Aussie Dollar Plummets [Archive]

Chimbu chuckles

9th Oct 2008, 01:32

AUD1=.6689 as of a hour ago.

For the younger viewers of this financial meltdown please ponder the amount of control being exerted by your elected leaders, precisely zero, for next time they are making claims as to their economic prowess. Australian political leaders, of whatever persuasion, are mere voyeurs - as much victims of what goes on overseas as we are. What they do next shows whether they are morons or not...and they all are.

When they drop interest rates and pump liquidity into the market - the way all western govts are at present -Australia less, so far at least - they are doing that in vain hopes of propping up asset values artificially. If assets are over valued, and real estate in Australia most assuredly is, making money too cheap merely sustains the bubble a little while longer (if they are lucky - and in the current circumstances they are, most assuredly, out of luck) and delays the inevitable correction.

In Australia of late an average house has been 6+ to 7+ x average wages. Historically in Australia it was closer to 3 - 3.5x. In the US, Canada, UK and EU just before the crash it was around 3.5x.

So what do you think house prices are most likely to do next? They weren't going to go up for much longer even without the current financial crisis.

NSW has been in recession all by its lonesome for 12 months. Victoria lives in relative recession permanently as does SA. That leaves NT, WA and QLD, the mining states (ACT is on a different celestial orbit:ugh: ) - with Asia going into recession demand for minerals will inevitably drop, offset a little by the helpful exchange rate - look for layoffs in the mining sector and the unravelling of house prices artificially inflated by CUBs (Cash Up Bogans) who went from marginally employable to 6 figures working for the mines and live in a house they think is worth 600k and have at least 1 very late model Falcon/Commodore/SUV (probably something similar for the Mrs), a new wake boarding boat and a brand new flat screen TV that covers half one wall in the living room opposite the brand new leather lounge...all bought with cheap credit...oh and lots of stuff for their 4 kids. Even a prime mortgage becomes sub prime in a heartbeat if you can't make the payments and the real value just decreased 40%. Think it cannot happen? Watch...real estate had tripled in the last 7 until just recently. Utter madness. Perth will be hit HARD.

Either peoples wages double or house prices crash - which do you think the govt would never let happen...which do you think the govt cannot stop?

This, our consumer economy, is what the Reserve Bank is desperately trying to prop up. Ultimately they cannot because it is impossible.

Jobs will be lost in the mining sector, tourism etc and that ripples out across the economy...estate agents, boat, car, TV, white goods sales all fall...law firms who specialise in conveyancing, trucking firms, mine support industries. All laying off staff and that ripples out further...builders, brickies laborers, plumbers, electricians, roofing people..and then banks.

Local and State govts start to feel the squeeze from a lack of stamp duty revenues etc...they wont fire people of course so they borrow and/or put up rates - we've seen that already - save water they screamed, so we did, they lost revenue and put up the rates based on artificially inflated land values. Wanna lay bets on how fast land values will be adjusted downwards and thus the rates?

Then we get to commercial real estate - already taking a hammering in the US - in fact had it not been for the commercial real estate bubble lasting until a few weeks ago the US would have been in recession last January. Businesses go broke and vacate leases, new businesses don't start and yet look at the mad building of commercial real estate that has been going on in the last 7 years - new shopping malls, industrial estates and theaters.

Look at the enormous amount of high density living that has gone up on the coast, much still unfinished...and look at the developers flirting with insolvency as we speak.

All this debt collateralised, leveraged, rated AAA and sold off to the ignorant in CDOs (Bonds) and worse, CDSs, (placing a highl leveraged bet that debts will default)...all completely un regulated...thank you elected officials again...and NO-ONE knows where all that worthless paper is or what it is worth...this is the real elephant in the beer fridge.

Then we get to the airlines.:sad:

This all must happen. Australia probably won't be hit as hard as the US/EU but we will be hit...how hard depends on how hard asia is hit. China, Japan and India in particular. We'll probably recover quicker because of the exchange rate and our minerals...3-6 years if history is anything to go on.

Who is to blame?

Ultimately our elected officials make the policies/turn a blind eye that allow this madness with low interest rates and affordable housing mandates that entice, or in the case of the US demand, lending criteria to be relaxed so people who couldn't get a mortgage all of sudden are convinced they can afford it.

Mortgage defaults/repo/bankruptsy were at historical highs in Australia for the 12 months before this latest fiasco..what do you think happens next?

If you're older than early to mid 40s you're seen it before - probably not as bad - for you 20 somethings watch and learn. Watch the pollies **** this up.:hmm:

neville_nobody

9th Oct 2008, 01:47

Anyone else see the UWS Economics professor the other night on the 730 report? He was very much doom and gloom. I would not be going anywhere near starting out in aviation if you listen to his advice. Basically he said get rid of as much debt as you can and get employment in a secure industry and hang on. Best case scenario was a recession that hits hard and last for a few years. Worst case scenario was great depression stuff. I will post the transcript when they print it.

PlankBlender

9th Oct 2008, 02:23

Chimbu, some very astute observations, as always ;)

BUT I think you're wrong in one of the central and early assumptions in your chain of events: Asia, and particularly China, and to a lesser degree India, will not be dragged into a massive recession methinks.

Why? China is so incredibly cashed up (they are the main financier of the Bush administration's loose monetary policy, a delicate irony often overlooked) and is such a huge net buyer of commodities, that it is very resistant to economic downturn elsewhere in the world. Most of the growth in China is home made. There are hundreds of millions of peasants climbing the social ladder, a development akin to industrialisation in Europe a few hundred years ago. In my view pretty much nothing can stop them. Also, they're protected by a system that is not pure capitalism and as such can be more inventive and ruthless in times of crises.

Of course trade of China (and India for that matter) with the rest of the world will slow, but most of the growth in those countries as I said comes from within and ripples out (private and infrastructure construction is probably the biggest part). Economic growth comes in large parts from population growth and access to means of production, and this is in its purest form what is happening in India and China these days. (I'd even go so far to say that this won't stop even if the world's financial system grinds to a halt. China will simply decree a system of their own and continue. A little far fetched? Maybe. Possible? Absolutely. But I am digressing..:E)

The US are going down fast, and deservedly so, and are taking the willing participants of their financial follies with them. Good! That bubble needed to burst much earlier. I won't look at my share portfolios for a few years and otherwise probably not be affected too much..

Aviation: As mining will continue to develop (maybe a bit slower), demand for aviation in those parts will not dry up. The training industry will continue to grow, demand from China, India, the Middle East and the rest of Asia will not slow too much (see above, growth there will continue). The Middle East is equally cashed up and rapidly growing with their oil money, so I don't expect that too slow either.

House prices in Australia? You're spot on, the situation is ridiculous and there's a bubble waiting to burst, and I've got a few bob stashed away for when it'll happen, I'll snatch up a nice little bargain then. Every folly needs at least two willing participants. In this case it's greedy bankers, estate agents and developers on the one side, and silly private individuals on the other hand who would rather ruin themselves than rent. They've got another thing coming!

Yes, eventually there will be a property crash in Australia, but it's not going to be as a direct result of this US-made crisis. (There'll be a change of government in the US soon, and things will calm down and right themselves, capitalism has a way of adjusting supply and demand automatically).

When it does crash Down Under, it'll crash big, because we're sitting on a house bubble worse than in the US (7.5 times annual earnings? Ridiculous and unsustainable!). But Aussie homes are not secured by the dodgy financial instruments that are falling apart in the US, and banks not majorly affected (we are at the end of the world, remember? :E).

What results the crash here will have I can't even begin to speculate on. But it will hopefully end a situation where the government can keep land release for development way behind population growth (thus artificially increasing land prices), and maybe, just maybe, it will dispel the imported Anglo-Saxon myth that it's somehow uncool to rent..

In three words: Keep flying guys :ok: Demand for pilots will continue to increase, especially because now even more budding pilots will shy away from forking out the cash to get their CPL's.

[Steve]

9th Oct 2008, 02:37

The pilots of the economy grappled with the controls (and tried to avoid a nearby day-care centre) as the economy entered a deadly plunge. Banking passengers screamed in terror as their investments suddenly lost altitude.

"It was terrible, the floor suddenly fell from under us. People were screaming and crying everywhere. I thought this was the end. I saw flashed of 1930 before my eyes. And I'm not sure we're safe yet." a passenger was reported to have said just after the initial fall.

A well known pilots web site released a dramatic trace (http://au.finance.yahoo.com/q/bc?s=AUDUSD=X&t=1d&l=on&z=m&q=l&c=) of the economy's altitude information. A spokesman from the investigation refused to comment when asked to confirm or deny the accuracy of this information.

A Government spokesman said that the problem was caused by a near-miss with another crippled economy and re-iterated that there were no problems with the engines of the Australian economy.

The spokesman went on to say that the economy was still flying, although it is uncertain as to whether it can regain any of the lost altitude. He is confident that the pilots can bring it in for a soft landing.

The regulator, who had been out to lunch for several years, has stated that many of the economy's systems will need to be examined to determine the exact cause of the incident and to prevent a future occurrence.

A factual report should be released within 30 days, presuming the economy lands somewhere.

Gnadenburg

9th Oct 2008, 03:06

The AUD needs to be driven down further. Living abroad I have noticed Oz exports are starting to get caned by competition from the USA or USD pegged currencies.

There are a million Australians working abroad. Government should look at how to encourage them to repatriate their wealth to help the economy. They will probably just want to tax them.... :ugh:

Good Australian real estate should hold out OK. Propped up by a supply shortage and foreign bargain hunters.

Australia should do OK. Helped by a lowered currency.

Track Coastal

9th Oct 2008, 03:24

Australia should do OK
The leading recipient of our exports is Japan. Its a train wreck over there I believe.

The leading recipient of our Iron Ore is China (closely followed by Japan) to the tune of around $9B worth. Chinese leading steel makers today collectively announced an immediate cut in production of at least 20% on Business Asia. Some of our Coal is used for Coking as well as power for the mills.

Orangputi

9th Oct 2008, 03:42

Hi Gnadenburg,

I concurr with your comments, however, I agree that the best tack is to just ride it out pick up the odd bargain and not get too greedy.

Perhaps is Eden valley anywhere near the abode of peace?

Gnadenburg

9th Oct 2008, 03:42

So there's a hiccup in the commodities boom? Thank Christ for that! Have you seen the air in China?

Won't a lower AUD help the mining industry have a softer landing? A lower AUD will help other Oz industries- agricultural export etc.

First thing I would do is put off some expensive defence contracts. The arms race in Asia is on hold Mr Rudd.

BrokenConrod

9th Oct 2008, 04:40

I wonder how many Aussie dollars were on board the Qantas A330 that "plummeted" off the coast of WA?

Could have been the cause of the problem!

BC :E

Chimbu chuckles

9th Oct 2008, 07:17

Ah plankbender an optimist after me own heart:ok:

China indeed has an enormous trade surplus which I suspect the Chinese will use strategically rather than just hiding their heads in their hands and screaming "We all doom..la".

But I don't think it will be enough.

Those young people that are currently learning to fly who are REALLY keen will keep on and when things eventually pick up will be well placed to take advantage...many will give up and do something else...has always been thus. I learned to fly in the early 80s during that recession, went to PNG because there were NO jobs in Oz...had a ball. Africa and PNG are still there. Expectations will need to be re-adjusted - LH seat of shiny jet within 3 years of first solo will be replaced with L/H of Cessna Caravan for several thousand hours but that won't bother the dedicated inordinately.

Whomever is in power in the US in January will be more passenger than leader. What needs to be done is so politically unpalatable that I don't think either has it in them - I suspect Obama will make it worse and McCain will be a mere spectator - either will be a one term wonder, as will Rudd. Maybe in 4 years time the next POTUS might do the right thing. As Churchill said "The Americans can always be relied upon to do the right thing - after they have exhausted every other possibility".

This is not the end of the world merely the bursting of the latest economic bubble in a long line of bubbles - until next time.

PlankBlender

9th Oct 2008, 08:21

You're obviously not renting.

Actually, I am. I wouldn't buy into a massive bubble like this unless I was looking for a high risk, high cost, long term investment :=

For most of the renters I know (Mrs Leafblower is a property mgr) the rent is equal to the mortgage repayments... and in some cases, a litle more.

Mortgage payments don't equal investment. A good portion of a mortgage goes to the banks as interests and other costs, which is lost for the buyer of the property.

Ask any independent financial advisor, and they'll tell you that the stock market outperformed real estate consistently over the last two to three decades.

This may sound weird, but if you actually run the numbers, it works: Instead of buying, rent and spend the difference (there is one in most places, although property folk may want you to believe otherwise) investing the stock market (buy now, it's a good time :E), and you'll come out in front after twenty years. Doubt it? Work through an example using average earnings, house prices, real estate and stock market gains, and you'll see what I mean. Assume similar risk profiles when selecting mutual funds..

ABC news has just reported that one iron ore exporter's clients are asking for their shipments (to China and India) to be delayed.

I wasn't saying growth will not slow, but it won't stop (i.e. China will not enter a recession as per the technical definition).

PB

Howard Hughes

9th Oct 2008, 08:48

Who are you trying to convince?

