Just came back from an overseas secondment to spend the Christmas & New Year break with family.
Mum told me that she fell over and hurt her whirst. What relevance does this has?
She accidently went to see a non-family doctor and happened to meet the best general practitioner she has ever came across in her 60-year life so far.
The doctor is very patient and willing to help. Patients walk out of the clinic both of their thumbs up.
One patient told mum that the doctor has gone to the length to call patients 9am to check up on their progress.
It makes me thinking that the greatest asset that one ever has is his/her job, not the million dollar house one lives in or $150,000 invested in equity with a $50,000 collateral.
If most people realise this, we would have avoided numerous financial crisis in the past and many yet to come.
Friday, December 24, 2010
Friday, December 17, 2010
Housing bubble
There are divided opinions about the bubble status of Australian housing market.
It has enjoyed mostly uniterrupted growth over the last decade.
Any real house prices increases in excess of real GDP growth will eventually lead to asset bubble and consequently crash. (i.e. consuming more than one produces is not sustainable)
House bubble has a much larger implication for the economy than a stock market bubble.
The reason is very simple. One needs a roof over its head but not investment in stocks.
Once the housing bubble pops, it will have a broad impact affecting the rich and the poor. Because of the significant amount of capital tied into housing for majority of people's life.
Effect of bubble status will take years if not decades to work through the system mainly via deleveraging of debt starting from the least cost effective forms of debt.
This is essentially the American story. With 70% of GDP relying on consumption, the massive glut of unsold inventory and foreclosed home will take the livelihood of the American consumers when the unemployment is struck at 9%-10%.
What it means for Australian housing market. This is a perfect lesson that most Australian won't learn until it eventuates.
I am not saying the Aussie house price will collapse in near-term. In my opinion, the house market remain reasonably supported by strong employment and neutral interest rate environment.
An outright crash is unlikely. However, the house value has reached a level such that any future return on this asset class will be at best anemic.
If you were told by many that the Australian house market is a sure bet for future financial security, you have been warned.
It has enjoyed mostly uniterrupted growth over the last decade.
Any real house prices increases in excess of real GDP growth will eventually lead to asset bubble and consequently crash. (i.e. consuming more than one produces is not sustainable)
House bubble has a much larger implication for the economy than a stock market bubble.
The reason is very simple. One needs a roof over its head but not investment in stocks.
Once the housing bubble pops, it will have a broad impact affecting the rich and the poor. Because of the significant amount of capital tied into housing for majority of people's life.
Effect of bubble status will take years if not decades to work through the system mainly via deleveraging of debt starting from the least cost effective forms of debt.
This is essentially the American story. With 70% of GDP relying on consumption, the massive glut of unsold inventory and foreclosed home will take the livelihood of the American consumers when the unemployment is struck at 9%-10%.
What it means for Australian housing market. This is a perfect lesson that most Australian won't learn until it eventuates.
I am not saying the Aussie house price will collapse in near-term. In my opinion, the house market remain reasonably supported by strong employment and neutral interest rate environment.
An outright crash is unlikely. However, the house value has reached a level such that any future return on this asset class will be at best anemic.
If you were told by many that the Australian house market is a sure bet for future financial security, you have been warned.
Saturday, August 14, 2010
If history is off any guidance
If history is of any guidance, the first thing comes to mind is that history can be so invaluable to learn from in order not to repeat them.
Yet it is amazing how history repeated them over and over again.
As many of us look forward or even try to predict/forecast the future, we seems to ignore what history has told us over and over again.
When many experts say that "this time is different", the presence looks awefully similar to what has happened in the past.
It is true that history never repeats itself exactly. Many of the causes of modern day society problem appears to be the same triggers that led to regretable and irreversable consequences in the past.
Here is a wonderful place to reconnect and remind ourselves with how far human races has come along.
http://www.youtube.com/watch?v=6YJfOZkriyk&feature=player_embedded
Invest wisely
Yet it is amazing how history repeated them over and over again.
As many of us look forward or even try to predict/forecast the future, we seems to ignore what history has told us over and over again.
When many experts say that "this time is different", the presence looks awefully similar to what has happened in the past.
It is true that history never repeats itself exactly. Many of the causes of modern day society problem appears to be the same triggers that led to regretable and irreversable consequences in the past.
Here is a wonderful place to reconnect and remind ourselves with how far human races has come along.
http://www.youtube.com/watch?v=6YJfOZkriyk&feature=player_embedded
Invest wisely
Friday, August 6, 2010
Call to rein in Big four banks
This is the title of an article in the financial press of Australia.
A study found that for every $100 spent in Australia, $3 ended up as bank profit.
Not bad for banks but not so great for Australian consumers.
For those who don't know the banking section in Australia. The following is a brief overview.
The article suggests a number of policy to rein "super profit" from the big four.
