Posts Tagged‘global financial crisis’

Reserve Bank of Australia

The RBA Wants You To Spend, But Will You?

I wrote a post just last month that laid out the reasons why the banks would probably not be dropping rates independently of the RBA, even though the current funding climate could allow them to do so. Indeed current interest rates are comparable to when we were in the depths of the Global Financial Crisis however our, and the vast majority of others worldwide, economy is no longer struggling. These are things you don’t usually see going hand in hand because when times are good people like to borrow and spend which usually leads to a healthy credit market. It seems that punters are still wary of another GFC-esque situation as whilst the economy has vastly improve the desire for credit hasn’t which is quite odd, but nothing to be concerned about in the grand scheme of things (unless you’re a lender, of course).

Reserve Bank of Australia

It was for those reasons that many did not expect a rate cut from the Reserve Bank yesterday as all the pressures that prompted past cuts (decline in demand for Australian products, Eurozone Crisis, etc.) have run their course. It came as something of a shock then that they decided to cut another 25 basis points off the current cast rate bringing it to a record low 2.75%, dipping below even the lowest rate available during the height of the GFC. The rate decision release makes for some interesting reading as the reasons behind the decision aren’t the ones I was expecting.

The RBA acknowledges that the funding climate has improved dramatically with many of our larger trading partners undergoing periods of expansion. The Eurozone is still in recession although its effect on us is muted, largely thanks to the limited amount of trade with do with them. They also expect investment in the resources sector to reach its peak this year and so part of this rate cut could be a proactive move to encourage people to start investing in other areas before the resources boom starts to tail off. Inflation has remained within their target range being at 2.5% for the past year. However the major factor in cutting rates seems to come from the desire to encourage more spending and moving their savings into more productive asset classes.

It’s true that rate cuts take a while to work their way through the economy and the last year or so of cuts is still having an effect. Primarily this is due to relieving mortgage pressure which doesn’t yield benefits quickly but sustained periods of low rates will eventually lead to more consumer spending (as the RBA notes). This rate cut then appears to be more of a shock tactic rather than a long play, hoping to encourage people to either spend more or entice people into taking out mortgages at rates that will likely not be repeated for quite some time, boosting the credit industry. Additionally rate cuts always put a downward pressure on the Australian dollar which will help boost exports.

The ideas are sound as historically moving the cash rate downward does all the things that they’re expecting this current rate cut to do. However I’m a little sceptical as to whether it will have the desired effect this time around due to the circumstances we find ourselves in. The numerous cuts over the past 18 months, which were largely in reaction to the deteriorating conditions in the Eurozone, haven’t had the large impacts that they did during the GFC. Primarily this is because of how well insulated we are from said crisis but it also appears that Australian’s have lost their appetite for credit. Whilst its easy to lay the blame at the GFC for this I can’t help but feel there’s something else at play here, something which moving the cash rate won’t do much to alleviate.

This whole situation is a result of the weird financial climate we find ourselves in currently. Whilst I might not think the RBA is on the right track with this decision I don’t have any good solutions to the issues at hand because, as far as I can tell, what we have is a crisis of consumer sentiment, not a problem with the funding environment. It’s quite possible that this last dip will be the hair trigger for a major ramp up but I’ll remain sceptical for now as the previous cuts failed to bring that same idea to fruition, even if they were done for different reasons.

RBA Cash Rate 1993 to 2013

Hoping For RBA Independent Rate Cuts? Don’t Hold Your Breath.

The finance market in Australia is in a weird state at the moment. On the one hand we’re doing pretty good economically, with unemployment remaining low and our major trading partners still buying things from us despite our strong dollar. The finance market, specifically credit and lending, on the other hand looks much like it did back during the peak of the global financial crisis with lending rates at record lows. Now it’s not like this is completely unexpected considering that the Eurozone Crisis is still working itself out but favourable economic conditions and low lending rates rarely go hand in hand.

RBA Cash Rate 1993 to 2013

Indeed it’s gotten to the point where the Reserve Bank of Australia doesn’t believe they can effect much more change by lowering the official rate and will likely hold off on any changes until sometime next year. At the same time though banks funding conditions have continued to improve which has led to calls from industry bodies for them to start cutting their rates independent of the RBA. Banks have never been shy to raise rates outside of official RBA decisions but cutting them be something new for all of the major lenders, especially considering the rather turmutuous funding environment we’ve had to endure over the past 5 years.

Now no one would be expecting these cuts to happen now as there’s really no pressure on the market from either direction that would make such a move advantageous. Most industry analysts agree that within the next year however though conditions would be favourable for banks to do this. If this is the case then there’s a pretty simple method for checking to see if banks think that there’ll be a rate cut, whether by them/their competition or the RBA, within the next year. All we have to do is check the current fixed term rates and compare them with the current variable rates on offer and see what the difference is between the various fixed term lengths.