I have seen properties advertised in the last 3 months where it would be possible to purchase two properties in Sydney, rent one and live in the other and it would probably only cost you about $50 per week!:eek: These are not properties out in the 'mortgage belt' either, they are in sought after areas...:ok:

I wouldn't be going with any 'independant advisor' who advises an 'all the eggs in one basket' approach! Shares have their place in a balanced portfolio, as does property. I know a number of people who do not own the house in which they live, they do however have property as part of their investment strategy.:rolleyes:

Jabawocky

9th Oct 2008, 08:50

HH

PM me where these are....I'll go ya halves! :ok:

J:ok:

Howard Hughes

9th Oct 2008, 10:39

Check Domain Jaba, many properties that you can positively gear, in particular in the city! Rent's are ridiculous, I reckon it's all the 'get rich quick with shares' types who now have sold off their property to invest in the stock market, pushing the rental prices up!;)

ferris

9th Oct 2008, 10:43

PB.
You have to compare apples with apples. Leverage is required.

Banks etc allow you to leverage into property at a much higher gearing ratio than shares. Unfortunately.

glekichi

9th Oct 2008, 11:53

Why would anyone pay rent for a house that is more than what the mortgage would cost? (Except in a slump when no-one can get a home loan)

I am looking at buying my first place (but am being patient and waiting for the bubble to finally burst) and have found that in most cases the mortgage is close to double the price of renting an equivalent property.

PlankBlender

9th Oct 2008, 11:56

ferris, margin lending can do the same for your in shares, but is also associated with increased risk of course.

I looked at it a year ago but steered well clear of it once I dug into the potential pitfalls.. like a huge bet, really. If you don't know what you're doing, you might as well put it on the horses..

Same really with betting seven years' salary on continually rising property prices.. unless you have a really really good case for negative gearing (assumes you'll be paying taxes in Oz for years to come, which is not a given in aviation), you might want to stay flexible and independent..

..in most cases the mortgage is close to double the price of renting an equivalent property.

Says it all, really.. mate, rent a place, stay flexible for the next position on the other side of the country or the other side of the world, and invest the half you've saved wisely. For a young person, generally recommended is a third in bond/cash/term deposits, with the rest in mutual funds of whatever risk you find acceptable, with different institutions around the world, in at least two different currencies.

desmotronic

9th Oct 2008, 12:10

CFD accounts effectively give you 90% leverage against almost any stock on the asx. Long or short until shorting got banned.:ugh:

Metro man

9th Oct 2008, 14:58

This may sound weird, but if you actually run the numbers, it works: Instead of buying, rent and spend the difference (there is one in most places, although property folk may want you to believe otherwise) investing the stock market (buy now, it's a good time ), and you'll come out in front after twenty years. Doubt it? Work through an example using average earnings, house prices, real estate and stock market gains, and you'll see what I mean. Assume similar risk profiles when selecting mutual funds..

I've seen the numbers for this and it can work, provided you are disciplined enough to actually invest the difference rather than spending it on a higher standard of living, and the stocks you buy don't all crash. Personally I would rather have the security of owning the place I live in. Companies can go broke leaving your shares totally worthless.

Property markets can crash leaving you with negative equity, or interest rates can go sky high, but by hanging in there long term you will come out ahead. How much is a Qintex share worth today ? Compare that to a house bought at the wrong time in the 1990s.

ferris

9th Oct 2008, 15:09

PB, you are missing my point. Once saw the bloke from "money" standing outside his first house in SY, talking about how he had paid 100k for it, and now it was worth $350k (this was a while ago!!). He then went on to say that if he had put the 100k in an index tracking fund, he would now have 750k. Thats fine, except to put 100k in an index tracking fund, you need 100k (pretty much). To put 100k into a house, you need 10k (pretty much). Do you see my point about leverage? Go ask a bank how much they lend you for shares if you have 10k.

ps. there is no point in talking about the greater returns of the sharemarket if you cant handle the risk inherant in the sharemarket.

A fairly recent inception are leveraged funds, which might be the answer. A lot different to a margin loan.

Howard Hughes

9th Oct 2008, 20:56

A lot of people sweating on a margin call at the moment, I'm not sweating on the bank making a call on my housing loans, not yet anyway...;)

PlankBlender

9th Oct 2008, 22:45

To put 100k into a house, you need 10k (pretty much).

Granted, but don't forget this comes at a high price: interest, immobility to a degree, and certainly when buying into a big bubble you're a sitting duck for years on end potentially sitting on negative equity..

Miraz

12th Oct 2008, 06:39

I'm not sweating on the bank making a call on my housing loans

Have you checked the termination conditions on your housing loans? They make pretty sobering reading, they can be pulled at any time with very little notice.

Here are some interesting graphs:-
http://www.whocrashedtheeconomy.com/ausrealhomeprices.gif

http://www.whocrashedtheeconomy.com/householddebt.gif

http://www.whocrashedtheeconomy.com/householdnetsavings.gif
http://www.whocrashedtheeconomy.com/housepricevsrent.gif

PlankBlender

12th Oct 2008, 06:58

Miraz, if the info underlying those graphs is fair dinkum and not some skewed stats to make a political point, it's even worse than I thought.

Such a bubble will need to crash, and it'll be bloody ugly when it does :eek:

Torres

12th Oct 2008, 07:29

Checking my Super, I calculate I should be able to retire in ten years, totally broke! :{

Sky is reporting a resurgence in Australian real estate sales, following the recent interest rate cut. I suspect we'll feel pain in Australia, but not as much pain as the residents of many other countries - e.g. Iceland......

This may also be the final straw for a few Pacific nations.

Chimbu chuckles

12th Oct 2008, 08:55

Don't kid yourself Torres...look at those graphs on the previous page, they are accurate. Australian real estate is going to crash back to earth bigtime in the next few years.

Real Estate agents are madly trying to talk the market up but to little avail. The rate cut might have given it a little push but it is merely the last gasps of a bubble that is set to burst.

Stupid Govt caused this problem and stupid govt not only cannot fix it but will make the problem worse before it falls completely out of their control as has happened in the US.

They say we don't have a subprime probem in Australia...RUBBISH. We have the least affordable housing (by a long margin) and enormous house hold credit problems (using increased equity to by 'stuff'). All driven by artificially low interest rates and a decade or more of 100% loans etc.

The shoe is loose and WILL drop before long. NSW has been in technical recession for over 12 months, Vic, Tas and SA are always in recession. With China and Japan going into recession QLD, WA and the NT (the mining boom states) will be hit hard.

boocs

12th Oct 2008, 09:03

Very intersting points of view witten here. Thanks for the charts. As they say, a picture tells a thousand words.
b.

Miraz

12th Oct 2008, 09:17

It's worth looking at the history - the last time Australia suffered from a collapse in demand for resources on the back of a debt bubble was in the 1880's....property prices didn't recover until the 1950's

The scale of personal debt that we have in place now is entirely without precedent and the ability to service it has only been made possible by very low levels of unemployment....and the layoffs have just started to appear in sizeable numbers - prime debts can become sub-prime very quickly.

Even the much vaunted pillars of the Australian banking system are dependent on the international credit market for much of their funding, and they need to refinance nearly A$250bn of international debt in the next 12 months....the international interbank lending market is looking pretty ugly at the moment, and they will be competing with newly re-nationalised banks with sovereign credit ratings.

The A$/USD rate is being hit with a double whammy - on one hand the rate of debt contraction in the US economy is driving the USD up (less debt = less money in circulation....supply vs demand dictates that the USD will rise....when the Japanese property market collapsed in the 90's the value of the yen doubled) and on the other hand the demand for the AUD that was being driven by the resource boom and high interest rates is going away....not a pretty picture, I would not be surprised to see the AUD below USD0.40 over the next couple of years.

Howard Hughes

12th Oct 2008, 09:22

not yet anyway...
Miraz if you are going to quote, don't leave bits off!:rolleyes:

I am well aware that housing loans can be called, but it is not likely provided there is still considerable equity in the property. If there was to be a major downturn somewhere in the vicinity of a 50% drop in prices then I might be in trouble, but as for now I am not sweating!:ok:

Chimbu chuckles

12th Oct 2008, 09:27

Anybody talking on a mortgage based on the recent rate cut is an idiot...unless they managed to buy well at one of the MANY 'mortgagee in possession' auctions that are going on now. Home repossessions are at historical highs and have been for a year or more...many of these auctions have seen houses sold for 50% of what they were thought to be worth as recently as 6 mths ago.

With a goodly sized deposit and in the above circumstances and assuming you were buying something you absolutely loved and wanted as a home, as opposed to an investment, you might be ok.

Housing bubbles are the worst kinds of asset bubbles because of the time it takes to work out of the system, for prices to bottom - and demand to be stimulated again - and for people to get over their fear let alone be able to afford to buy at all.

The dot com bubble was hardly noticed by the average man in the street as an example...this housing bubble will be very different.

That is what makes the policy settings (low interest rates/relaxed or non enforced lending guidelines) put in place by our idiot elected officials, that promote bubbles, even more idiotic.

Miraz

12th Oct 2008, 10:45

it is not likely provided there is still considerable equity in the property

The one to watch is from the lender not being able to refinance their loan book, and needing to cull loans that they can no longer provide - if this happens, and it's still a fair way off from happening, then you will just get a letter in the mail requiring you to pay off the balance of the mortgage immediately regardless of the amount of equity in the property or your payment record.

james michael

12th Oct 2008, 20:39

Miraz

I'm backing your thiunking. Those graphs should be reading for all Australians - except 90% wouldn't comprehend.

Had a beer at the Aero club Fri night with an Aussie Home loans guy who had just been to consolidate debt for a guy who purchased a Harley, all up $54K, on his credit cards - because he had to have one (but could not pay the house mortgage).

A poll on the interest rate reduction last week showed - 45.5% were NOT going to use the cut to pay off their mortgage.

If you'd put up the Balance of Trade also there might have been even more shivering.

Two major crises in the pipeline:
1. The Australian sub-prime crisis. Look at the current trend in bankruptcy and repossession and remember there has to be $ out there to purchase the repos. (Rightly or wrongly a lot of that $ went into super under the Howard changes and is now suffering also). Unfortunately the USA probably won't even know about ours.

2. The lunacy of the carbon trading / global warming action Oz proposes that will add costs to everything further sucking away the household income and simultaneously making us even less competitive with the nations who already supply much of our goods.

The false spending boom of recent years propped up by loans and three years interest free must come home to roost sooner rather than later, or the crash worsens.

Chimbu chuckles

13th Oct 2008, 02:20

I'd say the bulk of any mortgage action taken under the recent cut was people renegotiating their existing mortgage to the lower rate.

An interesting statistic from the US, and going on your story of the Harley I don't doubt it is much different in Australia. 20% of new cars sold were sub prime loans which are now also defaulting.

james michael

13th Oct 2008, 02:58

CC

That 20% is another frightening statistic - and an indictment of how the education system is turning out people who cannot work out that 100% of your income is the max you can spend :)

My home loan in 1971 was a nightmare. Reams of paper, only a certain max % of income, only a % of the wife's allowed in case she fell pregnant, and I had to borrow a thou OTQ from a mate to bridge the gap. But, I paid the lot in 5 years. When I then purchased the rental property, still a tough bank approach but easier because I had collateral. But, I wasn't getting the $ without proof of ability to repay.

Then along came the US gurus to teach our bankers that their job was not to jealously guard the bank's money - but to get it out there working. And, the pendulum swung too far to the other extreme. Now they dish it out without qualms, particularly credit cars with their higher rates.

If you look at Harvey Norman and their "interest free" purchase scheme - the rate on anything outstanding at the end of the interest free period is 29.49%. And, like the pokies, they have a fair idea they will get a good percentage of mugs.

I think Aussie is in a lot of strife and we are just starting to see the effects. Ignoring the Aussie dollar comparison with the USD, I feel a recession coming on.

Track Coastal

13th Oct 2008, 03:44

Miraz, I was going to hit you up for onwards borrowing my copyright here ( http://www.pprune.org/jet-blast/313082-big-booms-big-busts.html ) from February but I see you have sourced them differently.

Anyway here is a corker on Aussie banks. James Michael it indeed was Americans that taught us how to run banks properly...
Big banks ignored sub-prime troubles | The Australian (http://www.theaustralian.news.com.au/story/0,25197,24486080-2702,00.html)

Metro man

13th Oct 2008, 06:09

I recently purchased a property in Asia, and despite being on a good income, reasonable length of time in my job and a good credit history, I was unable to secure 90% finance. 85% was the maximum I could get, a deposit of less than 20% is regarded as risky and these loans carry a higher interest rate and are hard to get.

No borrowing 105% of the property value here. However local banks are solid and actually getting increased deposits in these uncertain times. No government bail outs necessary due to the strict regulations.

Seems that the sort of people who can save up a 20% deposit and therefore have a large vested interest in the property, are the sort of people who keep up with the repayments. Unlike those who got more than the place was worth and simply turn over the keys in difficult times, leaving the bank to bear the loss and smiling because it was cheaper than renting.:hmm:

sprocket check

13th Oct 2008, 07:06

from the age today:

Property clearances on the weekend down 50% in metro Melbourne. It may not end up as bad as US, just depends on if there is a break in the domino line up.

btw, those relying on super and within 5-10 years of retirement...not good.
sc

maxter

13th Oct 2008, 07:23

20% of new cars sold were sub prime loans which are now also defaulting

C.C. where did you get this from? I have not seen anything like that being reported yet in Australia.