Some of the suggestions are:
These proposed policies appears to be fairly heavy handed.
The harsh regulation may simply add cost to banks and push banks to seek other means to fill in the void. Consequently the regulator may come with other policy to stop banks once again.
This negative cycle of playing "catch me if you can" does not serve in the best interest in either consumers, banks nor the regulator.
I would suggest government to consider policy to promote competition rather than prescriptive regulations. Let the invisible hand to take its own course, which will be more acceptable and effective in bringing benefits to consumers.
One way to increase competition is to open up the banking sector in an orderly fashion. Try to dialgue with both domestic and foreign banks to better achieve its policy intention.
Cooperation is the key here. Together we can build a strong, competitive and more resilient banking sector in Australia.
A study found that for every $100 spent in Australia, $3 ended up as bank profit.
Not bad for banks but not so great for Australian consumers.
For those who don't know the banking section in Australia. The following is a brief overview.
There are only 4 Australia banks which dominates over 80% of the banking business, so called big four. There is a "four pillar" policy in Australia which prevents banks from taking over each other and being taken over.
This regulatory barrier served Australia banks really well and create a fairly low level of competition, which subsequently breed "super profit" for the banks.
One simple example is that US banks has long been paying its customer to win and keep its retail savings business while Australian banks charges customer a monthly fee typical of $5.
Only recently the banks started to adopt a fee-free business model.
The sentiment toward banks has always been negative.
The article suggests a number of policy to rein "super profit" from the big four.
Some of the suggestions are:
- limit mortgage rate increase to changes in Reserve Bank cash rate
- laws to ensure that credit is not pressed on people with low income
These proposed policies appears to be fairly heavy handed.
The harsh regulation may simply add cost to banks and push banks to seek other means to fill in the void. Consequently the regulator may come with other policy to stop banks once again.
This negative cycle of playing "catch me if you can" does not serve in the best interest in either consumers, banks nor the regulator.
I would suggest government to consider policy to promote competition rather than prescriptive regulations. Let the invisible hand to take its own course, which will be more acceptable and effective in bringing benefits to consumers.
One way to increase competition is to open up the banking sector in an orderly fashion. Try to dialgue with both domestic and foreign banks to better achieve its policy intention.
Cooperation is the key here. Together we can build a strong, competitive and more resilient banking sector in Australia.
Japanese Yen
There has been talk about the strength of Yen against major currencies.
Yen USD cross rate has reached multi-year high in recent times.
The Friday disappointing US payroll number didn't help and USD plunged sharply against Yen in early trade.
One thing investor can take cue of is the strength of Yen is more owing to weakness of US economy rather than underlying strength in Japanese economy.
With record high public debt, it is very difficult to imagine a strong Yen relating to a booming economy.
Many savvy experts recommend this a good time to short yen as a long term play due to the weak economic fundamental.
My inner trade has told me that further upside of Yen to USD is limited. A gradual short postion on Yen does not appear a bad strategy.
However, bear in mind that this trade may take some time before it pays off as USD isn't the most desirable currency of the globe right now.
Trade wisely
Yen USD cross rate has reached multi-year high in recent times.
The Friday disappointing US payroll number didn't help and USD plunged sharply against Yen in early trade.
One thing investor can take cue of is the strength of Yen is more owing to weakness of US economy rather than underlying strength in Japanese economy.
With record high public debt, it is very difficult to imagine a strong Yen relating to a booming economy.
Many savvy experts recommend this a good time to short yen as a long term play due to the weak economic fundamental.
My inner trade has told me that further upside of Yen to USD is limited. A gradual short postion on Yen does not appear a bad strategy.
However, bear in mind that this trade may take some time before it pays off as USD isn't the most desirable currency of the globe right now.
Trade wisely
Friday, June 25, 2010
Market is unclear
Market appears to have bounced back from the recent short-term oversold position.
However, it started to show cracks again.
Fundamentally, the global economy is weak. US, UK and Europe countries remain in fragile state of economy. I see no near-term solution to this deep trouble with debt.
If the government around the world start cutting into their spending, it spells recession.
If the government continue to leave interest rate at virtually zero, the economy will be okay on life support for now but it will create mass inflation in the long run.
It is probably that there will be hyper-inflation.
This is exactly what you experience in the asset market right now. Both US treasury and gold price rally at the same time. One would have expected that the return on these two asset should be the opposite of each other.
It means that shorter term environment is deflationary whilst inflationary in the longer term induced by the mass amount liquidity to chase too little goods once economy starts to recover.
One conclusion this does not look good either way.
However, it started to show cracks again.
Fundamentally, the global economy is weak. US, UK and Europe countries remain in fragile state of economy. I see no near-term solution to this deep trouble with debt.
If the government around the world start cutting into their spending, it spells recession.
If the government continue to leave interest rate at virtually zero, the economy will be okay on life support for now but it will create mass inflation in the long run.