For this we’ll use fixed and variable rate home loans as they’re the best indicators of long term bank forecasting.

Right now the cheapest variable loan you can secure is about 4.99%, a bargain that we haven’t really seen since the deepest parts of the GFC. Whilst there’s quite a spread between the lowest and highest there’s a pretty good chunk of the market hovering around the 5.25% region so we’ll use that as our baseline for comparison. For a 1 and 2 year fixed loan it’s looking pretty similar with the rates basically remaining the same overall, although there seems to be more lenders willing to lock in at 4.99% for that amount time. It’s only at 3 years do we start to see much change when the average jumps up about 0.25% which is a pretty small increase and is essentially a hedged bet against any unforseen circumstances.

The take away from this is that by and large the banks don’t really expect the funding situation to change dramatically in the next couple years as their loan term loans aren’t really priced with that in mind. There are some examples of lenders offering very attractive rates around the 2 year mark (ones lower than their current variable rates) but they’re most certainly not the majority and consist primarily of smaller, non-bank lenders. Barring any drastic changes (like the Eurozone escalating again) I can’t see any indication that the banks are thinking of moving rates in any meaningful direction for the next couple years, nor do they expect the RBA to do similar.

This doesn’t really mean much unless you’re currently in the market for a new loan or refinancing but if you are then it means that the choice between variable or fixed is essentially moot at this point and you should go with whatever makes you feel the most comfortable. It’s actually a great time to get a home loan thanks to the wide spread stagnation of house prices and cheap funding which are set to continue for at least another year. Of course you probably shouldn’t dive in unless you’ve done the proper due dilligence but if you’ve been on the fence for a while I really can’t think of a better time to buy in the last 5 years.

Well apart from the darkest parts of the GFC, but that had a whole bunch of other issues associated with it.

RBA Cash Rate Historic Graph

I’m Not Sure Another Rate Cut Is Warranted.

If you’re a home owner with a variable rate mortgage the past year has been pretty kind to you with the RBA slashing a good 1% off the cash rate, an extraordinary amount of breathing room for many people. It’s also provided some relief for those who dived head first into the property market at the bottom of the Global Financial Crisis, taking advantage of the cheap rates, and over-extended themselves with a loan that was too big for them to handle comfortably. This in turn should be putting an upwards pressure on inflation as people spend more thanks to their incomes being freed up from mortgage payments however it seems that the past year of cuts wasn’t enough and the Reserve Bank of Australia might be lining up to cut rates yet again.

Futures markets have been pricing in a rate cut with a likelihood of 85% which means they’re almost certain that the RBA will cut rates in November. There are several plausible reasons for this like the government returning the budget to surplus and inflation coming in below the RBA’s target however some of the other reasons cited have me a little confused. Weaker currency prices aren’t fixed by rate cuts, they will actually make the currency comparatively cheaper, and citing them as a reason to cut rates would be counter-intuitive. I might be misinterpreting what the article means however as the currency trading rates are only casually mentioned.

The reason why this rate cut and not the ones preceding it have got my attention is the fact that with 1 more 25 basis point cut to the official cash rate we will officially be equal to the rates we saw back when the GFC was in full effect. Now we’re not exactly in the best of times at the moment with the Eurozone Crisis still playing out however we’re not in the midst of a global recession either with most developed countries, including the instigator of the last crisis, having several quarters of positive growth under their belt. The unemployment rate, whilst still being far above its pre-GFC minimum, has remained fairly steady in the 5% range over the past year as well which makes it even more confusing as to why the RBA would look to cut rates at this time.

Looking at their decision for this month where they cut 25 basis points off the rate it’s clear that they’re taking a pretty long term view and I’m not sure what’s changed in the weeks since then that could lead them to believe that they needed to drop rates to a record equalling low. The softer global economic outlook, lower commodity prices and low inflation are all valid reasons to drop the rate however they really haven’t changed in the past month and if another drop is warranted so soon after the previous one it could have easily been rolled into it, giving a single cut of 50 basis points. The RBA is usually reluctant to do rate cuts of that magnitude however (last time it happened was at the start of this year and prior to that it was the massive cuts due to the GFC) but the flip side of that is that the markets usually react better to larger cuts. I’m no economist though so there might be some deeper strategy to this that I’m just not seeing.