It is my understanding, that while rising, the loan defaults here are still low.

Chimbu chuckles

13th Oct 2008, 07:35

It was a US stat in an article about how deep in the mire GM et al are.

PlankBlender

13th Oct 2008, 07:40

btw, those relying on super and within 5-10 years of retirement...not good.

Anyone in that group should have shifted most of their super into cash or bond like securities that are largely unaffected by stock market movements.. it's quite shocking how little people seem to understand about the different phases of their lives and how their investment vehicles need to be tailored every decade or so :=

james michael

13th Oct 2008, 07:55

Maxter

I did not see the 20% but I did note either Jeremy Clakson or John Connell in the Oztralian talking of GM and Ford being about 10 months from belly up and Chrysler probably also there but due to private structure not being calculable.

Loan defaults here are still low and rising, as you note, but the trend is worrying and how many have extended their home loans to purchase cars, boats etc. If only people understodd the basic rule of 78.

PB

However, then you have to buy back in and time it. I went conservative and only dropped 7% last year - I treat that as within stock market tolerances.

One problem discussing these matters on here is that most pilots (a) have to use their scone and have a basic grasp of maths (although sometimes with 1:60 I wonder about next gen) and (b) have had to save money for their licence and subsequent flying. Not being complacent about this group but I suspect there are many out there far less numerical and logical in purchasing than are we :)

maxter

13th Oct 2008, 07:57

C.C.

Sorry I misread your reference to U.S. car loan defaults. I thought you were saying it was here in Aus. I have seen these reports re the U.S. and I guess that would apply to most loans there.

I am certain we do not have anything like this level of default yet. Unemployment at 6-8% will change that, if we get there. It is my belief it is too low now for the productive good of the country. My businesses employ something in excess of 250 people and finding good new staff for any growth is a nightmare. The bottom end that are floating around now are unemployable.

It will be interesting when the first of the 3yr interest free deals for plasma's etc become due. I would predict a very high level of default.

PlankBlender

13th Oct 2008, 08:51

However, then you have to buy back in and time it.

If I understand those beancounters properly, the idea is that as you age and need to use rather than grow the investments, you limit your risk by shifting more and more of your portfolio to low risk, cash like instruments. You basically only keep as much as you can afford to lose in the market, that way you're shielded from crashes and recessions..

Obviously, this presupposes that you've reached your financial goals by the time you reach retirement and can "afford" not to take risks that could jeapordise your lifestyle..

james michael

13th Oct 2008, 09:12

PB

Agreed however it becomes more confused if you retire before 65 as - with current longevity and unknown future inflation factors - you need to plan a long way ahead so you don't run out your investments too early.

Re the housing debt, this is of interest (source RBA) - admittedly written in 2003.

http://www.rba.gov.au/PublicationsAndResearch/Bulletin/bu_mar03/bu_0303_1.pdf

One particular point of interest is the location of the debt - less than one-third of us:
According to the 2001 Census, 43.0 per cent of Australian households own their home outright; that is, they have paid off their mortgage. A further 28.4 per cent live in rental accommodation, and so they also do not have a mortgage on their home. The remainder – 28.6 per cent – own their own home, but are still paying off the mortgage. It is this last group which has accounted for the growth of owner-occupied housing debt and, by extension, for much of the growth of total household debt.

My reading of the report is that first it was too optimistic and second much of the debt affecting disposable income may well be the things everyone has to have AS WELL as their home.

Just in from the Dog & Lemon Guide five minutes ago (extract) - more gloom:
“The U.S. government will rescue Ford & General Motors because it has no choice. However, as part of their rescue package the U.S. government will almost certainly force Ford & General Motors to dispose of their unprofitable overseas assembly plants. The Australian Ford & General Motors plants will be near the top of the list for closure.”

“At this point the Australian state and federal governments will undoubtedly rush in with their own rescue packages, but these rescue packages will merely postpone the inevitable. The sad fact is, car manufacturing in Australia was only marginally profitable even in good times, and the good times are long since over.”

Big car sales slump | theage.com.au (http://business.theage.com.au/business/big-car-sales-slump-20081003-4tc6.html)

Overall, the Aussie dollar is not looking good!

Jabawocky

13th Oct 2008, 12:28

I heard George Bush say one country should not do something that is counter productive to anothers efforts... or such like. I guess that does not apply to Ford and GM:cool:

J:uhoh:

PlankBlender

14th Oct 2008, 00:43

I heard George Bush say one country should not do something that is counter productive to anothers efforts...

This guy is the biggest joke in the world, if it wasn't so sad it would be funny :yuk:

He might want to look at himself first on that one (like that's gonna happen :rolleyes:), it was after all the lax monetary and fiscal policies in particular and lack of economic leadership in general of his administration, that created the environment which allowed the current situation to develop in the first place :ugh:

The only good thing that might come out of this, is that hopefully there will be a change of administration in the US that gives them a chance to right some of the wrongs of the past eight years..

james michael

14th Oct 2008, 01:16

Continuing the sad news for our dollar, and the motor concerns of last nights post:

Ford to slash unconfirmed number of jobs (http://news.ninemsn.com.au/article.aspx?id=646384)

(Probably predictable when the latest Ford import CEO for Oz looked and went back home).

The other item that will have a long term effect on our dollar sustainability is the SKI club (Spending the Kids Inheritance). Now the reverse mortgage for oldies is becoming a lifestyle option, there will be another slowdown when no inheritance passes to the kids later on.

404 Titan

14th Oct 2008, 02:33

PlankBlender

While I agree with your description of “Dubya” and his administration, the rot unfortunately didn’t start with him. The credit problems the US and the world are facing really started under the Reagan administration. The Clinton administration allowed it to accelerate with programs to get the poor into their own homes etc. “Dubya” just didn’t do anything to stop it. One has to ask what the common denominator with all these administrations was. The name Allan Greenspan comes to mind. He was the one that vermontly pushed for the unregulated capitalist economy of the US and vermontly supported the Derivatives market. His legacy will be remembered over time as the person that ultimately caused this mess.

Orangputi

14th Oct 2008, 02:56

Making Greenspan head of the Fed was like puting a fox in charge of the chicken pen or as a friend of mine indicated a barman in charge of the breathaliser

Greed is a wonderous thing, however, the likes of Greenspan and his cronies wont go hungry, it is the poor average MR and MRs middle class and lower middle class Aussies that will suffer. The housing bubble is going to really hurt!

Chimbu chuckles

14th Oct 2008, 03:14

Certainly enough blame to go around 404 and the Clinton Democrats really gave it a BIG nudge (threatened, badgered and cajoled fannie/freddie to relax lending criteria) but it goes back as far as the Carter Democratic Administration.

I suspect Reagan did **** all about it but 'Dubya' tried 17 times in the last 8 years to regulate fanny and freddie unsuccessfully. Certainly its true that at various times in the last 8 years the Republicans had control of the senate but mostly they didn't REALLY because even when they, theoretically, had the numbers at least two 'republican' independents caucused with the Dems. Too there were enough republicans too afraid of voter backlash to do anything meaningful in help alleviate the situation - a by product of the US electoral system that essentially ensures Senators are permanently out on the stump trying to get re-elected.

It was electoral suicide to put yourself in a situation where the democrats could label you as being 'against affordable housing' or as a stooge for 'the big end of town'...I am sure you can imagine the rhetoric that was aimed at that section of the electorate to stupid to see they were being suckered into debts that could not afford. VERY few politicians have the balls to be labeled as such even when they would, demonstrably, have been doing the right thing for those self same voters.

Greenspan too was to blame for inflating a housing bubble to offset the dotcom bubble...Benanke seems to be either just as stupid or is caught politically like the proverbial dear in the headlights...Paulson was a BIG part of the problem as a CEO of one of the big investment banks collecting best part of 1/2 a billion in executive bonuses based on (now) illusory profits from CDOs/CDSs...how he could be seen as part of the solution beggars belief.

Too you can lay much of the blame for Australia's exposure to our own version of subprime at the feet of Costello for keeping Australia's interest rates too low for too long to convince Australian voters that they were in clover when really they were being set up in exactly the same way as those in the US. Now we see the politicians around the world collectively lowering interest rates, flooding the market with liquidity and, essentially if not actually, nationalising banks left and right to try and stave off the inevitable. If you ever wanted proof that politicians really are as stupid, or dishonest, as they seem I point to the cause of our problems, cheap, easy money, as also being, apparently, the solution:ugh:

james michael

14th Oct 2008, 05:29

CC

Very true. If you can find a copy of yesterday's Herald Sun check the two page case study P74/75 with the couple in danger of losing their home.

Priorities are summed up near the end 'Although our couple will limit their spending on entertainment and gifts, this was considered "terribly unrealistic".' 'Troy and Vanessa will take up some suggestions but have said they are not prepared or able to do most of the things George (the financial consultant) suggested.'

My underlining for emphasis. I think I'll head off to have some cake and eat it too - how can Australia survive with the 'all things today' mindset?

PlankBlender

14th Oct 2008, 05:56

Whereas you guys are undoubtedly correct in that the historical erosion of lending criteria has been going on for decades, it was the lack of oversight of the current administration that enabled the banks to dream up and globally flog the derivatives made up primarily of bundled sub prime loans, that made the current crisis possible.

At the same time, Bush and his cohorts have made America the b!tches of Japan and China (mainly) by borrowing to spend themselves into the worst budget deficit in modern history :ugh:

"This administration will be responsible for the five worst federal budget deficits in American history," said House Budget Committee Chairman John Spratt
From here: Reuters AlertNet - U.S. CBO says FY08 budget deficit hit $438 billion (http://www.alertnet.org/thenews/newsdesk/N07331623.htm)

We can just hope that this correction was a wake up call for the next administration, and that they will clean up the American act somewhat, otherwise we might have seen the beginning of the end of the most influential economy in the world..

404 Titan

14th Oct 2008, 06:24

PlankBlender

Whereas you guys are undoubtedly correct in that the historical erosion of lending criteria has been going on for decades, it was the lack of oversight of the current administration that enabled the banks to dream up and globally flog the derivatives made up primarily of bundled sub prime loans, that made the current crisis possible.
And guess who strongly urged the current administration to adopt this policy? You guessed it, Alan Greenspan.

james michael

Unfortunately for ‘Troy and Vanessa’ unless they execute all the financial consultants advise they will have his advice forced upon them whether they like it or not and then some. I have no sympathy for people like this. Unfortunately my brother falls into that category as well. :yuk:

OZBUSDRIVER

14th Oct 2008, 06:26

Sub Prime lending in the US has no comparison product here in Oz. The closest is a product with a savage non bank lender who charges like a wounded bull and if you have to use them you may as well sign the deeds and hand over your house because they will get it in the end.

The yank market went after the great unwashed and conned them into taking on loans some of them could never pay No Income No Job or NINJa s as the market calls them. Where we all got involved is some clever SOB "wrapped" a hundred of these loans at a time and securitised them with foreign banks and anyone willing to buy a piece of the action. The twisted logic was that out of a hundred loans only a small percentage would default....how wrong they were. These instruments were traded all over the planet and no one really knew what their exposure was to them.

I could be cruel and say the big banks have repeated the ninties all over again but this time they lent to the other end of the high risk market.

Where it is different here is interest rates whilst pretty low by oz standards is still relatively high by world standards. The mistakes of population control in the perverse idea of allowing Sydney to expand as it has with limited scope for large scale land development to keep pace with populatiuon housing growth forced a price bubble in Sydney real estate that was easily supported by lowish interest rates. This price bubble spread right around Australia. Little hamlets in Tassie were ravaged in as little as five years to go from cheap affordability with no jobs to increased market value with no jobs fueled by asset rich Sydney investors . Even as far as wheat belt towns in WA felt the touch of the east coast bubble. Darwin with its combined military build up and resources boom has forced up prices and that same situation in Perth and environs fueled by their own resource boom. Banks are tightening up on WA and NT as we speak because of this. Buyers are having to stump up more deposit to purchase in those states and THAT is what is going to force a collapse in those states of over-fueled land and house prices. Owners will not be able to easily offload an overgeared house in this market.

Cashed up Sy and ML folk chasing better surrounds in more temperate climes started the flood of investment right around the country. If you ask me the Reserve has stu:mad: big time with the last four rate increases. They were not required. Trying to bludgion a mythical inflation gene has just suddenly disappeared up in a puff of magic hokuspokus. The inflation number is still there! The foolishness of this incoming government trying to create an image of better fiscal managers has , in my opinion, forced the economy to take a deep suck and, in the ensuing mind rush, start to panic for no reason. In the last six months there is a sharp as I have every seen drop in consumer confidence. Is this the same country that survived the tech wreck? the asian crisis when all the paper tigers went up in smoke SARS and September 11th? Nothing has changed internally except a higher dollar(..not any more:E)

For the last five years I really thought we had finally beaten the idea that if the US sneezed we caught pneumonia. Now we are back to where we were fifteen years ago. My next bet is the Reserve is going to cut another full 100points and then hang on for the Keating rollercoaster of 2.0% rate changes that WILL break the back of land and house owners in Australia.