It is probably that there will be hyper-inflation.
This is exactly what you experience in the asset market right now. Both US treasury and gold price rally at the same time. One would have expected that the return on these two asset should be the opposite of each other.
It means that shorter term environment is deflationary whilst inflationary in the longer term induced by the mass amount liquidity to chase too little goods once economy starts to recover.
One conclusion this does not look good either way.
Saturday, April 10, 2010
From safety to greed
It is amazing to experience the roller coaster ride from a credit induced recession.
Investors sentiment went from concerning return of capital to chasing return on capital again mere 18 months after the arguably most servere economic downturn of all time.
Many simple lesson can be learnt during the process:
1. How quickly people can forget about all the gloom and doom in the midst of the global financial crisis.
2. Unlevered investor has the upper hand to sit out the trough during recession when market goes into disarray while the levered ones do not have such luxury
3. No asset class price can continue an upward trend indefinitely and vice versa regardless of the fundamentals.
4. The entry price remains the single biggest determinant of the resulting return on asset.
5. Market can stay irrational longer than one can stay solvent.
Investors sentiment went from concerning return of capital to chasing return on capital again mere 18 months after the arguably most servere economic downturn of all time.
Many simple lesson can be learnt during the process:
1. How quickly people can forget about all the gloom and doom in the midst of the global financial crisis.
2. Unlevered investor has the upper hand to sit out the trough during recession when market goes into disarray while the levered ones do not have such luxury
3. No asset class price can continue an upward trend indefinitely and vice versa regardless of the fundamentals.
4. The entry price remains the single biggest determinant of the resulting return on asset.
5. Market can stay irrational longer than one can stay solvent.
Thursday, April 1, 2010
A deeper look into housing affordability
According to the 6th annual demograhia international housing affordability survey, Australia capital cities possess 22 of the 62 severely unaffordable markets in this years survey.
The survey uses median house price to gross annual median household income as the main metric to measure the housing affordability.
Sydney ranked second serverly unaffordable house market with a median multiple of 9.1, Melbourne at 8.0, Adelaide 7.4, Darwin 7.1, Perth 6.9, Hobart 6.8, Brisbane 6.7 and Canberra at 5.8.
The report attributes the reason for the servere housing unaffordability of Australian major cities to be "plan-driven" land use regulation instead of more responsive "demand-driven" process.
The report compares Sydney and Melbourne ("plan-driven" land use regulation) to Atlanta and Dallas-Fort Worth in the United States ("demand-driven" land use regulation). The statistics presented in the report were mind-blowing.
If you are unfamiliar with the median multiple metric described above. Try the % of gross annual income used to mortgage on median house price.
If you are still not convinced, take a look at the monthly mortgage payment.
The numbers above speak for itself. The most ironic thing about the comparison is the following:
So what does this tell you about demand for housing in two cities with significantly higher population growth than Sydney and Melbourne?
It speaks pretty loud and clear to me that Australia house market has been in an increasingly dangerous bubble territory owing to the lack of affordable land due to the prescriptive and "plan-driven" adminstrative process.
To share some personal experience with you. I contacted the Kogarah City Council enquiring about criteria on land sub-division in early February 2010. The following was what happened until I received a response in mid-March 2010.
a) I called the council on one Friday afternoon to enquiry about sub-division of land. I was told the person in charge was busy at the time of my call.
I left my contact details and was promised a call back latest by the following Monday.
b) no response until the following Wednesday. I sent an email detailing my enquiry. The email was not replied one-week later informing that the person in charge was on leave.
c) Sent a reply email to request to speak to someone else in the Kogarah council. It was told that the person on leave is the only one knows anything about the sub-division of land. Therefore, I need to wait for the person to come back from holiday. I was also told I would be contacted when the person returns. A date was provided on when the person will return.
d) One week after the supposing return date, there was still no response provided. I had to send an email yet again to see when the council can provide a response.
e) one day later the person called. The phone conversation lasted less than 60 seconds.
A 60-second phone conversation regarding the criterias on sub-division of land took a local council over 6 weeks to respond. You can imgaine how efficient the government works. (Be sure to check my previous post on difference between prviate and public sector).
One more important thing to note about the prescriptive land use regulation.
This is not the "years of supply" of land that matters but the supply of affordable land.
The survey points out:
By the way, the report defines affordable as having a median house price to gross income ration of 3.0 or below. This figure was last seen in Australia in 1980s. This figure will be an insult to many experts in the property market.
The survey uses median house price to gross annual median household income as the main metric to measure the housing affordability.
Sydney ranked second serverly unaffordable house market with a median multiple of 9.1, Melbourne at 8.0, Adelaide 7.4, Darwin 7.1, Perth 6.9, Hobart 6.8, Brisbane 6.7 and Canberra at 5.8.