Considering the relative economic positions between the peak of the GFC and now it just seems odd that we need to have the cash rate at the same level. The global economy not hurting anywhere near as bad as it was at the same time all those years ago and whilst there are indicators that suggest a rate cut might be warranted it seems over zealous to drive them down to the same levels as when we were on the verge of recession. I’m most certainly not going to complain however as it only means good things for my current investments but I’m more interested in the underlying factors that might drive such a cut. I guess we’ll have to wait until November 6 to find out as anything up until then is going to be firmly in the realms of speculation.

Affordability, Statistics and the Australian Housing Market.

Before I get into what could be a slightly ranty post about the Australian property market I feel it’s prudent to mention that I’m an owner-occupier, investor and would be regarded as being particularly well off when compared to the average Australian. Thus my views may be somewhat skewed by the fact that I have a vested interest in the property market. However I believe that there’s a lot of disinformation out there about housing prices and what constitutes “affordable” property, especially when the entire market is boiled down to single figures. What I intend to show you is that whilst Australian property is more than likely above fair value this does not preclude the average Australian family from owning their own home, nor are first home buyers priced completely out of the market.

There’s been a report circulating recently from NATSEM that says we’ll need a decade of flat housing prices in order for them to come back to affordable levels. This sparked quite the reaction in the media, strangely lacking any direct finger pointing that usually accompanies issues like this. There’s no question that the last decade has seen some extremely wild growth in the Australian property market and for years people have been predicting the ultimate downfall of the Australian housing market. The Global Financial Crisis was supposed to be the trigger that sent property prices tumbling but it had the opposite effect, with extremely low interest rates pulling many into the market and increasing demand significantly. Now that the pressure is back on with interest rates at their pre-GFC levels the question of affordable housing is a hot topic, but it’s not all bad news for those chasing the Australian dream.

For starters let’s dive into the (thankfully unbiased) figures from the NATSEM report. On the surface it looks bad for Australia with the median¹ house price being a whopping 7.3 times that of the median income, 50% higher than what it was back in 2001. However whilst I believe using the median as the measure is by far more intellectually honest than other measures it does hide some important information from the reader. Although the median Australian house price might be $417,000 that also means that 50% of all Australian houses are valued somewhere below that particular line. For first home buyers this means that they shouldn’t be shooting to buy a house at the median price since there is an ample amount of stock available at a much cheaper price bracket. The houses above the median then are usually more suited to those looking to upgrade and not those trying to break into the market.

For interest’s sake I’ve done some calculations based on some typical scenarios. The first is a median income earner attempting to buy a median house with a typical interest rate:

  • Income: $57,000 /year, $3,823.33 / month after tax.
  • Home loan: $396,150 ($417,000 house price, 5% deposit, 7.1% interest, principal and interest) =  $2,662.25 / month
  • Repayment as percentage of total income: 69.63%
In this situation I am in agreement with NATSEM that this is completely unaffordable. I believe that this is a pretty atypical situation however as a single person buying (or financing) a house should definitely not be shooting for a median property, opting instead for the lower end of the spectrum with smaller town houses or apartments. However a more typical scenario would be a young, childless couple (I’ll stick with median incomes) looking for their first home, shooting for the lower end so they can break into the market. Taking these factors into consideration we get:
  • Income: $114,000 /year, $7,646.66 / month after tax.
  • Home loan: $356,535 ($375,000 house price, 5% deposit, 7.1% interest, principal and interest) = $2,396.03 / month
  • Repayment as a percentage of total income: 31.33%
In this situation it’s starting to look a lot better with the percentage of total income spent on housing much closer to the 30% of total income that the banks usually use when determining loan size. The above scenario isn’t too far from the situation I was in when I purchased my first house back in 2007 and whilst it wasn’t the easiest thing in the world to do (it was helped a lot by renting out the spare rooms) it was definitely possible. This doesn’t disprove the point that Australian house prices are unaffordable for median, single income earners however but even in 2001 it would’ve been a struggle.

Since the media hasn’t played the blame game yet I thought I’d throw my hat into the ring on this one. Investors who are negative gearing would be an easy target with this one and they’re usually the first to get blame for high housing prices. However in Australia the vast majority of property, to the tune of 68.90%, is owner-occupied (I.E. people who own it live in it). The remaining 31.10% is investors but the vast majority of investors only own 2 properties, their home and another investment. It then seems infeasible for investors to be solely responsible for housing price gains when the vast majority of property is in the hands of owner-occupiers or one time investors. The price rises logically then come from the majority, but how are they doing so?