CC, you are quite correct. No politician can control what happens to the market. However, what they say, if they say it often enough, the sheep will eventually believe. Australia has been conned. Go and read up on monitary policy with the Banks. THEY MUST GUARANTEE ALL ACCOUNTS HELD since the demise of Pyramid in Vic. Political grandstanding! They must hold in cash the equivalent of all moneys lent on homes.(edit- I will get a ref for this) Australian banks are the most tightly secured banks in the world. Thats why they are four amongst the top ten in the world. Not becuse of their brilliant management...because we(through the government) made them that way.

Just watch now for a spree of big government projects around the country to pump prime the economy and try and revitalise the fragile confidence of business to start to invest in infrastructure.

I am soooo p:mad: off that we allowed ourselves to get sucked in..again!

We really do deserve the government we vote for!

No mind, I know the way out.

OZBUSDRIVER

14th Oct 2008, 06:34

PlankBlender, you beat me to it:ok:

My business is in the worst shape since 1990. Most of my work revolves around building infrastructure. It IS very quite. My wife is in finance, she is rolling along OK but the new first home buyers have dried up to a large extent. On that regard it will be very interesting to see what the banks make of this forced savings plan. It amounts to a drop in the bucket as far as helping with the purchase price. Effectively, it may lock out first home buyers for another five years in a worst case scenario.

EDIT- just to add. And this is the reason I cannot afford to fly at all!...there! That makes it more GA oriented!

james michael

14th Oct 2008, 06:51

404

Back in the 70's I paid off the house before I started my flying lessons on the basis of pay as you go, not on the never never.

The carpet was threadbare, the Holden weary - but I owned it all. Things came to us later - when I knew we could pay for them. The missus now understands why we did it because she now has cash in the purse and no debt in the last 30 years..

How do we get that message to the Troys, Vanessas, and your bro? Of course, that raises its own problem with the Aussie dollar because it busts the artificial spending boom and creates its own economic dramas.

Somehow I'm reminded of the Hal Roach line about the Irish guy who sold his bike and said "If I knew he wasn't going to ever pay me .... I'd have charged him twice as much" - I think the economy has turned Irish :rolleyes:

Chimbu chuckles

14th Oct 2008, 09:01

Ozbusdriver Australia does have a subprime problem...because many 1000s of mortgages were given on minimum or no deposit finance based on the belief that property prices were going gang busters (FOREVER) and they'd have 25% equity in a few years anyway.

If you put down 5-10% (or even 20-30% in some cases) on a house 1 or 2 years ago it is highly likely your mortgage is now subprime in that the house is worth less (if you HAVE to sell) than you owe the bank. This is 'ok' in the short term if you stay employed and interest rates stay reasonable. Unemployment is going up...watch the result of the mining boom losing some or all of its steam in WA (especially), NT and QLD.

Yes, not as bad as the Ninja loans in the US but with real estate prices at double the multiples of wages that exist in the rest of the developed world they are unsustainable. Real estate prices tripling within 7 years is a bubble that will burst and when it does even if prices only crash back to where they were 5 years ago that is a 50% reduction.

A large % of the population of Australia, everyone below 30-35, seems to think that real estate cannot go down (and stay down for a long time)/have never seen a recession/don't believe it can happen/have fallen for the BS that modern economic management has ended the boom and bust cycle of previous generations. Witness the couple in the above post.

I know people in their late 40s saying all the above.

Every week we hear the politicians talking and every week they have been wrong. I don't have any expectation that this week's attempts to avert recession are any more enlightened than last week's. Politicians in the UK (at least) have been receiving briefings by Japanese bankers and politicians on what happened in Japan back in the 90s...and rather like the couple above are cherry picking those parts of that advice that seem palatable.

Japanese real estate, if memory serves, fell by 80% back in the 90s and hasn't recovered since. I don't think Australia will be as bad for all sorts of good reasons but 50% would merely put us back in line with the rest of the western world at 3-3.5 times average wages for an average house...instead of 6-7 times.

I don't think the fear in the population is unreasonable at all. If they understood the true extent of the CDS/CDO issue that fear would turn to outright panic.

Very few people, including our elected leaders, understand it. One of the points made by the Japanese is the banks will lie through their back teeth about their exposure and hence they recommend 100% nationalisation of the banking industry in the UK, as an example. Brown is not doing that he is merely 'investing' taxpayers money and taking a shareholding...in institutions that are quite probably truly fecked units. Ditto the US.

I agree that our Banks in Australia have operated under some of the strictest regulation in the western world. That doesn't make them immune from credit defaults or the CDS/CDO issue, to which they are exposed to an extent that I am sure they are not being completely honest about.

Japan, our biggest trading partner by a long way, is heading for recession again just as it started to recover from its last recession..almost.

China will contract dramatically too if not go into technical recession.

Those two countries make up a huge chunk of the 'mining boom'.

I just bumped into Kiwi friends just back from holidays in NZ. They described NZ as 'mayhem' with properties (and toys) for sale all over and businesses going broke left and right...the rhetoric there in the media was 'the Australian bubble is about to burst - and take NZ with it' and you'd have to say that is much more likely than not.

Track Coastal

14th Oct 2008, 09:35

Weekend Oz: Big banks ignored sub-prime troubles | The Australian (http://www.theaustralian.news.com.au/story/0,,24486080-2702,00.html)

AUSTRALIA'S big banks ignored the sub-prime crisis in the US and actively took greater risks in the home mortgage market to see off a challenge from rival lenders.

The banks not only relaxed their lending standards in recent years - ultimately luring many customers into financial distress - but held off tightening their terms of credit to build a better market position.

Reserve Bank documents, obtained by The Australian using Freedom of Information laws, show the change in lending standards was driven by competition and the housing boom.

In the last six months of last year, banks informed the Reserve Bank that the proportion of new mortgages described as non-standard - such as low-document loans and those with high loan-to-valuation ratios - was increasing.

That was despite the sub-prime crisis, rising interest rates and evidence that more of their existing mortgage customers were unable to make repayments.

In April this year, as the Reserve Bank ended its run of interest rate rises, an RBA analysis found the relaxation of lending standards had allowed some Australians to take on extraordinary debts. Households with annual incomes of $60,000 or more could borrow up to five times their annual income - up from 4 1/2 times in 2004 - requiring repayments of about 50 per cent of gross income, up from 45 per cent in 2004 and well above the common cut-off point that lenders applied of 30 per cent.

Single individuals could borrow amounts requiring repayments of 50-75 per cent of their net income, about 5 per cent higher than in 2004.

Although most borrowers had not utilised their greater borrowing capacity, the analysis found "recent low-income home buyers do appear to have taken on relatively larger loans".

The median mortgage debt servicing ratio - the proportion of income spent on a mortgage - for recent mortgagors had risen from 20 per cent in 2003-04 to 22 per cent in 2005-06 and had been "accompanied by an increase in financial stress".

Based on income scales, the largest increase, 4 per cent, came from lower-income households and first-home owners.

The analysis noted that new and poorer mortgagors had increasingly found themselves in financial trouble; since 2004 there had been a gradual increase in the proportion of loans that were at least 90 days in arrears.

A follow-up analysis in July this year, based on data collected in May, found that for households earning $90,000 or more, their borrowing capacity had fallen by 6per cent since late last year. But most of that was due to rising interest rates as lending standards were "still much looser than in 2004".

That month, the Reserve Bank's financial stability department also warned that the relaxation of standards, and particularly the rapid growth in low-document loans, "may mean that the average borrower in arrears is now less able to 'self-cure' than in the past".

"Arrears rates on low-doc loans are currently a little over double that for prime full-doc loans," the department noted.

As recently as August, the Reserve Bank was unable to ascertain any significant tightening of lending standards, although that has since changed.

"In the housing loan market, the large banks have continued to increase their market share, and lending standards have not tightened significantly," one document noted, before a September meeting with banks.

"Nonetheless, with banks paying increasing attention to credit risks, there are signs that credit has become less readily available for some borrowers," it said.

The Government last month decided to spend $4 billion to foster competition in the mortgage sector. The amount was doubled yesterday.

max1

14th Oct 2008, 11:34

CC,
For someone I have read quite a bit of on these forums,

"It was electoral suicide to put yourself in a situation where the democrats could label you as being 'against affordable housing' or as a stooge for 'the big end of town'...I am sure you can imagine the rhetoric that was aimed at that section of the electorate to stupid to see they were being suckered into debts that could not afford. VERY few politicians have the balls to be labeled as such even when they would, demonstrably, have been doing the right thing for those self same voters."

I would have thought you would have been advocating that this lot do the right thing, be unpopular and lose but walk away with their principles intact.

It is a dig at your values, but one of the reasons we, collectively, are in the poo is because some people will not stick to their beliefs but believe that as long as they are still in the game that they can make a difference.

Longterm, people have respect for individuals who are willing to take a bullet for their principles and come back, than those who will compromise their principles for political expediency.

A politician cares about the next election, a statesman about the next generation.

I've stolen that line from someone. Churchill? But I'd love to find a statesman soon.

Chimbu chuckles

14th Oct 2008, 12:30

100% agree max1. I point out only what happened not that I agree with what happened.

A better wording perhaps would have been,

It was perceived as electoral suicide to put yourself in a situation where the democrats could label you as being 'against affordable housing' or as a stooge for 'the big end of town'.

Some years ago that perception was probably accurate. I think that has changed.

As my last sentence that you quoted said

VERY few politicians have the balls to be labeled as such even when they would, demonstrably, have been doing the right thing for those self same voters."

The world is particularly poorly served in the Statesman department in the last decades.

A couple of links that enlighten.

YouTube - Democrats Defend Fannie/Freddie from Regulation - 2004 Video (http://www.youtube.com/watch?v=YL36nwCSYUM)

YouTube - McCain's Early Recognition of Fannie/Freddie Crisis (http://www.youtube.com/watch?v=63siCHvuGFg&feature=related)

glekichi

16th Oct 2008, 00:19

So CC, PB, and Miraz, what do you make of the doubled first homeowner grant?

Obviously this alone isnt going to solve the economic crisis. Do you think it will cause the prices to spike and then make the housing bubble worse?

Its very tempting but to be honest there still arent enough houses out there in a realistic price range. I am baffled as to how the average person affords a house. The average income (amongst full time workers - and including overtime!) in Australia only realistically supports a $150,000 loan at today's interest rates!

I know we cant do any more than speculate, but, assuming it will, how long do you guys think it will take before we see the housing market crash?

I would have been happier if they left the first home owners grant as it was and made the new home grant available to all (not just first time) homes built for the purpose of occupancy (i.e not for investors). That would spark more building and take a lot of pressure off, and might even bring house prices down slowly instead of a massive crash.

flog

16th Oct 2008, 00:35

Show me an oversupply in available housing and I'll show you a housing price bubble. The US had a massive oversupply in cheap housing, crap rental returns and prices going through the roof.

Here, we have an undersupply, high rentals with high occupancy rates and the associated price inflation. Until there is a change in the supply situation nothing should change.

In theory.

Everything works in theory.

PlankBlender

16th Oct 2008, 01:00

Flog, you should have another look at the graphs on the first page of this thread: Rents have been very closely following inflations for years, and in relation to general cost of living across the country aren't higher than in other countries, with the exception of a few centres like Melbourne and Sydney, but the same is true in other large cities around the world..

The fact is that there has been an unsustainable price hike in Oz housing prices over the last ten years or so, closely linked as discussed to the resources boom and baby boomer spending. Once those two influences start to wither (and they will!), house prices will come crashing down.

The ABC quoted one of the pre-eminent real estate academics in the US the other day saying "real estate returns over the last few hundred years have averaged around 1 percent" (!!!) and "if it were any other way in the long run, people would not be able to afford to buy a house as prices would permanently and irrecoverably detach from incomes". The latter has happened to a degree in Australia (average house price being 7.5 times average annual income, as opposed to 3-3.5 times in the rest of the world), supply and demand laws dictate there must be a crash to correct this imbalance!

OZBUSDRIVER

16th Oct 2008, 02:50

I really should do my research. Our Dollar (http://www.exchange-rates.org/history/USD/AUD/G/180) tanked on July 15th, 2008.
What happened on or around that day?
Oil peaked
Aluminium started to slide
Copper peaked
KRudd gave his speech on Carbon Pollution Elimination and the announcment of the green paper.
AND the winner is....FAR EAST STEEL PRICES Peaked at over $900tonne in July and now heading south of $335tonne

All commodities heading south and we are just sliding with it. This is all linked to a very global retraction that is bought about by corporate greed in the land of the free. So, in a fashion, it is linked to the sub prime meltdown in the US but not because of our own domestic housing market.

Housing is fast becoming a victim and as pointed out about that Government forced savings policies?....by the way here is another $24000AU for a new house. BUT wait theres more! My kids just gave me a windfall $8500 to spend for christmas..NOT BLOODY LIKELY! Half of the surplus just disappeared in a pen stroke.

This government is trying to remedy the symptoms and doing nothing about the cause. This time last year, we were all collectively berated for causing inflation to increase by spending so much on ourselves over christmas????(What with?)..I wonder what this lever does?

Miraz

16th Oct 2008, 04:22

Show me an oversupply in available housing and I'll show you a housing price bubble

800,000 empty properties in Australia currently....if you peek under the covers of the media coverage of Australia's housing shortage it can *all* be traced back to the real estate industry which has a huge vested interest in perpetuating the fallacy.

Do you think it will cause the prices to spike and then make the housing bubble worse?