The report attributes the reason for the servere housing unaffordability of Australian major cities to be "plan-driven" land use regulation instead of more responsive "demand-driven" process.
The report compares Sydney and Melbourne ("plan-driven" land use regulation) to Atlanta and Dallas-Fort Worth in the United States ("demand-driven" land use regulation). The statistics presented in the report were mind-blowing.
In Sydney and Melbourne, the median mutiple is 9.1 and 8.0 respectively. While for Atlanta and Dallas-Fort Worth is 2.6 and 2.7 respectively.
It takes 6.25 to 14.5 years for the residential land to be designed for development and the completion of the first home in Australia due to the more prescriptive use of land regulation.
The same process in Atlanta and Dallas-Fort Worth takes only 1 to 1.5 years as a result of demand driven process.
If you are unfamiliar with the median multiple metric described above. Try the % of gross annual income used to mortgage on median house price.
Sydney 57.4%
Melbourne 50.4%
Dallas-Fort Worth 13.4%
Atlanra 16.8%
If you are still not convinced, take a look at the monthly mortgage payment.
Sydney $2,968
Melbourne $2,521
Dallas-Forth Worth $790
Atlanta $680
The numbers above speak for itself. The most ironic thing about the comparison is the following:
Population growth in Dallas-Fort Worth was much faster than Sydney which is now nearly 50% larger than Sydney.
Atlanta population is now 50% higher than Melbourne and more than 25% greater than Sydney.
Yet the median multiple for Dallas_Fort Worth was 3.5 in 1981 and it dropped to 2.7 by 2008. For Atlanta, the median multiple remained the same at 2.6.
So what does this tell you about demand for housing in two cities with significantly higher population growth than Sydney and Melbourne?
It speaks pretty loud and clear to me that Australia house market has been in an increasingly dangerous bubble territory owing to the lack of affordable land due to the prescriptive and "plan-driven" adminstrative process.
To share some personal experience with you. I contacted the Kogarah City Council enquiring about criteria on land sub-division in early February 2010. The following was what happened until I received a response in mid-March 2010.
a) I called the council on one Friday afternoon to enquiry about sub-division of land. I was told the person in charge was busy at the time of my call.
I left my contact details and was promised a call back latest by the following Monday.
b) no response until the following Wednesday. I sent an email detailing my enquiry. The email was not replied one-week later informing that the person in charge was on leave.
c) Sent a reply email to request to speak to someone else in the Kogarah council. It was told that the person on leave is the only one knows anything about the sub-division of land. Therefore, I need to wait for the person to come back from holiday. I was also told I would be contacted when the person returns. A date was provided on when the person will return.
d) One week after the supposing return date, there was still no response provided. I had to send an email yet again to see when the council can provide a response.
e) one day later the person called. The phone conversation lasted less than 60 seconds.
A 60-second phone conversation regarding the criterias on sub-division of land took a local council over 6 weeks to respond. You can imgaine how efficient the government works. (Be sure to check my previous post on difference between prviate and public sector).
One more important thing to note about the prescriptive land use regulation.
This is not the "years of supply" of land that matters but the supply of affordable land.
The survey points out:
The prescriptive land use regulation provides land seller and buyer the reliable information on where the development will occur. This tends to significantly raise the price of land and eliminates the supply of affordable land.
By the way, the report defines affordable as having a median house price to gross income ration of 3.0 or below. This figure was last seen in Australia in 1980s. This figure will be an insult to many experts in the property market.
Tuesday, March 30, 2010
Difference between private and public sector
This is one line I think it is so true. I quote from a blog called Calafia Beach Pundit:
This is exactly why the budget deficit will not go down but up. There is no notion of cutting costs in a public sector despite all the talks and spins around rein the spending.
The private sector is all about survival: if your revenues drop, you have to cut your spending. The public sector is all about politics: your survival and prestige is a function of the size of your budget, so you never consent to a cut. Instead, you always ask for more and more spending authority, no matter what.
This is exactly why the budget deficit will not go down but up. There is no notion of cutting costs in a public sector despite all the talks and spins around rein the spending.
Sunday, March 28, 2010
Stimulus may not be so stimulating after all
Do you know that stimulus may not work the way we expect. It can and in history it had negative impact on GDP growth defying its very intention.
During early 1990s, Sweden adopted aggressive fiscal expansion to revive the economy. Guess what happened? Private consumption and business investment fell sharply and economic growth was pushed into negative territory.
I suspect that the suddent increase in public spending crowded out the private spending.
Stimulus may have worked this time. However, it didn't solve the very pressing issue which brought us into this mess at the first place i.e. excessive level of credit and credit growth.
Imagine when the world reaches a debt level such that the lowest level interest rate will not prompt household to borrow and spend money. Many gurus called it the "zero" hour. Some argued that we have already had a tasteful of it.
Can you really imagine that? Well there is no need to imagine. Japan was and still is a perfect example.