Simply put it’s people leveraging the equity in their own homes in order to upgrade to a bigger, better home whilst keeping the loan repayments at a similar level. The initial 2001 – 2004 boom meant that many had enough equity to upgrade and many did so over the years. Of course being rational actors they attempted to maximize their sale price in order to reduce the loan on the next property and this put an upward pressure on housing prices, both on the low (the one they were selling) and high (the one they were buying) end of the market. The interest rate scare of 2007-2008 put enough pressure on people to curtail this behaviour for a while, but the GFC dashed those high rates and the upgrades began again in earnest.

I’ve long been of the opinion that there will never be a house price crash, instead I foresee a long time of stagnant or small negative growth whilst wages catch up to bridge the affordability gap. The simple fact is that prices can only drop significantly if people are forced to sell and although many first home buyers who bought in during the lowest interest rates are feeling the pressure now they form only a small part of the market, not enough to trigger a price collapse and most will simply delay selling until conditions improve.

It is unfortunate that the Australian dream is out of reach for a median single income earner, but many factors point towards housing becoming more affordable for them in future. The government could do a much better job of incentivizing the construction of low cost housing as current market conditions favour bigger, higher cost houses. Additional land releases and incentives for desirable, low cost housing would also go a long way to putting a downward pressure on house prices. It’s not a problem that can be fixed overnight either and we’ll need long lasting reforms in order to keep housing affordable, lest the prices rise and the cycle start all over again.

¹The median in statistics refers to the value in which 50% of the total data set is above that value and 50% is below it. It’s much more resilient to use this figure when you have outliers on either side of the equation which in the case of Australian property and wage figures there are many. Using the average would then be less representative of the real world.

Election 2010: Let Me Educate You, Australia.

I resisted getting into politics in any way for most of my adult life. For the most part I thought it was just a popularity contest that I had no intention of getting involved with, nor trying to form an opinion on more it than once every 3 years. Fortunately I can count amongst my friends a highly skilled academicwho’s area of study is politics and his constant pontificating about the subject eventually pushed me into figuring the whole thing out, lest I be unable to communicate with him (and subsequently be utterly bored). Today I pride myself on taking an engineer’s approach to the world of politics, figuring out the variables and breaking it down into manageable chunks upon which I can base my ultimate decision. It’s no secret I tend towards the liberal ideals with perhaps a touch of the libertarian in me, much like most of my generation.

This year though presented quite a conudrum as neither of the two major parties nor any of the others could logically get my full support. Labor continues to push policies that I can not agree with (Internet filtering and other nanny-state type policies) and the Liberals candidate for Prime Minister is nothing more than a rabid attack dog who couldn’t write a decent policy to save his life. The popular choice amongst my peers would then be the Greens party who, whilst giving their preferences to Labor, don’t support Internet filtering and have favourable policies in many other areas. Unfortunately for someone like me who sees the benefit in developing nuclear power in a similar fashion to countries like France the Greens can’t be an alternative as they outright oppose any kind of nuclear development. Other favourites include the newly formed Australian Sex Party who take similar positions to the Greens on many matters but unfortunately lack clear direction on many other key matters. The same can be said for many of the other minor parties as well, as whilst they have solid positions on their key issues I can’t really vote for them unless their stance on many critical issues is formalized.

After some research (which was sped up nicely by this spreadsheet) I came to the ultimate conclusion that no party fully supports my political vision. I can understand that this is usually the case with any political party as you can’t satisfy everyone but in the past I was able to easily reconcile my differences with the major parties as the issues were usually small. This last term has seen my support for the party I once supported wane without a strong competitor that rose up instead. In the end it looks to be the Greens who will get my vote as whilst I disagree with some of their policies I can reconcile that with the fact that many of my ideas won’t take off in Australia for decades to come, so I might as well go for the people who support the largest majority of my ideas.

Election time always sees discussions over the dinner table with my family about who we’re going to vote for and my weekly dinner with the parents was no different. My father was always a staunch Labor supporter whilst my mother flits between different parties depending on the political climate of the time. This year was quite a different discussion than the ones I was used to as whilst my father said he would be supporting Labor (but wasn’t quite happy about it) my mother wanted to send a message to the Labor government that she wouldn’t tolerate their actions, and so would be voting Liberal. Since they are in one of the most critical seats of Australia, Eden-Monaro, I took it upon myself to see why she felt that way and the results surprised me.

Many of the issues were those you’d find in the popular media. She wasn’t happy with Julia Gillard’s rise to power, felt that the border protection policies were lax and overall didn’t trust the government to bring Australia back into the black over the coming years. I agreed with her on several key points, I wasn’t terribly happy with the way Gillard came into power either, but the fiscal management one caught me off guard. Since my mother had lived through the Labor government previous to this one I thought she would’ve understood why Labor had to spend money during their times in government, but honestly who really does remember what happened 20 years ago?