I doubt it will make any significant difference, it might tempt a few suckers into the market, but the apparent downsides now outweigh the benefits of getting a govt handout that the numbers of takers are unlikely to be enough to shift the market significantly.

The housing market is already starting to look pretty sick, the trigger for the crash is likely to be substantial rounds of job losses that force families to sell properties that they no longer have the ability to finance.

Have you been to a property auction recently?
I recommend it, you'll see more waving hands from a crowd of people modelling strait jackets.

One way to look at it is that the rental return represents the amount that someone will pay to live in the house, and the difference between that the cost of ownership (mortgage + return on invested capital) is purely speculative.
As the perception of future gains diminish then the speculative spread will shrink as rents rise, and prices drop.

Chimbu chuckles

16th Oct 2008, 05:37

Personally I was a bit stunned that Krudd could be offering inducements to first home buyers by doubling and tripling the first home buyers grants in this market. Can he really be so stupid as to think this is a good idea when the bubble is set to burst...must burst in fact?

Does he really think 100,000 or 200,000 more sub-prime loans is the answer?

The extra money to old age pensioners/carers is good but does he think a one off payment is enough? Are all old age pensioners now expected to fall off their collective perches just as that money runs out?

If he announced a massive increase in infrastructure spending I would have applauded, as long as it was sensible - like more dams/water infrastructure etc, not greeny BS like windfarms. That sort of thing creates jobs and has been sadly lacking in all state and federal govts for a couple of decades.

He has essentially wasted 1/2 the surplus bequeathed him by the previous federal govt...I even saw a piece, allegedly, written by him in the print media yesterday claiming HIS govt was responsible for the budget surplus ...like we haven't seen previous federal labor govts do that before:ugh:

THE world is experiencing its worst economic crisis since the Great Depression.

Share markets throughout the world have fallen dramatically and many developed countries are facing the possibility of a recession - this will mean a contraction in economic growth and rising unemployment.

The US, Britain and other nations' governments have been forced to bail out some of their largest banks and have moved to guarantee bank deposits to shore up confidence.

Australia is not immune from this global crisis.

It will affect our financial sector and our economy.

Banks are facing higher borrowing costs as foreign banks become less willing to lend, share prices have fallen significantly and slower world economic growth means less demand for our exports and lower tax revenues.

What has gone wrong? It boils down to a couple of core facts.

Roll the clock back to the US recession of 2001, to what was then described as the "tech-wreck", and to what happened when the US Federal Reserve responded.

Capital became very cheap, money became very cheap and, as a result, risk and the perception of risk was reduced.

You had excessively cheap finance, resulting in excessive risk in US mortgage markets.

At the same time, new financial products came on to the market, financial products that the regulators had not properly thought through.

On the one hand, you had excessive risk in the mortgage market, but on the other hand, underpinning those mortgages was the securitisation of them by financial institutions using financial instruments that neither they, nor the US regulators, properly understood.

The amount of bad mortgages was a problem.

But the much bigger problem was the fact that these sub-prime loans were hidden from the financial regulators.

Knowing how much people owed is one thing.

Not knowing how much US financial institutions were exposed to that, well, that is something else.

And that has created the two core elements of the problem we face.

So much for what went wrong.

What are we doing about it?

I strongly believe in levelling with the Australian people on the gravity of this crisis - it is the economic equivalent of a rolling national security crisis.

But in the gloom we also have a silver lining for Australia - out of all of the developed countries caught up in this crisis, we are probably the best placed of any country to ride it out.

If you've got money in the bank, if you own shares, if you own property, if you've got a job, or if you're looking for one, then Australia is probably the safest place in the developed world you could be.

This is because the Australian economy and our financial system are in very good working order.

Our banks are among the best regulated, safest and strongest in the world.

On Sunday I announced a guarantee on all cash deposits, whether from a business or an individual, along with guarantees on term funding - the loans banks make between themselves.

My Government has also built up a $22 billion surplus as a buffer against tough economic times. (Gee, I remember it slightly differently)

Those times are now here.

We thought ahead of a future when the rainy day would come, and it has arrived, meaning the Budget surplus can now be used responsibly to strengthen the economy.

The recent cuts of 1.25 percentage points in interest rates, along with any further cuts the Reserve Bank might make, mean that families paying off a mortgage have some breathing space after 10 straight rises under the Coalition. (that would be the interest rate rises the economy needed to rein in an economy out of control?)

This takes a bit of pressure off the weekly household budgets, which will also help keep the economy ticking over.

Back at the time of the Budget in May many commentators and critics told us to abandon the tax cuts we promised before the election - we rejected that approach, and those tax cuts are now also helping to strengthen the economy.

And the source of much of Australia's ongoing economic prosperity has been the China-led resources boom. (which will come to a grinding halt when the US stops buying the crap China produces)

The Chinese economy is still expected to grow strongly over the next couple of years. (You hope - but not very likely)

That will help to bolster demand for our exports and underpin ongoing economic growth here in Australia.

We have already acted decisively to protect Australia from the worst of this global crisis but there are many international factors that are out of our control. (Nope, they are all out of your control)

That is simply a cold, hard fact.

Nonetheless, we will continue to focus on the things we can control and use every economic tool at our disposal to protect working families, pensioners, carers, small businesses and everyday Australians from the damage that will be a consequence of this crisis.

Kevin Rudd is Prime Minister of Australia

Thank God it points out this moron is the PM:ugh:

Chimbu chuckles

16th Oct 2008, 08:55

Anyone smell fear?

Rates tipped to fall to historic lows

Thursday October 16, 2008, 4:07 pm

Australian interest rates are tipped to fall to the lowest level since the aftermath of the September 2001 terror attacks as the central bank worries about a recession.

One Sydney academic is even forecasting an unprecedented zero interest rate by 2010 on the premise that debt-laden consumers will close their wallets and threaten to push the economy into a deep economic contraction.

Macquarie Group interest rate strategist Rory Robertson said the Reserve Bank of Australia (RBA) would cut the cash rate, now at six per cent, to 4.25 per cent over the next year as global financial market turmoil put the economy under pressure.

That would be equal to where the cash rate was in December 2001 in the aftermath of the September 11 terrorist attacks in the US.

Interest rates have not fallen below that level since the RBA began publishing a target interest rate in January 1990.

Debt futures markets are expecting two bigger than usual interest rate cuts by Christmas.

They expect the RBA to cut interest rates by 75 basis points in November and follow up with another three-quarter of a percentage point move in December.

Another big rate cut next month, following on from October's one percentage point move, would be the most generous series of official interest rate relief since 1992, in the aftermath of the last recession.

Such cuts would take the cash rate to 5.25 per cent in November and 4.5 per cent by Christmas, a level not seen since mid 2002.

"As the financial conditions continue to deteriorate, the Reserve Bank is becoming increasingly worried about the outlook for growth," Mr Robertson said.

"So the Reserve Bank is cutting aggressively to limit the risk of recession in Australia."

University of Western Sydney associate professor of economics and finance Steve Keen is radically bullish on interest rates, predicting a two per cent cash rate by the end of 2009, dropping to zero per cent in 2010.

Dr Keen said the RBA would become more concerned about high household debt levels than inflation, as deep rate cuts in 2009 failed to stimulate the economy.

"The debt bubble is bursting and when it bursts, people stop spending and borrowing," he said.

"They (the RBA) can cut the pain but they can't boost the economy."

Earlier this month, the RBA cut interest rates by 100 basis points for the first time since May 1992.

The RBA cut rates by one percentage point on five occasions during 1991 and 1992.

Dr Keen said another series of deep rate cuts were needed now because household debt levels made up a much bigger portion of gross domestic product (GDP) than in the early 1990s.

He said central bank policymakers before the 1930s Depression focused on consumer price inflation and ignored asset prices, and have repeated that mistake more recently.

"Reserve banks everywhere go it wrong, not just ours," he said.

"They focused on the wrong problem which was inflation."

Macquarie's Mr Robertson said the RBA was more concerned about reversing the 12 rate rises from 2002 to March this year and would deliver bigger than usual rate cuts before Christmas to reduce home mortgage and business borrowing rates.

Source:By Stephen Johnson, AAP

maxter

16th Oct 2008, 09:15

C.C. Your beloved Liberal party did not back this package? Funny that is not what I saw 'Your Dear Beloved Leader' Malcom say.

Of course the Liberals are the font of all wisdom and virtue.:mad: I really wonder where the closed minded Right-Wing get off sometimes. I don't particularly like Labor and would vote 3-4 to 1 conservative, but at least I will open my mind a little beyond the Rabid ranting of those who just want a Right-Wing dictatorship for life. Thank god we still have a democracy and for that I am pleased. We should be able to change parties in power without the losers chucking all their toys out of bed. Don't like it just stay away as you have already chosen.:mad:

Maybe Pinochet in Chile would be more your style. Bondy and a few Aussies took to him many years ago.

Chimbu chuckles

16th Oct 2008, 09:36

Why did I say to deserve that little rant?

If you read what I have actually written instead of what you think I've written you might just glean the fact that I hold the greatest disdain for ALL politicians of whatever bent...I simply hold MORE disdain for the left.

I have stated above that we are in this bubble because of policy settings put in place by the liberals but that doesn't make Krudds claims of fiscal enlightenment any more factual.

He was handed the budget surplus last November by the liberals. You remember them, they were in power for the preceding 10 years.

If he was half as smart as he wants people like you to believe he would be leaving interest rates where they were recognising that the long term economic reality beats the short term pain inflicted on people who have been stupid.

Instead he comes up with a plan to entice more people into real estate?

The economy WILL contract, the housing bubble WILL burst and people WILL lose their houses. Whether this is a relatively short term (say two years) recession or something more akin to that the Japanese experienced through the 90s and until recently depends on what the govt does now. The Japanese interest rates went to zero and that didn't stop an 80% crash in real estate...why will it now?

So far they, and the US/UK/EU govts are repeating the policy mistakes of 1930.

If the Liberals were still in power and behaving the same way I would be equally as scathing of them...as it stands they must be breathing a HUGE sigh of relief that they lost last November...Costello especially...why do YOU think the little **** is so adamant that he is leaving politics?

argusmoon

16th Oct 2008, 10:35

You are talking in absolutes.
In economics/finance there is no such thing.
Demand outstrips supply in accommodation in pockets all over Australia..that is why rents are high....in pockets
There has has been little increase in the housing supply particulalry in NSW for a number of years.
House prices are generally stagnant or in decline over most of the country.
There are however pockets of real estate that will alwys command prices above the norm/average
The bubble as you call it will burst if demand declines markedly and the provision of credit declines with it.
People still need somewhere to live....whether they rent or buy.
Most peoples wealth lies in their home.Their levels of consumption are tied to that presumption
Bone up on the multiplier effect and its relation to inventory levels.
Aviation in this country and around the world is about to get hammered as discretionary spending is curtailed

Chimbu chuckles

16th Oct 2008, 11:38

Most peoples wealth lies in their home.Their levels of consumption are tied to that presumption

And therein lays the fundamental problem. If you buy a house for 300k and 5 years later it is 'worth' 1 million you are no more wealthy than you were 5 years before UNLESS you sell and realise that capital gain. Then you need to buy another house in that same elevated market. Unless you move somewhere cheap which people rarely do. The thing people more commonly do is buy a much more expensive house with that collateral...so they may go from 200k mortgage on their 'million dollar' home to a 600k mortgage on a 1.5 million dollar house....plus a boat and a couple of new cars. Yet the are STILL no more wealthy than they were 5 years before in any real sense. They are unlikely to be earning more in real wages increases because there essentially hasn't been any real wage increases since the 70s. People don't realise that because Keating changed the way CPI is calculated in the 80s and cut out food, transport and housing, among other, from the figures.

Many people have bought investment properties (I was until 2004) which is mostly what drove the property boom in SE Qld...people buying investment properties and retirement homes with the increased equity in their primary residences in Sydney and Melbourne. Not to mention their severely skewed idea of values. **** a waterfront house for 400k/500/600k? Cheap!!! it would be 2 million in Sydney!!!!

I have lost count of the number of people I have met who 'own' 20 houses on a fairly minimal wage...a 20 something J* Flight Attendant as just one example. The adds for these types of schemes are STILL running in Australia.

'Buy an investment property for as little as $50/mth using the equity in your home'

When the bubble bursts, as every bubble has in history, the vast majority of those investment properties will become sub-prime and the banks will be phoning those people demanding they increase their liquidity. They will struggle to sell them for anything like what they 'think' they are worth in this market.

I didn't learn all this because I am smarter than others I learned the hard way. 5 years ago I was 1.1 million in debt on about 1.8 million in real estate and earning 185k/annum net. I lost my job and spent a year unemployed and was forced to liquidate before my 'wealth manager' at the bank did it for me. I was very lucky in that I had bought these properties at the beginning of the east coast boom and sold at what I thought was the top in 2004. Properties I purchased went up between 50% and 300% in 2-4 years and I knew then it was a bubble. Imagine my surprise to see property double again since 2004.

This is unsustainable lunacy and all the policies we are seeing from our elected and unelected officials are hell bent on sustaining it. I have been too frightened to get back into real estate in the last few years because I could see the bubble bursting - I did NOT see the debacle we have unfolding in the US but had it not been that it would have been something else.