During early 1990s, Sweden adopted aggressive fiscal expansion to revive the economy. Guess what happened? Private consumption and business investment fell sharply and economic growth was pushed into negative territory.
I suspect that the suddent increase in public spending crowded out the private spending.
Stimulus may have worked this time. However, it didn't solve the very pressing issue which brought us into this mess at the first place i.e. excessive level of credit and credit growth.
Imagine when the world reaches a debt level such that the lowest level interest rate will not prompt household to borrow and spend money. Many gurus called it the "zero" hour. Some argued that we have already had a tasteful of it.
Can you really imagine that? Well there is no need to imagine. Japan was and still is a perfect example.
Hot potatos will cool down eventually
Following my last post regarding Australian property market being over-valued by many metrics such as price to rent ratio, price to disposable income ratio etc.
For those who thinks that property price does not decline because the land cannot be created hence making it scarce resource. Here is the hard evidence for a second thought.
Japan's land prices at new low. The land price is currently at 1/3 of what they were in 1991 after Japan's bubble economy peaked. No one can argue the scarcity of land in Japan, one of the most densely population place on earth.
Yet land price fell long and hard. More importantly it is still falling.
Think twice when many experts put their cases forward regarding the fundamentals of the Australian property market. Think what happen to Japan.
Japan is a prime example of what happens after accumulation of mountains of debt. At some point, the economy will snap. The harder the market streams ahead itself. The hard and longer it falls from the top.
Nothing goes up forever vice versa. Each individual have different level of risk tolerance.
However, one thing is common everyone hates to lose money. So don't get yourself into that position.
For those who thinks that property price does not decline because the land cannot be created hence making it scarce resource. Here is the hard evidence for a second thought.
Japan's land prices at new low. The land price is currently at 1/3 of what they were in 1991 after Japan's bubble economy peaked. No one can argue the scarcity of land in Japan, one of the most densely population place on earth.
Yet land price fell long and hard. More importantly it is still falling.
Think twice when many experts put their cases forward regarding the fundamentals of the Australian property market. Think what happen to Japan.
Japan is a prime example of what happens after accumulation of mountains of debt. At some point, the economy will snap. The harder the market streams ahead itself. The hard and longer it falls from the top.
Nothing goes up forever vice versa. Each individual have different level of risk tolerance.
However, one thing is common everyone hates to lose money. So don't get yourself into that position.
Friday, March 26, 2010
Australia residential property
The following is a list of signs manias and financial crises by Edward Chancellor from GMO investment management.
1. Great investment debacles generally start out with a compelling growth story.
2. Blind faith in the competence of the authorities.
3. A general increase in investment is another leading indicator of financial distress. Capital is generally misspent during periods of euphoria. Only during the bust does the extent of the misallocation become clear.
4. Great booms are invariably accompanied by a surge in corruption.
5. Strong growth in the money supply is another robust leading indicator of financial fragility. Easy money lies behind all great episodes of speculation from the Tulip Mania of the 1630s – which was funded with IOUs – onward.
6. Fixed currency regimes often produce inappropriately low interest rates, which are liable to feed booms and end in busts.
7. Crises generally follow a period of rampant credit growth.
8. Moral hazard is another common feature of great speculative manias. Credit booms are often taken to extremes due to a prevailing belief that the authorities won’t let bad things happen to the financial system. Irresponsibility is condoned.
9. A rising stock of debt is not the only cause for concern. The economist Hyman Minsky observed that during periods of prosperity, financial structures become precarious.
10. Dodgy loans are generally secured against collateral, most commonly real estate.
Australian residential property has been a darling asset class for investor since financial crisis. Unlike many other developed nations, the resilience of the property sector has fuelled another round of significant property price thanks to government intervention.
I have long argued that the commentary about the supply and demand imbalance is not a sufficient condition for property boom. More importantly the long rising price is greatly owing to the deregulation of the banking sector and availability of cheap debt.
Australian property market has yet to reach the signs of mania and bubble described above. However, it is certainly on its way there.
A very simple sign of over-exuberance comes from observations in daily life.
Many of baby boomers such as my uncle believe that equity is very risky and property is safe and only goes up and never comes down.
Another example is that some mechanic I know has turned away from his business to focus on property investment.
It was no surprising for baby boomers to believe that property price won't drop as this has largely been their experience up to date. It is not uncommon to extrapolate future from historic experience.
However, headwinds are ahead of us not behind us as many believes after GFC. The reason is two-folded.
1. As baby boomers come to retirement, the spending will significantly reducing coming off the peak of their wealth and income phase. This will place significant pressure on property prices.
2. Level of household debt. Australian household debt has reached unprecedented level despite the GFC. In some sense, Australia households are in worse position than U.S. and U.K as they are yet to realise the consequence of the level of their debt.
So who will be winners and losers from this property mania.