I can tell you I certainly don’t remember much. The last time Labor was in power I was still in primary school, blissfully unaware of all the goings on. Still my perverse interest in all things financially disastrous had taught me quite a lot about the economic climate of the time, and the similarities to the current government were startling. I asked her “Do you remember what was happening in the early 90s that just happened recently?”. She couldn’t answer and I don’t think many Australians would be able to either.

The answer is: global economic crisis.

Most Australians will remember Paul Keating’s famous line of the “recession we had to have” which was in fact caused by a wider economic crisis that can be traced back to Black Monday in 1987. Whilst everything appeared to recover during the early nighties it was unfortunately shorted lived and many countries, including Australia, plunged into recession because of it. Since the great depression all governments have recognised the ideals of Keynesian economic theory which dictates that during times of recession the government should step in and spending in order to stimulate the economy. Traditionally this is done with deficit spending, I.E. borrowing money, which many people see as being detrimental. However as history has shown not going into debt to avoid a recession will make said recession last that much longer. Indeed we saw the swift action by our government that saw Australia to be the only developed country to avoid a recession, a phenomenal feat especially when the rest of the world couldn’t manage it.

The past 2 Labor governments have presided over an Australia that was ravaged by global economic tides and the notion that all a Labor government does is spend the surplus that the Liberals build up is complete bullshit. Everyone seems to forget that the last Liberal government saw such economic growth and surpluses because it was never hit by a global financial truck that required them to spend their way out of it. Indeed even the Liberal party forgot that Labor delivered a budget surplus in its first year only to have it dashed by the global financial crisis the year after. To say that a Labor government is fiscally irresponsible because they always run a deficit shows a complete disregard for the facts and is nothing more than political spin. My mother also brought out the old chestnut of interest rates being higher under a Labor government, conveniently forgetting the last 3 years.

The fact is that if you’re worried about a Labor government staying in power because you don’t trust them to run the economy think again. They proven that they are completely capable of handling an economy through the toughest times where the Liberals have only shown how they fair when the seas are calm. Additionally if you’re worried about your interest rates I’d point you to the last 6 years of the Liberal government which saw a steady rise of interest rates that only came down under Labor. Really though the interest rates have absolutely nothing whatsoever to do with the government of the day, so please ignore any pontificating you hear when its related to any political party.

Hopefully you’ve learned something from this post and I urge you to spread this knowledge amongst everyone you know. The misinformation around this subject is abnormally high and the media outlets have no interest in setting the records straight. Whilst such information won’t swing the election one way or another it may do the public some good to question what they’re being told and hopefully seek out the truth for themselves.

Recession No More.

This morning brings some good news for America and the world at large. After 4 consecutive quarters of the GDP shrinking, the unemployment rate rocketing to 9.5% and the financial markets flailing around in a complete mess the United States of America have managed to drag themselves up out of the dank depths of recession and post some exceptionally strong growth (given the circumstances). Of course it’s not all sunshine and rainbows over there yet, and Obama has recognised this with his recent speech on the matter:

Oct. 29 (Bloomberg) — President Barack Obama said U.S. economic growth in the third quarter affirms that the recession is abating, adding that the nation has “a long way to go” to fully recover and reduce unemployment.

He said a Commerce Department report that the economy grew at a 3.5 percent pace in the third quarter, after shrinking for four quarters, is “welcome news and an affirmation that this recession is abating.” It isn’t enough, he added.

“The benchmark I use to measure the strength of our economy is not just whether our GDP is growing, but whether we’re creating jobs, whether families are having an easier time paying their bills, whether our businesses are hiring and doing well,” Obama told business leaders in a speech on the White House grounds.

He’s being cautious in trumpeting this as a victory for himself and his party and this is with good reason. Right now the last thing that any economy needs is uncontrolled growth as that will just get us back in the same situation in a very short period of time. Right now this serves as an indicator that the work the Obama administration has done in order to combat the financial troubles experienced in America worked and the lessons of the past have not gone unheeded. It would seem that all the naysayers about the various stimulus packages will have to take another look at what they’ve said as it appears that Obama’s ideas have worked despite their vitriol.

Hopefully this is the kind of indicator that will prompt companies to start rethinking their strategic direction. For the last few years most of them have been in at least one form of damage control or cost reduction scheme in order to stay in business. This is of course what has lead to the high unemployment figures that are currently plauging the USA. A few quarters of consecutive, small growth will see most businesses rework their directions from “staying alive” back to business as usual and this will easily be tracked in the unemployment rate. In fact the last 3 months have seen a drop in the unemployment rate of 0.2%. It’s not much, but it’s definitely a start.