You can't eat bricks and mortar and you can't sell off bits of your house, unlike shares, to buy 'stuff' with. Unlike a company or commodity (before the last month anyway) it is very difficult to get a true indication on what real estate is worth because the volumes are so small compared to the millions of shares that are traded every day on the stock exchanges. A house is only worth what someone else will pay for it and at the moment foreclosure auctions (those that sell at all) are seeing 50% of what that house was thought to be worth by the owners a short time before. This is happening Australia wide in every major city.

Unlike Americans who 'invest' in the stock market (predominately) Australians predominately 'invest' in real estate. That is why our real estate is so much less affordable than US real estate...average house 7 times average wages rather than 3. Each of the prime properties I bought (3 waterfronts, 1 an apartment at Gold Coast, a house on a canal at Carrara and a great house on 1.5 acres on the bend of a river in Berrima NSW) I payed less than 3 times my wage. In no time flat they became 'worth' 6-7 times. They were consuming about 40% of my wages. Easy...until you don't have a wage anymore.

In case you hadn't noticed unemployment is rising.

A great deal of real estate in Australia is highly leveraged the same way stocks etc were in the US.

If you want to ignore reality then fine...but reality will never ignore you.

kotoyebe

16th Oct 2008, 12:08

Many people have bought investment properties (I was until 2004) which is exactly what drove the property boom in SE Qld...people buying investment properties and retirement homes with the increased equity in their primary residences in Sydney and Melbourne.

This only works if you have tenants. Rents have skyrocketed in the last 12 months suggesting a shortage of rental properties. Even here in Sydney!

I guess this was because of the increase in property values, and subsequent low rental yields forcing investors out. Is this not the market correcting itself?

Assuming the doomsday scenario of the banks calling in their dosh, where are these tenants going to live? Your not suggesting they will all become owners at the new low prices?

A house is only worth what someone else will pay for it and at the moment foreclosure auctions are seeing 50% of what that house was thought to be worth a short time before. This is happening Australia wide in parts of every major city.

I have been looking at upgrading myself. I live in mortgage belt outer suburbs Sydney. Can't find any bargains. Granted prices have reduced slightly, but certainly no bargains. And it's been like this for a couple of years. Went to a foreclosure auction myself last Saturday. Yes, only a couple of bidders, probably not serious anyway, and the highest bid was $150k UNDER the banks vendor bid. Passed in. The bank obviously thought it could negotiate a higher price because they didn't sell. So they haven't panicked yet. CC..should I wait, and how long should I wait to pick up one of these 80% off bargains?:)

Unlike Americans who 'invest' in the stock market (predominately) Australians predominately 'invest' in real estate. That is why our real estate is so much less affordable than US real estate...average house 7 times average wages rather than 3+.

I thought it was houses that got them in the poo?

I'm more worried about our leaders finding something for us to do other than dig stuff out of the ground. But then again, we want more than $50 a week in pay, don't we!

Chimbu chuckles

16th Oct 2008, 12:23

80% falls happened in Japan in the 90s...I fervently hope they won't happen in Australia for the sake of a few friends of mine. I merely seek to draw comparisons of what our elected leaders are doing right now to what other people's elected leaders did in similar circumstances in the recent and not so recent past.

The sub-prime 'problem' was approximately 3 million mortgages in default. A meaningless drop in the bucket of the US real estate market. Few if any were investment properties rather they were homes sold to people who couldn't afford the repayments. The disaster was caused by what the 'market' did. Massively leveraging and collateralising mortgages and selling them as AAA rated bonds and other derivatives.

You don't seriously expect me to tell you when you should upgrade your house do you?

Highest bid 150k short of the mark tell you something about what your house might be worth?

I will give you a hint...if that bank had reached a figure that got THEM off the hook (not the people who lost it) they would not have passed that house in.

kotoyebe

16th Oct 2008, 12:45

You don't seriously expect me to tell you when you should upgrade your house do you?

I did have my tongue in my cheek via a smilie!

Highest bid 150k short of the mark tell you something about what your house might be worth?

It actually tells me more about the dill that bought the defaulted house, and the bank that lent him the money, rather than mine. I guess you had to be there, but I would never have paid what he did...even with double or triple my income!

I'm going to bed now!

Ka.Boom

16th Oct 2008, 18:03

You make assertions but provide little understanding of economics or understanding of the australian circumstance.
There will be no bursting of any bubble,but rather a gradual deflation.
..unemployment fluctuates over time within a small band particulalry when an economy is where the Oz Economy is.
In reality an economy that has 4.% unemployment is considred to be in full employment.
Fear drives an economy and the stockmarket down.
The Australian economy is sound.
There will be no major collapse here.

Chimbu chuckles

16th Oct 2008, 18:27

I don't do hysterical:hmm:

Without a mining boom Australia is in deep trouble. We don't produce much of anything else, some cows and wool, the rest of the economy is based on people spending money which they have been, until recently, at an unsustainable rate.

The whole world is linked inextricably these days. With the US and EU/UK in trouble that is China and Japans biggest export markets teetering. That puts Australia in a VERY precarious situation. Everywhere else in the western world is madly trying to save banks from collapsing left and right and seeing house prices drop dramatically and foreclosures climbing.

Dropping interest rates and flooding the market with liquidity has never worked for very long before why will it work this time?

In 1929 the stock market fell about 35% in a very short period and for all the same reasons as now and the US govt did all the things they, and our, govt are doing now. There followed a 50+% rally and then in 1930 the markets dropped by over 80%...and pretty much stayed there until WW2.

The Australian stock market has dropped by 35% odd in the last 10 mths or so. The US/EU/UK markets fell more. The Australian Govt is dropping interest rates and flooding the market with cheap money. The US/EU/UK govts more so.

The housing market is drying up. Car manufacturers are laying off 1000s of staff and may very well cease to exist in Australia...the parent companies in the states are in HUGE trouble and in no position, or mood, to help. Toyota is about the only car company having a good year, so far at least.

My Brother in Law is in marine electronics - the arse has dropped out of that in the last months...ditto boat sales. I have no doubt the same applies across the board with white goods, TVs etc, most purchased on zero down and zero interest for two years - then about 25% interest.

Oil is down over 50% (did you know Australia is an oil exporter? - we export our very high quality oil and import **** oil to refine) and, as Ozbusdriver pointed out above, steel is down around 60% in the last few months. With demand for steel dropping the demand for coking coal will also be down because that is used to make steel. Coal is our biggest export. Hopefully the Chinese will keep buying it for their power stations but they do have plenty of their own.

With the world reeling under the worst financial crisis in 70 years what do you think will happen in due course with inbound international tourism? If Australians aren't buying cars, houses, boats, depth sounders, GPSs and TVs and are worried about the future are they still going on holidays domestically let alone internationally?

4% unemployment?

That would be the doctored figure that doesn't show people in part time employment whether they like it or not. It can hit 10% in the blink of an eye and that figure will STILL be a politically doctored figure. Much like the CPI is doctored by close to 50% by stripping out food, transport and housing but includes flat screen TVs that have actually been getting cheaper:rolleyes:

About the only really good thing happening is the currency is tanking...really bad for importers but great for exporters..and expats:ok:

Rudd has just blown 1/2 the budget surplus trying to get people to go into more debt.

Even the 30% of people who own their houses outright will be significantly effected because they are, for the most part, older Boomers relying on the increased equity in their homes to fund their retirement. Don't believe the BS about boomers all being wealthy. Those that retired a decade ago have pretty good defined benefit super schemes but for those retiring now, and in the next decade its mostly wrapped up in their homes and therefore illusory wealth.

Can you really not join the dots?

Take a look at those graphs at the bottom of page two again and tell me how this ends in gradual deflation...I am a glass half full kinda guy and I cant see it.

james michael

16th Oct 2008, 20:30

Kaboom

You have been reading political propaganda and the Herald Sun again.

In reality an economy that has 4.% unemployment is considred to be in full employment.

You got that correct. And, if we really only had 4% unemployment, it would be fantastic.

What we do have is the statistical machine juggled over the past two decades (non-homogenous data if you are purist) so that the unemployed statistic is artificially reduced by altering the ability to register. Fact. Ably assisted by the increase in casual and part-time and contract term jobs at the expense of long term full time employment. (how do you plan your house repayment strategy on a 1 year contract?)

Then you have a massive and increasing pool of "unemployed" - the retirees, many paying no tax to drive the Government juggernaut.

And in the mature agers particularly 40+ retrenched or reduced without payout you have a substantial group desperate for work that cannot get it - nor register for unemployment in many cases.

Chimbu is not being at all hysterical - rather, a realist. We get the Government we deserve and the great Oz public is quite happy to live in a fools paradise under either party. I don't think our economy is sound - it's based on selling holes in the ground at ridiculous cheap pricing and with a limited lifespan - for me, the AUD does not have a very bright future.

PlankBlender

16th Oct 2008, 23:38

Kotoyebe, you a realo by any chance? :}

Rents have skyrocketed in the last 12 months

Maybe you can provide some proof for that (from a reputable source with some data behind it, Herald Sun or the Aussie Realo Club won't do), 'cause it seems to me, looking at the ABS data on page one of this thread, that rents have been rising moderately in relation to inflation, nowhere near "surging" like house prices.. :=

There's no doubt that housing is in short supply, and here's a novel idea: Why wouldn't the government increase supply by releasing land quicker and reducing red tape to enable faster and more profitable development?

But I guess PR stunts like the one we just saw just plays better with the voting public in the short term :ugh: Let's see how the voters thinks at the next general election when they're sitting on negative equity :ugh::ugh:

Chimbu chuckles

17th Oct 2008, 00:06

Anyone else seen the fees councils charge a developer to develop a block of land?

70-100k:mad:

And it goes straight on to the price you pay...for doing precisely nothing.

Much like stamp duty...anyone been able to work out why the stamp duty should be more for a 500k mortgage than a 200k one? I mean theoretically they are just stamping a bit of paper.:ugh:

And for the love of god will someone shoot that stupid bitch Penny Wong...see her quoted in London in yesterdays media? ETS and saving the planet is a 'personal and moral' crusade that will go ahead in 2010 despite the meltdown.

Wanna bet?:=

maxter

17th Oct 2008, 00:24

I don't know what the real unemployment figure is in actual percentage but up to date it is definitely 'full employment'. It is basically only the dregs left. I operate in 4 states in Aus and in each one the cry form businesses that I see is there is no-one left who wants a job.

That will change no, there is nothing more certain that there will be many good people lose their jobs before this mess is over.

Not to certain that food is excluded from CPI. I remember a couple of years ago, after the cyclone in N.Q., the worlds best treasurer blaming bananas for the rise in cpi. I would agree however that CPI does not reflect what I see as real inflation. Reported figure is way to low.

Alistair

17th Oct 2008, 00:35

Hi CC, people only listen and act on what fits into their own perceived reality. You see it here all the time and you are seeing it throughout the world at the moment. Some still need to believe this isn't really happening.

For me, keep it coming. It has been an interesting read to see a different take on all this.

I can remember talking to a guy here in HK about 18 months ago. He was involved in setting up China's pension funds and later joined Goldman Sachs. After a few bottles of red he started talking about NINJA loans and what was being sold in the markets based on these kind of schemes. He was buckling down the hatches back then!

We have been hammered by exchange rates for the last few years, but as you say there may be a window of opportunity opening up for those of us overseas. Unfortunately someones loss usually ends up being someone elses gain and there looks like a tough time for Australia ahead. If the pollies are looking to China to pull them through this then they are in for a surprise.

flyinggit

17th Oct 2008, 00:36

I can remember a certain 'group' back in the late 80's (WW111) within the aviation sector that where advised by their 'minders' to get their affairs in order, meaning to battern down the hatches to weather the oncoming 'storm'. Wise words considering the ugly outcome of the day. Maybe we ought to be doing the same here. We have all been living the high life for yonks, time to take stock of what it has 'cost' us to do so.

FG

thinking pilot

17th Oct 2008, 01:01

What exactly is the high life. Do you mean expensive cars, plasma TV, ect ect.
So what do we do, sell everything. Buy a ****box, live on bake beans.

I'm proud to say I have worked long and hard for my toys, and paid cash as well. please don't take my toys away.:=

PlankBlender

17th Oct 2008, 01:29

thinking_pilot, if you've paid cash for your toys, no-one can take them away, unless you decide yourself that you want to get rid of some (e.g. to get a better toy :E).

The problem is with people who don't think twice to defer debt by buying everything "interest free", loading up their credit card, and generally living beyond their means, thinking the equity in their houses is safe and will get them out of trouble at that point in the future when they'll possibly have to own up to their shopping sprees. They're so wrong it hurts! :ugh::ugh::ugh:

Trouble is, it'll hurt the prudent guys too once the idiots are dispossessed en masse, as the stupid hordes will drag the whole economy down.. :{

In today's Australian, there's a piece about rental increases, which shows pretty much no increase in almost all places save Darwin (Perth rents are even going down!). So if a realo or such like serves you BS about ever increasing rents to waffle you into buying property, tell them to f:mad:k off!

Gnadenburg

17th Oct 2008, 02:46

I just put the rent up 25% on commercial holdings in BNE & 20% on a residential holding in MEL.

Prices are going down? But yields are up. Cashflow is what's really important in these times. Actually, with low debt I have really come to appreciate this most basic of concepts.

Interestingly, how many properties do the property detractors own on this thread? Seriously. How many? I often find positions of extreme negativity loaded with ulterior motive. No denying short term downward pressures on property. Beyond that?