In the short term, there will be a wealth transfer from the later generations to baby boomers i.e. gen X and Y to baby boomers.
In the long run, some future generation will benefit from property prices declines. The million dollar question is which future generation.
1. Great investment debacles generally start out with a compelling growth story.
2. Blind faith in the competence of the authorities.
3. A general increase in investment is another leading indicator of financial distress. Capital is generally misspent during periods of euphoria. Only during the bust does the extent of the misallocation become clear.
4. Great booms are invariably accompanied by a surge in corruption.
5. Strong growth in the money supply is another robust leading indicator of financial fragility. Easy money lies behind all great episodes of speculation from the Tulip Mania of the 1630s – which was funded with IOUs – onward.
6. Fixed currency regimes often produce inappropriately low interest rates, which are liable to feed booms and end in busts.
7. Crises generally follow a period of rampant credit growth.
8. Moral hazard is another common feature of great speculative manias. Credit booms are often taken to extremes due to a prevailing belief that the authorities won’t let bad things happen to the financial system. Irresponsibility is condoned.
9. A rising stock of debt is not the only cause for concern. The economist Hyman Minsky observed that during periods of prosperity, financial structures become precarious.
10. Dodgy loans are generally secured against collateral, most commonly real estate.
Australian residential property has been a darling asset class for investor since financial crisis. Unlike many other developed nations, the resilience of the property sector has fuelled another round of significant property price thanks to government intervention.
I have long argued that the commentary about the supply and demand imbalance is not a sufficient condition for property boom. More importantly the long rising price is greatly owing to the deregulation of the banking sector and availability of cheap debt.
Australian property market has yet to reach the signs of mania and bubble described above. However, it is certainly on its way there.
A very simple sign of over-exuberance comes from observations in daily life.
Many of baby boomers such as my uncle believe that equity is very risky and property is safe and only goes up and never comes down.
Another example is that some mechanic I know has turned away from his business to focus on property investment.
It was no surprising for baby boomers to believe that property price won't drop as this has largely been their experience up to date. It is not uncommon to extrapolate future from historic experience.
However, headwinds are ahead of us not behind us as many believes after GFC. The reason is two-folded.
1. As baby boomers come to retirement, the spending will significantly reducing coming off the peak of their wealth and income phase. This will place significant pressure on property prices.
2. Level of household debt. Australian household debt has reached unprecedented level despite the GFC. In some sense, Australia households are in worse position than U.S. and U.K as they are yet to realise the consequence of the level of their debt.
So who will be winners and losers from this property mania.
In the short term, there will be a wealth transfer from the later generations to baby boomers i.e. gen X and Y to baby boomers.
In the long run, some future generation will benefit from property prices declines. The million dollar question is which future generation.
Wednesday, March 24, 2010
Why everyone is so excited about elections?
Australian prime minister Kevin Rudd had a debate on health system with the opposition leader Tony Abbott on Tuesday. This is a show opener for the upcoming election.
I just watched a program on SBS called insgiht. The topic was (as you can guess) was what you think about politician's policy and who you will vote for.
Not sure if the audiences were pre-elected to put on a show or randomly selected from ordinary citizens. Anyhow, they all seemed very excited and looking forward to the election as if some amazing things are waiting to happen e.g. government will turn budget deficit into surplus, the hospital system is on its way to recovery, taxes will be cut further.
Best of all a much brighter future is await for us ahead. I guess that's what politicians are so good at in making us feel that way.
One reminder though, they hardly keep their promises or make a difference in a value-adding fashion to citizen or taxpayers.
Whatever they do or say is to serve the interest of themselves and their party in an effort to keep elected in the next round. Whether labour or liberal gets elected, the same old thing will start all over again.
One thing I would like to point out.
It is amazing to hear that many praised the government in getting the economy out of the recession or some call it the worse recession we ever had since the great depression.
Wow, if politicians can lure you to think that, I must they have done a pretty good.
Two reasons why Australian economy remained resilient from the GFC is that the banking system in Australi largely stayed away from toxic instruments and Australian economy remains heavily skewed toward exports in commodities. It was more luck than anything that got us out of recession largely unscratched.
Tell me one thing that Australian government did differently to the US, UK and the Europe during the GFC.
I certainly can't think of any except massive stimulus spending to replace private debt with puclic debt.
Oh, excuse me for forgeting to mention one thing that Australian government did manage to achieve while many other Western nations had a good go but failed to realise i.e. more household debt in the forms of mortgages.
I can't think of a better phrase for the "First Home Owner Boost" introduced by the Government other than "First Home Vendor Boost".
Thank you, Professor Keen for pointing it out loud and clear.
Unfortunately, professor the harsh reality is that politician will continue to support this ponzi scheme until the day of reckoning.
I just watched a program on SBS called insgiht. The topic was (as you can guess) was what you think about politician's policy and who you will vote for.