For as long as the GFC has been in effect I’ve always been very skeptical about how long its effects would last. Sure when you tallied up the dollar amounts that were lost or “potential loses” the situation looked extremely grim, much worse than the great depression. The knowledge of past recessions however let us ride through this with a few bruises but wiser for the experience. One good thing that’s come of this is tighter regulation of the banks in the USA, something which could have prevented this disaster from happening in the first place.

Overall this is great news for the world at large. When the giant of America was toppled by its own system the world rightly went into panic. After battling naysayers, unwilling congress critters and the scathing eye of the media Obama has won himself a hard fought victory for all of America and this will resonate with the public.

Like my fellow blogger said, he’s going to have no trouble coasting into re-election come 2012.

June Quarter National Accounts: Another Swing and a Miss!

Today we will see a release of the National Accounts document from the Australian Bureau of Statistics which will give us a very clear idea of how Australia’s has faired since it narrowly avoided a recession just 3 months ago. As with any ramp up to figures like this, especially during tough economic times like this, there’s already a healthy amount of speculation abounding with the growth currently tipped to be somewhere around 0.2%:

Most economists’ forecasts were revised down after figures yesterday showed a worse-than-expected current account deficit.

Still, it would be the second consecutive quarter of growth after the December quarter’s contraction of 0.6 per cent.

Annual economic growth is expected to come in at just 0.2 per cent.

Joshua Williamson says household spending kept the economy afloat in the June quarter.

“Consumers have gone out and spent some of their stimulus payments and we’re expecting to see that through the household consumption data,” he said.

BT Financial Group’s chief economist, Chris Caton, says the economic picture will be mixed and goes beyond the gross domestic product figures.

“Although GDP growth has remained close to zero and/or positive except for one quarter, we’ve taken a 2 per cent hit to the unemployment rate, so we certainly have been affected, but not as much as elsewhere.”

I was going to wait for the figures to be released prior to posting this however I realised that regardless of the outcome my stance would be the same: Whilst Australia might be the only developed nation dodging the dreaded “r word” this is not something that signalling a bigger crash further down the road, as many doom and gloomers would have you believe. We as a country are very well set to ride out this global financial crisis as the problems that plagued the United States and many other countries simply aren’t present here (which I’ve blogged about previously).

There are 2 quips I commonly encounter from my friends over on the doom and gloom side of the fence. The first is that Australia only avoided a recession due to Rudd’s initial cash splash for over 8 million Australian tax payers. I give this some credit as for the most part it was spent as intended and the saving or paying off debt helped ease the burden on banks. However the idea falls down when you see that the unemployment rate around the same time showed signs of levelling off. The next round of unemployment figures (due out this time next week) will settle this issue succintly, and I’ll make sure to do a follow up then.

The second is that through their other stimulus initiatives (mostly the First Home Owners Grant boost) are keeping asset bubbles propped up which give the false impression that we’re doing fine and a crash is soon to come around the bend. Whilst I can appreciate the idea that housing is relatively expensive in Australia I always question the algorithms people use to come up with their metrics. The standard would be median house price to median wage (the median multiple) which I remarked about in the comments on a previous post. Such a metric is an extremely blunt too with which to judge housing affordability as there are many other factors that can influence what constitutes affordable housing. Take for instance the situation back in 1990 and compare it to today:

  • Data:1990/Today
  • Interest rate: 14%/3%
  • Average wage: $30,576/$53,404
  • Average house price: $100,000/$468,819
  • Median multiple: 3.27/8.77
  • Average mortgage repayment: $14,000/$14064

That last line is the kicker. With interest rates this low the average mortgage will be only $64 more than it was 20 years ago. This also doesn’t take into account that first home owners should not be buying a house in the median price bracket and should start out with something that’s less desirable but affordable (both of my current mortgages are below median properties, so I’m not just peddling nonsense here). Housing is affordable for those in a stable job and do their research. The main problem I see is a crisis of desire as most people want the large house close to town, which as a rule of thumb will always be out of reach of the first home owner.

BREAKING NEWS:

As I was writing this post the figures were released! Here’s the low down:

GDP (Chain volume measure)
Trend
0.3
0.3
Seasonally adjusted
0.6
0.6
Final consumption expenditure (Chain volume measure)
Trend
0.5
1.6
Seasonally adjusted
0.8
1.9
Gross fixed capital formation (Chain volume measure)
Trend
-1.9
-3.2
Seasonally adjusted
0.7
-2.3
GDP chain price index
Original
-2.2
-0.5
Terms of trade
Seasonally adjusted
-7.4
-11.6
Real net national disposable income
Trend
-2.2
-3.2
Seasonally adjusted
-2.0
-3.2

Staggering. The figures show that even before seasonal adjustment we still come out ahead. Australia has now had 2 quarters of small positive growth, so much for a recession ey?