I am after some more international property in the next 12 months and a Sydney apartment in need of a reno. Subject to an availability of bank funds.

PlankBlender

17th Oct 2008, 03:00

Gnadenburg, I have owned property in London and have profited handsomely from it. I would never buy property here now unless I had money to burn.

Yields may go up when prices go down, but owning property only makes sense if it is set to rise in capital value within the period you're planning to own it for, at least on par with other forms of investment, or unless the risk of falling values is more than weighed up by the advantages of negative gearing.. For the latter to work you'd have to be pretty wealthy already..

Given it could take decades for values to recover after a practically unavoidable crash, I would seriously doubt it would make sense for 95% of the population at the moment to buy into the Aussie property market..

Ka.Boom

17th Oct 2008, 03:12

You dont do hysterical...you are giving a good impression of someone who is.
There will be some industries...luxury producing industries...that will suffer as discretionary expenditure is re evalauated.
I have a B.Comm LL.B from UNSW which provides a reasonable understanding of what is going on...I liquidated every stock I had in July last year...not being smug or clever...but it was obvious that things were getting ridiculous.
Things are serious...sure...but there are opportuniites now that havent been avaialble for awhile.
Go down to the local mall..... is it empty?.
Are people living in cardboard boxes outside your house?
The interest rate hikes over the last 5 years made people re evaluate their debt levels...most did.
This puts most people in reasonable shape to ride this situation out.
Your arguments are repetitive and circular.
The Sub prime mortgage situation in the US was bought about by home buyers being sold mortgage products that had nasty kickers.Introductory rates of 3% that balloned to 12 and 13 % after 5 years.Defaults on these mortgages were inevitable.
Hedge funds got in on the cheap money and were paying inflated prices for just about everything.
Fair value was destroyed and the gambling mentality took over.
The good times were never going to end...well they have...for awhile.
The Americans took their eye off their financial instituitons and let them run riot.
Not so in Australia...our exposure to sub prime was/is comparatively small.
None of our banks needs to be bailed out.Liquidity is a little tight.Thats not a bad thing.
The banks are solid...the real estate market is solid.The dole Qs havent lenghtened...nor will they lenghten appreciably over the next 12 months.There will however be a reallocation of labour.
Rudd is doing the right thing.
Spending is what ended the Great depression.
Give people a reason to spend..
Its the oil of economic machinery.
Consumers stop consuming ...game over.
Fair value is about to return to just about everything.
Go out and start bargain hunting.
Dont buy what you want...buy what you NEED.
Stupidity is about to be replaced by common sense.
The people who caused this problem now caused the problem in '87.
In another 20 years time they will cause another problem...if we let them

Gnadenburg

17th Oct 2008, 03:25

Yields may go up when prices go down, but owning property only makes sense if it is set to rise in capital value within the period you're planning to own it for, at least on par with other forms of investment, or unless the risk of falling values is more than weighed up by the advantages of negative gearing.. For the latter to work you'd have to be pretty wealthy already..

I don't understand what you are saying here.

I though rents should be falling. As mentioned, I have hiked rents considerably in supposedly vulnerable areas- inner city commercial and residential holdings.

Good property could very well increase in value if this financial strain is sorted and we don't will ourselves into recession.

I am looking at Sydney apartments. I always wanted one. Water front, art deco. Rent it for a year than do a smart reno and run a depreciation schedule on the reno'. I reckon I will be happy with this strategy in 5 years.

ABX

17th Oct 2008, 03:26

And for the love of god will someone shoot that stupid bitch Penny Wong...see her quoted in London in yesterdays media? ETS and saving the planet is a 'personal and moral' crusade that will go ahead in 2010 despite the meltdown.

:D:}:E:ok::D
Make it a grenade and do it when Garrat is standing next to her! (He should have stuck to singing!)

ABX

17th Oct 2008, 03:33

Odds on that KB is a Kruddophile.

As usual CC your posts make good reading - and combined with the likes of OZBD, FB and more present a pretty plausible picture of things past and possibly to come.:ok:

Gnadenburg

17th Oct 2008, 04:01

I often go to pilots for financial advice. And then do the opposite to what they suggest.

Can anyone explain why my rents are increasing dramatically???

Housing shortage, historically low unemployment rate, almost silly levels of immigration; or some things just bullet proof- even in recession?

Chimbu chuckles

17th Oct 2008, 04:04

Oo look...someone with a degree...last I looked people with degrees got us into this mess:ugh:

I'll grant you that FDR's New Deal helped end the Great Depression but so did WW2 (so you should credit Adolf and Hirohito too) for the yanks anyway. They didn't give away all that stuff that flew, rolled, floated and went BANG!!...and eventually everyone else...when we finished paying the yanks off...was it last year or the one before?

What effect did Herbert Hoover's largesse have in 1929/30? Certainly it wasn't a 'soft landing'.

Perhaps you could use your degree to explain to all what the effect is on a currency not backed up by anything, besides good will, when the printing presses get put into turbo boost?

The Icelandic Govt has just guaranteed to rescue its failed banking system..at a cost of 500k/ Icelandic man, women and child. Could be some VERY good deals there on all manner of stuff...don't expect any capital gains for a few generations though...or 7.

Swiss bank UBS has just been effectively nationalised and Credit Swiss just sold a chunk of itself to...wait for it...Qatar Soveriegn Wealth Fund..for 9.4 billion or thereabouts...but they said they didn't really need any help.

One Australian bank has written off best part of 900 million $ in US exposure and reckons on recovering 55% of defaulting mortgages...in fact 50% is becoming a very common number in relation to real estate values.

The western economies are in completely uncharted waters and you're calling a bottom. Gutsy Move Mav.

Even the Oracle from Omaha isn't game for that...suggesting long and deep but it will recover eventually. Listened to him at length the other night...a REAL unreconstructed glass half full type. "It has never paid to write off the US economy since 1776 and it doesn't pay to do it in 2008" and "I only ever buy companies that are so GREAT that even an idiot could run them...because eventually one will...just like Govts"

Chumbu chuckles. ATPL(lots), PHD GynA

Jabawocky

17th Oct 2008, 04:05

Stupidity is about to be replaced by common sense.

Now I would like to say that will happen........and as optomistic as I am, don't bet on it.

You know when you claim you made something idiot proof, nature goes away and breeds a better class of idiot!:ugh:

J:ok:

Jabawocky

17th Oct 2008, 04:36

And check this out............

'Top Model' judge's boyfriend on fraud charge (http://news.ninemsn.com.au/article.aspx?id=648726)

So if you call the cops and claim it was fraud, you can't then be seen to be negligent.

They say its fraud, I say its BANK STUPIDITY :=.

W:mad:kers!

J:ugh:

BPH63

17th Oct 2008, 05:39

Fewer Aussies keen on new credit: survey (http://news.theage.com.au/business/fewer-aussies-keen-on-new-credit-survey-20081017-530d.html)

I think a lot of people will be relieved they don't have to keep spending to keep up with the Jones or maybe discussion over BBQ s may now change from "how many and what investment properties" to "how much one is knocking off the mortgage" :hmm:

Ka.Boom

17th Oct 2008, 05:50

I vote neither labour or liberal...both are inept
Most of those responsible for this mess ..those on Wall Street DONT have degrees..part of the problem.
The Great Depression was ended by stimulus..... the development and production of war machines...it put people to work and paid them.
They spent their wages and bought goods and services,which in turn increased demand and in so doing provided more jobs.
Chimbu you are a pilot and a historian.
As a non pilot I defer to your expertise in matters related to flying.
Perhaps you could extend me the same courtesy without the thinly veiled insults.
Just to reiterate....Rudd is doing the right thing.
The sky will not fall.
Opportunities abound for those who can see them.
Think 10 years from now...not 10 days,not 10 months,but 10 years and you will prosper from investment decisions made now

Ka.Boom

17th Oct 2008, 08:32

Some do ..many didnt.
Like many in the Aviation industry.
Look at Dixon...doesnt even have an MBA
Lets Be clear...having a degree doesnt make you infallible.
My grandfather referred to many university graduates as educated idiots.
A degree should/can provide insight.... but not always.
If you are 70 years old and have degree you completed in 1952 you are not really in the game irrespective of which campus you attended.
Having an ATPL doesnt make you a fantastic pilot.
It does provide some potential however.
This is irrelevant.
This thread is about a number of things.
Primarily about cause,effect and a way forward.
There is a way forward...particularly in Australia
The decisions being made at a federal level are not being made by one man....he is the spokesperson
Lots of heads better than yours mine and his are very active in determining a positive outcome for this country.
Like it or not this is a work in progress...the situaton is volatile and decisions need to be made in response to the ever changing circumstances.
If anyone in this forum feels that they are better informed and better equipped to resolve the situation then please, by all means, make your way to Canberra.
Meanwhile let these guys do their job and stop being sideline sports mums.

glekichi

17th Oct 2008, 08:47

Ka.Boom,

Just one question.

Do you suggest that housing prices of 7-9x a person's income is sustainable, and that we could possibly increase this?

The globally recognised standard is 3x the average income.

Ka.Boom

17th Oct 2008, 09:03

A multiple of 7 to 9 of whose income?
Yours mine or Jamie Packers?
The real estate market in each country is different.
You can't compare the Australian market with that in Thailand or Japan.
Different legislation different cutural mindset,different economic circumstances
The Spanish prefer to rent and spend their money on lifestyle.
Australians want their 1/4 acre block.
Whose wrong...whose right?
In the UK you dont buy a property you buy a lease on property in many cases.
Some properties are freehold some are leasehold.
The price reflects this

PlankBlender

17th Oct 2008, 09:29

Ka.boom, you obviously have no idea what you're talking about.:ugh:

The relation average annual income to average house price is 3 to 3.5 in the rest of the developed world. This is consistent across all sort of different cultures, whether they are ownership focussed or not.

7.5 times annual income as we have it here at the moment, is clearly not sustainable for a number of reasons including affordability for first home buyers (basically if this continues, Joe Average would only be able to buy his first house at 40), long term growth (in a couple of decades with these growth rates, the average owner would not be able to pay off his mortgage during his working life), interest and a few other reasons.

Your comment re. the Spanish is total BS, I have lived and worked in Spain, and they like ownership almost as much as the Anglo-Saxons. Incidentally, they are just suffering through a housing price crash at the moment because they had similarly unsustainable price hikes over the last five or so years!

Re. the UK, I've lived there too, believe it or not, and I've owned property in London, and unless you buy a very short leasehold (i.e. 50 years or shorter), the difference in price to freehold is negligible. Most purchases are actually long leaseholds (mine was 999 years) because it makes it easier to administer the development, or in case of London, whole blocks are in the freehold of the crown or other aristocracy. I got offered the freehold of my flat for less than 5% of the purchase price after a few years when the developer wanted to get rid of it..

So before you spout bullsh!t here next time, get your facts straight and read a bit, it's all here on the net, mate :=

Chimbu chuckles

17th Oct 2008, 09:30

KB we agree on something...I have never voted in an election in my life.:ok:

In this case we are talking multiples average wage vs average house.

When the rest of the western world is around 3 and we USED to be around 3 but now, or very recently, it was more like 7 we are talking an imbalance by any standard. We are not comparing Australia/UK/EU/US to Thailand.

So we should all just shut up and keep our opinions to ourselves?

Good..shut down all BBs...no more exchange of ideas allowed on the worldwide interner webby thingy...KB says so.

I agree with your Grandpa but am prepared to admit you might be the exception so on that basis please accept my humble apology.

No one seems the least interested in my PHD in amateur gynecology...I'd thought just a LITTLE nibble:E

Chronic Snoozer

17th Oct 2008, 09:58

There does appear to be no lack of doomsayers in the market today. Personally, you do have to wonder if things are really that bad. I took a quick look at some numbers (and I know the statisticians are now salivating) today in the Perth market. REIWA website - Perth median prices. (say what you want about their validity)

In 1999, the median house price was $150K and no boom was happening. Historically, property does about 10-11% per annum (8% in real terms) - hence the real estate agents 'doubles every 7' catch cry. So in 2006 the median house price should have been around $300K but it was more like $400K, quite an overshoot. (33% too high)

The median price 'should' be $368K this year, in Sep quarter it was $426 however, and it looks like the the peak is definitely tracking back closer to the norm. In fact by 2010, according to the long term average, the median price should be close to $450K. (triple 150K) So to me it appears a natural historical level rate of return is emerging, and I take that to mean that there will be little to no growth in the market for two years.

The fact that people are predicting 30% drops, particularly Perth, suggests the median should be around $330 (based on the 2007 peak) but historical data doesn't bear that out. Granted there may be an overswing correction, but the lowering of interest rates should mean homeowners have less reason to sell.

The great thing about stats is you can make them say whatever you want, but sometimes they're needed to counter some pretty emotional commentary. Australia is 5 mins away from a market of 2 billion people on the Asian sub-continent who all want a better lifestyle. Even with the doom and gloom being shoved down our throats (no shortage of experts on how bad things are) I have difficulty believing we are headed anywhere near a depression if we are smart and confident in our economy.

But the pundits have us scared out of our wits and will will us into one.