Not sure if the audiences were pre-elected to put on a show or randomly selected from ordinary citizens. Anyhow, they all seemed very excited and looking forward to the election as if some amazing things are waiting to happen e.g. government will turn budget deficit into surplus, the hospital system is on its way to recovery, taxes will be cut further.
Best of all a much brighter future is await for us ahead. I guess that's what politicians are so good at in making us feel that way.
One reminder though, they hardly keep their promises or make a difference in a value-adding fashion to citizen or taxpayers.
Whatever they do or say is to serve the interest of themselves and their party in an effort to keep elected in the next round. Whether labour or liberal gets elected, the same old thing will start all over again.
One thing I would like to point out.
It is amazing to hear that many praised the government in getting the economy out of the recession or some call it the worse recession we ever had since the great depression.
Wow, if politicians can lure you to think that, I must they have done a pretty good.
Two reasons why Australian economy remained resilient from the GFC is that the banking system in Australi largely stayed away from toxic instruments and Australian economy remains heavily skewed toward exports in commodities. It was more luck than anything that got us out of recession largely unscratched.
Tell me one thing that Australian government did differently to the US, UK and the Europe during the GFC.
I certainly can't think of any except massive stimulus spending to replace private debt with puclic debt.
Oh, excuse me for forgeting to mention one thing that Australian government did manage to achieve while many other Western nations had a good go but failed to realise i.e. more household debt in the forms of mortgages.
I can't think of a better phrase for the "First Home Owner Boost" introduced by the Government other than "First Home Vendor Boost".
Thank you, Professor Keen for pointing it out loud and clear.
Unfortunately, professor the harsh reality is that politician will continue to support this ponzi scheme until the day of reckoning.
Westpac accused of charging interest on interest?
Westpac, an Australian bank is accused of introducing charging interest on interest from credit cards.
I can understand the disappointment from credit card holders who are currently paying interest on their credit card debt.
However, I believe that no one should pay interest on credit card because they should never allow themselves to accumulate to a level of debt such that one cannot payoff the balance at the end of each statement.
Before blaming bank being the biggest jurk on earth, remember you are the one who willing contribute to their fat bottom lines.
Many may disagree. But I think this is a good kick to the back of those who were more or less careless about their finance.
As bad as it sounds, it may be beneficial to credit card debt holders in the long run. It is time for you to start clean up your debt especially non-deductible ones and/or those attract high interest rate.
By the way, if interest on interest is discovered bad what about tax on taxes?
Government has been doing that for years. Anyone noticed?
Stamp duty on owners-occupying residential property is just one of many example in our lives.
The nasty thing about it is that it creeps up with rising property price further eroding affordability with no benefit being added to home buyers.
So your hard eanred money first get chopped off by the income tax, your remaining income is waiting for yet another one somewhere down the line. I am talking tens and thousands of dollar
Despite all your generous contribution (whether intentional or not), our government still managed to squander most of them. Sigh.....
I can understand the disappointment from credit card holders who are currently paying interest on their credit card debt.
However, I believe that no one should pay interest on credit card because they should never allow themselves to accumulate to a level of debt such that one cannot payoff the balance at the end of each statement.
Before blaming bank being the biggest jurk on earth, remember you are the one who willing contribute to their fat bottom lines.
Many may disagree. But I think this is a good kick to the back of those who were more or less careless about their finance.
As bad as it sounds, it may be beneficial to credit card debt holders in the long run. It is time for you to start clean up your debt especially non-deductible ones and/or those attract high interest rate.
By the way, if interest on interest is discovered bad what about tax on taxes?
Government has been doing that for years. Anyone noticed?
Stamp duty on owners-occupying residential property is just one of many example in our lives.
The nasty thing about it is that it creeps up with rising property price further eroding affordability with no benefit being added to home buyers.
So your hard eanred money first get chopped off by the income tax, your remaining income is waiting for yet another one somewhere down the line. I am talking tens and thousands of dollar
Despite all your generous contribution (whether intentional or not), our government still managed to squander most of them. Sigh.....
Monday, March 22, 2010
Better to be safe than right
A university professor had a bet with an economist in a renowned investment bank.
The bet is about the Australian property price in the midst of the global financial crisis.
The professor argues the property market will decline up to 40% over a period of 2 years (I may be wrong about the exact time period) becausing of deleveraging of the highly-leveraged household.
On the other hand, the economist predicted that the property price will hold because of the supply and demand fundamental in the housing market.
At the time of GFC, the professor was few people who had such a dire forecast about Australian property given the historic track record in creating "wealth" for Australian.
The bet was looking rosy for the professor at an early stage where major cracks started to appear in the holiday home market then spreaded across to the top end of the market then somewhat to the middle and low end of the price bracket.