Australian Property’s Reaction to the Financial Crisis.

The last 6 months have been a real roller coaster ride for pretty much everyone financially, even more so for the people like myself who have tried to buck the trend and continue investing during these times. Whilst the majority of the hyperbole has died down over the past couple months there’s still a strong feeling of doom and gloom from a lot of people. This is despite signs that the property market, which was everyone’s favourite punching bag, is on the mend and the unemployment rates whilst increasing are not as bad as was predicted. This then begs the question: is there still potential for Australia to suffer a major hit to it’s property markets?

Ever since this crisis was thrust upon us by the collapse of the sub-prime market in America the outlook has been that Australia would soon follow suit with our property prices plummeting anywhere from a reasonable amount of 5% all the way up to 50%. The gap in speculation should show that no one really has a definitive idea of where the Australian property market will be going and depending on what data you use you will get a different story. The first problem that most of these predictions make is translating the problems that the American sub-prime market had and translating them to Australia. It’s really not that simple.

Let’s step back from the current crisis for a moment to study what lead to the economic crisis over in America. The straw that broke the camel’s back was the fallout from the sub-prime mortgage market. In essence this refers to the practice of lending to individuals who do not meet prime lending criteria and as such have a much high chance of defaulting on their loans. With the helping of insurance companies like AIG banks were able to repackage these liabilities as mortgage backed securities which then allowed them to put these high risk loans back on their books as assets. Banks are typically allowed to lend out more money than they have, and the repackaging of these loans means that they could then re-lend that money out to someone else. You can now see that when one of these loans went belly up it would have a much bigger effect than it would previously. Due to the way the loans were written at the time most of the home owners were on honeymoon rates for the first 2~5 years. After that they reverted to a much higher rate, of which most of them could not afford. What you then had was a lot of loans all defaulting at the same time, which brought the banks and insurance giants to their knees.

I can not stress enough how different this is to Australia. What the American banks were suffering from was a lack of capitalization, I.E. they didn’t have enough real assets under them to back up the money they were lending out. Banks in Australia do not suffer from this and can not perform the kind of magic accounting that the American banks did due to the much more strict regulation they have to comply with. Lending criteria in Australia is also much more strict than what America had prior to its collapse and was tightened significantly after the crisis hit (I got loans before and after the crisis hit, and the second time around was far more stressful than the first).

The next couple facts I generally see is that house prices are unaffordable and the current increases are merely due to a boost in the first home owner’s grant. Whilst I’m not going to argue that Australian property is cheap it’s definitely not as bad as some and with interest rates so low now renters are usually better off buying a house if they have the savings for it. The next 12 months will show us how the market is going as I will admit the figures are somewhat distorted by the FHOG extension.

At the heart of the doom and gloomers is a desire for more affordable housing for everyone and their idea of reducing house prices is for the market to crash so that everyone can jump in. With 70% of the houses in Australia being owned by the people that occupy them (with 50% of those having no mortgage) there’s not really a lot of pressure on the market to sell. The only sector of the market that stands to make a great loss, and as such would have motive to sell quickly and below market, are the investors. With only 30% of the market at real financial risk it stands to reason that the property market won’t be suffering too much price wise, but there are some other factors to consider.

When people can’t sell a property for what they want/need there’s few options left for them: refinance or rent it out. With the tight lending market currently you’re not going to see many banks offering favourable deals so many will choose to rent it out. What you will then see is a glut of rental properties which will put a downward pressure on rents, which we have already seen. This will continue for a few years until America and the worst hit countries find their feet again which, in my view, will lead to a short to medium term stagnation in property prices. In real terms this means a decrease in property prices in line with inflation over the same period, or about 3% annually. There will be no crash but housing will become more affordable.

The government on the other hand could easily make housing more affordable by releasing more land and pumping more cash into base infrastructure to get the new land releases fully serviced. One of my good friends just recently finished building a house in a new suburb in Canberra for which he purchased the land almost 3 years ago. This kind of delay in new housing puts an upward pressure on established buildings and is one of the many causes of the affordability problem. Right now would be the perfect time to speed up development of new areas as the market is primed for a influx of affordable properties.

So overall I don’t believe that the markets will suffer as much as the doom and gloomers believe. Whilst the potential is there for properties to come down in value there’s several key factors that are missing and without them a decrease in real value is all that aspiring home owners can hope for. As I’ve said previously though property is a long term investment and any hit that it might take now will be recovered in the years to come.

Times are tough, but not as tough as some would have you believe.

