutive month. In line with the easing of production, employment fell for the eighth month in October and at a more rapid pace.
- On the positive side, input and wages costs growth eased significantly in October, while selling price growth also eased solidly.
- Inventories and supplier deliveries fell markedly. Exports fell.
- Manufacturing activity fell in all states.

Housing prices suffer record quarterly fall

Also yesterday the Australian Bureau of Statistics (ABS) released housing activity for the September 2008 quarter.

Last (Sept) Quarter:

- House prices fell by 3.3 per cent in Brisbane, 2.5 per cent in Canberra, 1.9 per cent in Melbourne, 1.8 per cent in Sydney, 1.1 per cent in Perth and 0.1 per cent in Adelaide.
- House prices rose by 0.7 per cent in Hobart and 0.1 per cent in Darwin.

For the 12 months till end of September 2008:

- Perth recorded the biggest annual fall in house prices of any capital city in the year to the September quarter, down 4.1 per cent compared with a 2.8 per cent increase nationally.
- Brisbane's 12 month growth is 5.6 per cent.
- Adelaide has the strongest housing market, growing at 9.7 per cent over the year.
- Melbourne grew by 8.1 per cent over the last year.

So the longer term growth numbers still look rosey and distort the falls over the last 3 months. If the Sept Qtrly figures continue, we could see falls in housing prices across Ausrtralia of 10-15 per cent (mininium) by this time next year.

My next post will go into more detail about the outlook for housing in Australia and why debt levels are of a huge concern...

Cheers,
Scott

(Lets hope my gloomy economic predictions are wrong like my Melbourne Cup picks - Zipping and Mad Rush)

Global Trade at Risk

The following is an article today from Alan Kohler. He and a few other commentators were talking about this issue a couple of weeks ago. It appears to have worsen significantly, and yet it doesn't even pop up on the nightly news or the front of main stream newspapers.

Kohler's articles can be viewed daily at: http://www.businessspectator.com.au

The global shipping crash continues to get worse and this morning’s GDP data shows the US recession is already deeper than 2001 and probably 1990-91 as well.

Meanwhile the International Monetary Fund seems determined to make the whole thing worse by imposing the most ruinous strictures on supplicant nations.

Yesterday the Baltic Dry freight rate index fell below 1000 for the first time in six years and last night it fell another 40 points to 885. In June the index was 11,900, so it has fallen 93 per cent in a few months – a crash far worse than anything ever seen in the stockmarket.

The spot daily rental for a Capesize ship is now $6365, down from $234,000 per day over the space of a few weeks. Maybe that previous price was absurdly inflated, but at $6365 it is just $365 above the average daily cost of crews and fuel.

As a result the world’s ports are filling with empty ships because shipowners can’t afford to run them, as well as some full ships because the owners of the cargo won’t unload without a bank letter of credit, which banks are refusing to supply.

Shipping companies are starting to file for bankruptcy in increasing numbers as they breach loan covenants, and a shipping researcher, Andreas Vergottis of Tufton Oceanic has told Bloomberg that a fifth of the world’s dry bulk companies may soon have negative net worth because the market for second hand ships has collapsed and the value of their fleets is below outstanding debt.

Like property-based loan agreements, shipping companies’ debt covenants have loan to value ratios that are typically 70 per cent. As the value of their fleets decline, banks are making margin calls.

Meanwhile, as expected, US GDP fell in the September quarter – by 0.3 per cent. The only reason it wasn’t worse was government spending, which added 1.1 per cent to the rate of GDP change. There was another 0.6 per cent from private inventories – that is, unsold goods.

In any case, US economic data is always rushed out quickly, based on guesswork, and then revised later. Most of the guesses in this morning’s figure look optimistic, so it is very likely to be revised downwards.

Even on this morning’s optimistic estimate, it is the first year-on-year decline in GDP since 1991, so this recession is already worse than 2001 and clearly has a long way to go.

And remember that in 1990-91 – and 1980 and 1973 and 1961 for that matter – the monetary and fiscal authorities were more or less in control. Or rather – they started it.

Those recessions were caused by central bank and government efforts to control inflation. This time it’s all about a spontaneous collapse in private sector credit and governments around the world are desperately trying to counteract its effects with interest rate cuts, liquidity injections and fiscal stimulus.

That is…all except the IMF. It is imposing the most horrendous conditions on bailout loans to bankrupt countries.

As the rest of the world’s official interest rates come down, Iceland’s this week went up 6 per cent, from 12 to 18 per cent, as a condition of its $US2 billion rescue package.

Hungary, Serbia, Belarus, Pakistan and Ukraine are now facing the most excruciating choice: default on their debts or ask the IMF for money at the expense of crushing their economies under the weight of a massive increase in interest rates.

As Ambrose Evans-Pritchard writes in last night's London Telegraph: “A deflationary strategy of this kind could prove counterproductive – or worse – if applied in enough countries simultaneously. It would defeat a key purpose of the rescues, which is to stabilise the global financial system.”

Meanwhile China, the world’s greatest creditor nation, is now cutting interest rates as its economy slows.

The emerging world in general has “recoupled” (if it was ever decoupled) and the removal of hedge fund investments in their currencies, government debt and sharemarkets will, in many cases, result in deeper recessions in those countries that in the US – where it all started.

Which is why global shipping has collapsed: it is the harbinger of the end of the era of trade, in which third-world labour costs kept first world inflation down and allowed interest rates to fall and stay low and debt to be increased to an historic degree.

That process of importing deflation (or, more precisely, disinflation) from developing nations – especially China and India – relied on trade: raw materials in; finished goods out.

The fall in freight rates for both dry bulk carriers and container ships is telling us that it’s over.

Australia is potentially in the most vulnerable position. Commodities could potentially be on the brink of collapse if ships do not start to move soon. Already we are currently witnessing Mount Gibson Iron (MGX.ax) in a trading suspension because China will not/cannot move its ships to buy MGX's iron ore. MGX is by no means a small Australian company. It is in the ASX100, and would be in the top 20 resource companies in Australia.

The fallout of a huge resources bust is almost unthinkable. A few zinc mines have shut (or reduced output) over the last few months in Australia. Now at current spot prices, even OZ Minerals Century Mine (formally Zinifex) near Mt Isa, the 2nd largest zinc mine in the world, is unprofitable at current prices. Commodity prices need to rebound quickly along with ship movements, or Australia will enter deep recession within a year. Commodities make up around 60% of Australia's exports, and it is no coincidence that the Australian Dollar has fallen by 40% in only a couple of months!

Picture this: A truck driver working in a mine in the Pilbara earning over A$100,000 p.a. suddenly looses his job because the mine shuts down. Only a year earlier he took out a mortgage on a new house in Perth. However, 100,000s of other people are in the same situation. Mines closing, exports decreasing. Australia hits recession and there are few jobs. The miner, who expected to maintain employment and a high income is suddenly unable to pay the monthly mortgage with no solid income. Property prices across Australia then start falling sharply on weak buyer demand and falling expectations.

This is a real possible situation which may hit Australia soon if the resources boom comes to a grinding halt which is increasingly looking more likely.

Scott