The tide turned soon after the federal government annouced a "first home owner boost" of doubling the existing first home owner grant for existing houses and tripling for newly contructed home.
Coupled with a ultra low interest rate environment one has seen for over 40 years, the property market has taken off from the bottom end and quickly worked its way through to the top end.
(For those unfamiliar with the first home owner's grant (FHOG), it was introduced in early
2000s to help the first home buyer to enter the market as the then booming property market appeared to have priced the first home buyer out of the market.
The irony of such grant is that since its introduction, the property price has been pushed up even higher (i.e. less affordable) to a level that non human sense can be made from the activities in the market at its hype left alone any economic sense.
The following is a real example from friend of my mother, who signed a sales contract to buy a property during 2002 to 2003 without knowing some of the basics of the home purchased.
A conversion between she and my mother"
Mum: Congratulations on the purchase of your first home. Tell me about the property, you know how many bedrooms, what it looks like?
Friend: Mmmm..... There were lots of the potential buyers waiting outside the door for their turn to inspect the property and to make an offer. Oh..... I was this close not being able to buy it because the real estate agent was pushing for a higher price knowing that someone waiting outside will make a higher offer.
Mum: So what the house look like? How many bedroom?
Friend: Oh.... yes of course. It was, let me see, it was three, no..... Mmmm..... four bedrooms maybe with a sizable garden.... Who cares....? The important thing is I bought it.)
The professor was right in theory that the debt-laden households will commence a process period of deleveraging when they start to feel insecure.
However, I would say that in reality it will be safer to predict softer downturn than a 40% decline over 2 years. For the economist, it is no brainer to go with the consensus like many other economists predicted because even he was wrong, he was just one of the many who got it wrong. His job won't be on the line.
Having an extreme view of the market either upside or downside will have a high potential of damaging his career/reputation.
In a game show term, an extreme view/prediction is equivalent of "double or nothing".
If you are right, you will become the handful like John Paulson's famous billion-dollar trade on subprime derivatives.
If you are wrong, it will haunt you for the rest of your life.
So next time when you read a prediction from some economist or market commentator, think twice about the real concern behind their predictions. You will find a lot more than professional views.
The bet is about the Australian property price in the midst of the global financial crisis.
The professor argues the property market will decline up to 40% over a period of 2 years (I may be wrong about the exact time period) becausing of deleveraging of the highly-leveraged household.
On the other hand, the economist predicted that the property price will hold because of the supply and demand fundamental in the housing market.
At the time of GFC, the professor was few people who had such a dire forecast about Australian property given the historic track record in creating "wealth" for Australian.
The bet was looking rosy for the professor at an early stage where major cracks started to appear in the holiday home market then spreaded across to the top end of the market then somewhat to the middle and low end of the price bracket.
The tide turned soon after the federal government annouced a "first home owner boost" of doubling the existing first home owner grant for existing houses and tripling for newly contructed home.
Coupled with a ultra low interest rate environment one has seen for over 40 years, the property market has taken off from the bottom end and quickly worked its way through to the top end.
(For those unfamiliar with the first home owner's grant (FHOG), it was introduced in early
2000s to help the first home buyer to enter the market as the then booming property market appeared to have priced the first home buyer out of the market.
The irony of such grant is that since its introduction, the property price has been pushed up even higher (i.e. less affordable) to a level that non human sense can be made from the activities in the market at its hype left alone any economic sense.
The following is a real example from friend of my mother, who signed a sales contract to buy a property during 2002 to 2003 without knowing some of the basics of the home purchased.
A conversion between she and my mother"
Mum: Congratulations on the purchase of your first home. Tell me about the property, you know how many bedrooms, what it looks like?
Friend: Mmmm..... There were lots of the potential buyers waiting outside the door for their turn to inspect the property and to make an offer. Oh..... I was this close not being able to buy it because the real estate agent was pushing for a higher price knowing that someone waiting outside will make a higher offer.
Mum: So what the house look like? How many bedroom?
Friend: Oh.... yes of course. It was, let me see, it was three, no..... Mmmm..... four bedrooms maybe with a sizable garden.... Who cares....? The important thing is I bought it.)
The professor was right in theory that the debt-laden households will commence a process period of deleveraging when they start to feel insecure.
However, I would say that in reality it will be safer to predict softer downturn than a 40% decline over 2 years. For the economist, it is no brainer to go with the consensus like many other economists predicted because even he was wrong, he was just one of the many who got it wrong. His job won't be on the line.
Having an extreme view of the market either upside or downside will have a high potential of damaging his career/reputation.
In a game show term, an extreme view/prediction is equivalent of "double or nothing".
If you are right, you will become the handful like John Paulson's famous billion-dollar trade on subprime derivatives.
If you are wrong, it will haunt you for the rest of your life.
So next time when you read a prediction from some economist or market commentator, think twice about the real concern behind their predictions. You will find a lot more than professional views.
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