2008_us_bailout_vs_other_large_government_projects_pie_chart

Delicious Pie.

I’m what you could call an Internet grazer. Throughout most of the day I’ll have my RSS reader open and I’ll usually take a 5 minute break every hour or two to muse over the latest articles that come my way. I usually find quite a lot of interesting info this way and yesterday was no exception. What I came across were two very interesting pie charts that describe the current economic situation in America. The first one shows the personal expenditure breakdown of your average American citizen:

wheredidthemoneygo

The largest section here now comes as no surprise considering that sub-prime home loans were what began the crisis in the first place. What really got me where the runners up of transportation, food and insurance. Adding all of the top 4 up you get around 75% of your average Americans money being spent on just being able to have a roof over their heads and get to work everyday. This really puts the whole crisis into perspective since the people who were getting these loans simply had no fat in their budget to trim when the interest rates rocketed up to their non-honeymoon levels. Granted these people were probably offered loans they would never be able to normally afford in the first place but it still highlights the issues that lead up to the collapse in the sub-prime market.

The next yummy pie chart I came across was this one outlining the previous expenditures of the American government vs the bailout:

2008_us_bailout_vs_other_large_government_projects_pie_chart

This highlights another key issue that hits pretty close to home with one of my major interests. Whilst the enormity of the bailout can not be underestimated when put into perspective like this you can see how many view the bailout as being wasted money. Probably one of the most glaring points in this chart (for me at least) is the comparison between the Iraq war, NASA and the initial quest to land a man on the moon.

Since the end of the space race NASA has been an easy target for budget cuts for politicians looking to cut back on government spending. Whilst I understand that expenditure on a space program can hardly be justified at the dizzying heights that were seen during the Apollo era the continued focus of cutting back on NASA spending only serves to damage America’s reputation as a leader in space. Ironically they may have set themselves up for another race with China, since they have refused their requests to work with them on the International Space Station. I can only hope that China gets their Tiangong 1 station up as scheduled since having another permanent space presence (without international co-operation) would definitely put America on the backseat as leaders of the space community.

What do you take away from these delicious pie charts? :)

Tell ‘em They’re Dreaming.

The Global Financial Crisis is hitting everyone, and with each passing day it would appear that it is hitting more and more people directly. With the unemployment rate hitting 5.2% back in March the figures do support that idea, with many economic forecasters saying that it could hit as high as 10% next year. Primarily this will hit the Blue Collar workers first as companies seek to reduce output in order to keep themselves afloat. Whilst it is a valid business strategy in time like these I often wonder what would happen if we simply forgot that this was happening.

Australia as a whole is in a strong position in terms of weathering the storm. Our economy is based strongly on resources (rather than services) and with our main export being coal for power generation and heating, which people will still want during a recession, we are well placed to continue on as per normal. However, economic growth was down 0.5% for the December quarter with the great decline shown in non farm GDP (whilst Farm GDP grew a whopping 10%!). Could it be that companies and consumers are cutting back just because of the threat of the economic downturn, and not because they are actually feeling the hardship?

Up until around September last year interest rates had been steadily rising in order to combat the extrodinarily high inflation that Australia was experiencing. It seemed that no amount of interest rate hikes could reel in consumers, even with fuel and transportation costs soaring at the same time. However, once people were told of dark economic times ahead suddenly that all changes, and the Reserve Bank is forced to try and spur the economy on by cutting interest rates in quick succession for months on end. Did everyone really lose all their spending power in under a month?

All the stimulus packages are based around the same thing, trying to inject cash into the consumers and corporations so that they’ll spend it, hopefully spurring the markets on so they’ll recover through normal means. How is this so different from having the media say to everyone “The economic crisis is over, we’ve done X and changed our policies Y… etc etc” and then have everyone return to their normal ways of spending? The average Joe has already been manipulated by the media to believe that the world is coming to an end, what’s stopping the media from telling them that everything is ok?

There is of course, a happy middle ground between what the government is doing now and blatantly lying to everyone about the current economic situation. Large government owned and funded projects like say, a light rail system for Canberra (We’ll have it one day folks!!!!) will create jobs and provide that first step into repairing the market, tempting private companies back in. I say government owned and funded mostly because of the recent catastrophe that occurred with BrisConnections, a privately owned but government subsidised project.

So I’d recommend a two pronged approach. Cease the constant reporting on the GFC and have the government start up a large number of projects in order to create some sustainable jobs for the battlers out there. It’s not the easy route and if a change of government happens next election Kevin Rudd will be hard pressed to take credit for his work. However, should he do it and ge re-elected he will be remembered as the herald of the new economic good times, something that people like me will find hard to forget.