Fred Gassit

17th Oct 2008, 11:35

Yep, media has a lot to answer for but once they get what they wish for they point the finger (who else is gonna?) everywhere else.

argusmoon

17th Oct 2008, 12:09

I lived in Spain (in Alicante) and no one wanted to own a house or property.
They were indeed more interested in having a good time.
So who do we believe your BS or someone elses?
May be you lived there after the Spanish American War?

PlankBlender

17th Oct 2008, 12:26

argusmoon, I think it depends more when than where..

Spanish culture is undergoing massive changes, not least because a generation of not-so-catholics is growing up and they're moving out earlier, and they're buying home rather than renting.

For reasons that elude me, the Spaniards have been jumping on the property bandwagon like no other people in Europe, at their peril as it now transpires..

I can only speculate that a lot of them got sucked in by early gains, and now they have whole new developments empty and tons of average wage "investors" broke..

Realos are the same anywhere in the world, you see.. never believe one or a used car salesman :E

Machinegun Fellatio

17th Oct 2008, 12:36

Posters like Plankbender are what is wrong with a lot of forums like PPrune.
They take one small part of a post and criticize it.Totally ignore the rest of the well reasoned well thought out argument or position.
There has been some interesting discussion here.
Its certainly given me something to think about.
The Australian economy is the new kid on the block insofar as Western Economies are concerned.Maybe we are still figuring this real estate thing out.
The next generation wont be able to own a property.Staying home with Mum and Dad might be their go.Thats what Japanese kids appear to be doing.
All this is uncharted territory.These circumstances have never existed before(Im sure Plankbender will correct me if Im wrong).
No one really knows where we will end up.

PlankBlender

17th Oct 2008, 12:41

Machinegun.. at least you should disguise the style of your postings a bit better, it's a bit more than obvious that you're the same as Ka.boom.

Grow up!

ABX

17th Oct 2008, 12:50

Im sure as hell I dont

You got that right Ka.boom/argusmoon/MF.

Plankblender...:ok::ok::ok:

packrat

17th Oct 2008, 12:51

Plankbender may be you should grow up.And no Im not related to either KB or the other guy.
Is ABX related to the bender then?What were we discussing?
The economy stupid.

4beef curtains

17th Oct 2008, 13:06

Now PPrune has style.Wankers.Plankbender is related to me.He must be. we both signed up together

ferris

17th Oct 2008, 13:41

Certainly interesting to read different viewpoints.

I have two friends in different parts of the banking industry. Both intelligent, conservative guys. One (who has a more domestic focus) believes that the recession will be mild, and that economic conditions in oz are a lot better than preceding the recession 'we had to have'. The other believes that we will be lucky not to have a full blown depression.

Generally, I have found that when economists agree on something, it is almost certain not to happen. With commentators generally agreeing that we will have a recession (either mild or severe), that can mean only: Stable conditions/growth or the biggest depression ever!

Seriously, some strange statements here so far:
KB, you state that people will stop buying what they want, and only buy what they need. What effect do you think that will have on the economy? You agree, elsewhere, that there will be a contraction- but it will be a gentle deflation of the bubble, and not a "bursting". After either event, how do you think asset prices will compare (to now)? How does that sit with other people's thoughts on valuation-to-earnings ratios?

OzBD. Banks in oz have to have cash backing for housing loans???? Nup. Asset backing is different to cash backing. Especially when the asset is the debt. There are also mortgage providers (rams, wizard etc) who began without even the facility to take deposits. Credit is CREATED by banks. If more people understood this, they may be more interested in nationalising the banks. It was certainly a revelation to me when I learned this principle.

IMHO unemployment is the big thing to watch. If (when) unemployment begins to rise, the real deflation of asset prices will begin. The pointers are there that this will happen (Kleinfeld {Rio Tinto} yesterday decribing falling commodities prices as due to softening in Chinese demand and not seeing their govt intervening to stimulate activity until mid 2009!!= end of mining boom), but data always lags the reality. People have to have lost their jobs before it appears as data. Just look around and ask people in business how they are going, how their forward bookings are, hiring/firing etc is the best guide. The signs are always there, as long as you know where/how to look. Great way to get the jump on people who are insulated from 'us in the trenches' (economists, govt officials etc). Local bank managers used to be great at having their finger on the pulse- they were accutely aware of how small businesses were going (cashflows, overdrawn/default days etc) before these things showed up as 'data'.

My sources say it isnt looking good.

Track Coastal

17th Oct 2008, 20:12

Not so in Australia...our exposure to sub prime was/is comparatively small.
None of our banks needs to be bailed out.Liquidity is a little tight.Thats not a bad thing.
The banks are solid...the real estate market is solid.The dole Qs havent lenghtened...nor will they lenghten appreciably over the next 12 months.There will however be a reallocation of labour.

Not all hunky dory.

ANZ, CBA, NAB and Westpac must come clean about their riskier exposures, especially in credit default swaps (CDS), Michael West writes (http://business.smh.com.au/business/time-to-come-clean-20081013-4z8w.html?page=fullpage#contentSwap1)
CDS and Aussie banks

A Citibank report from mid-July shows ANZ at the top of the CDS pile in Australia. It had $45.7 billion worth of CDS in its conduits.

While all the banks used CDS to hedge their credit risk, ANZ actively traded them.

In other words, as with its primacy in stock lending (of Opes Prime fame), it took the greater risks.

As of March, the bank had some $23.4 billion in ``long'' CDS positions and $22.3 billion in ``short'' CDS positions.

``ANZ entered short CDS positions with counterparties who desired credit protection whilst simultaneously purchasing offsetting protection for a cheaper premium from different counterparties (we understand these counterparties were "monoline" insurers on around half of all occasions). The spread differential between the short premium and long premium generated trading income,'' says the Citibank report.

When one such monoline insurer, ACA, was downgraded from investment grade to CCC in February 2008, ANZ was forced to recognise a provision of $226 million based upon a $1.5 billion notional contract value.

``In effect, they were saying that the long leg of the trade was not suitable in terms of providing insurance - as the rating of the insurer was sub-investment grade the hedge was no longer viable.''

As with other financial stocks now underperforming their peers, ANZ partied hard in the good times by indulging too much in high-yield securities. Now it is clear they were not high-yield for nothing.

Its rivals carry risk but not to the same degree.

CBA has $5.9 billion ($3 billion bought and $2.9 billion sold), Westpac has $4.9 billion ( $4.9 billion sold and $0.1billion bought) and NAB, which Citigroup rates second to ANZ on risk has $24.4 billion in CDS ($13.7 billion and $10.7 billion).

Next Tuesday (PM) is pay up time. I wonder if Any Aussie banks will have to pay up?
Fears of Lehman's CDS derivatives haunt markets - Telegraph (http://www.telegraph.co.uk/finance/comment/ambroseevans_pritchard/3211647/Fears-of-Lehmans-CDS-derivatives-haunt-markets.html)

Those on the wrong side of these Lehman debt contracts - known as credit default swaps (CDS) - must come up with the money by Tuesday, the next D-Day in the ever-fraught calendar of the credit markets. There has been a deafening silence so far.

There is no easy way of finding out who they are, so every bank and insurer is suspect. The $55,000bn CDS market is "completely lacking in transparency and completely unregulated" in the words of Chris Cox, the chairman of the US Securities and Exchange Commission.

The settlement auction on Lehman CDS contracts last week was in itself a bombshell. Creditors retrieved just nine cents on the dollar from the Lehman wreckage. As Naked Capitalism put it, the bank had "vaporised". The biggest players at the auction were Goldman Sachs and Deutsche Bank but they were almost certainly transacting for clients.

The insurers of the debt -- a third are hedge funds -- will have to pay 91pc of the $400bn in contracts.

The Depository Trust and Clearing Corporation says the risks have been exaggerated in headline scare stories, insisting that the total sum to be paid will be closer to $6bn. It says most positions are "netted out".

"That's not credible," says Andrea Cicione, credit chief at BNP Paribas.

"They keep coming up with these number by 'netting' but we think the amount is going to anywhere from $220bn to $270bn. The chain broke in the CDS market when Lehman Brothers went down. We may now see other counter-parties defaulting," he said.

Full steam ahead for Australia?

The East is in the Red: the white-knuckle ride begins | smh.com.au (http://business.smh.com.au/business/the-east-is-in-the-red-the-whiteknuckle-ride-begins-20081017-539p.html?page=fullpage#contentSwap1)

Traders who had been selling iron ore at around $US200 a tonne on the Tangshan spot market were struggling this week to make a sale at $US80. The Newcastle spot price for power-generating coal has plunged from nearly $US200 to $US110. Copper has fallen more gradually, by one half, and nickel by three-fifths. This week Rio Tinto's chief executive, Tom Albanese, shocked the London and Sydney stock exchanges by being the first major mining executive to warn that China would not recover before year's end.

"No, I did not predict the carnage at the moment," says Jim Lennon, Macquarie Bank's respected head commodities analyst. "Last week was the first time since records began that the Chinese spot market price for iron ore went below the Australian long-term contract price. The freight market has imploded. We've declared force majeure on the global commodities super-cycle."

Resource price rises that directly injected 2 or 3 percentage points of additional income into the Australian economy each year are swinging into reverse. "As the resources boom unwinds it will do significant damage to Australia," says Kieren Davies, a leading economist at ABN Amro. "The fall in national income will flow to weaker company profits and weaker business investment and cascade through the economy."

Most of the hundreds of Australian mining companies that have sprung up at the tail end of the resources boom will not survive. "A lot of the junior miners will run out of cash and go into liquidation as they will be unable to raise funds," says Linda Liu Bearne, an investment consultant whose clients include China International Capital Corporation, China's largest investment bank.

Ka.Boom

18th Oct 2008, 00:00

The ANZ has reduced its interest rates greater than the RB's 1%
The CBA is busy with its acquisition of Bank West
The merger with Westpac and St George is still on.
Nothing there would indicate portending drama.
Australia is not an economic island.There will be some changes in our economy.
But for all the reasons previously stated there should be nothing catastrophic

Gnadenburg

18th Oct 2008, 02:14

Back to the AUD.

55 cents if commodities unwind.

50 cents if additionally, there is a moderate correction to the housing market.

CBA forecasting 59 cents by 1st QTR next year.

packrat

18th Oct 2008, 03:11

Looks like the family will be holidaying at home next year.
We will not be flying Jet*

tinpis

18th Oct 2008, 03:33

How come were still getting ripped a $150-60 a litre for gas?

Chronic Snoozer

18th Oct 2008, 04:51

the-east-is-in-the-red-the-whiteknuckle-ride-begin (http://business.smh.com.au/business/the-east-is-in-the-red-the-whiteknuckle-ride-begins-20081017-539p.html?page=fullpage#contentSwap1)s

From the same article

So far the Chinese economy is rebalancing exactly as Mr Hu and Mr Wen wanted, although the pain threshold for unemployment cannot be far away. China has been the saviour of the Australian economy for five years or more and it will not be too long before it is again. The forces that are driving Chinese people to urbanise, escape from poverty and consume energy and mineral resources are far from over.

Earlier this year a team of 20 consultants at McKinsey & Company constructed a ground-up model of what China will look like two decades from now. By then China will have urbanised and another 350 million people will have moved from the countryside.

They will live and work in more than five million buildings in 200 cities that each contain more than 1 million people. Fifty thousand of those buildings are likely to be skyscrapers - "the equivalent to constructing up to 10 New York cities," says the McKinsey report, Preparing for China's Urban Billion.

The message, studied closely by Australian mining companies such as BHP Billiton and Rio Tinto, is that if you have been impressed by the gleaming towers of Shanghai and Beijing then you have seen nothing yet.

Track Coastal

18th Oct 2008, 05:40

Chronic Snoozer, long term it will be probably milk and honey.

But, if the demand for Chinese goods slows in the US, the slowdown in economic activity in China will be reflected here short to mid term.

KB's she'll-be-right comments are a little delusional IMO. Quite a large chunk of our have-it-now generation in Australia has a bigger household negative equity problem than the USA (more`debts than assets*). It will correct and there will be defaults. Kevin Rudd hit the panic button last week.

*Oh but my house is worth $600K. Bull****! Its unrealised paper assets. Put it on the market and see what you actually get for it.
How come were still getting ripped a $150-60 a litre for gas?
Tinpis. It should be around $1.10L accounting for the flight from the AUD. So what about greed as a reason?

On the raison d'etre of this thread, currency traders are abandoning Commodity Currencies like the AUD. Unlike KB, they don't think its all hunky dory downunder.

The ANZ has reduced its interest rates greater than the RB's 1%
The CBA is busy with its acquisition of Bank West
The merger with Westpac and St George is still on.
Nothing there would indicate portending drama.

Greedy bastards still being greedy?

Firecat

18th Oct 2008, 06:02

prospector

18th Oct 2008, 06:27

If you have a freehold house, and a big garden, then no problem.Not going to be able to widen your horizons for a while, but so what???

BPH63

18th Oct 2008, 07:40

i'm surprised at the chicken little attitude of a lot of "mature" people (including experienced pilots) who should just get a grip.
2 points -
1.The headlines are being written by kids
and
2. it's not metastatic cancer!

Track Coastal

18th Oct 2008, 14:58

The $Oz tanked for two reasons.
1.The unwinding of the yen carry trade
2.The flight from high yield currencies due to(perceived) risk aversion.
Show me a country,any country,that is better placed to weather this perfect financial storm than Australia

Bull****! There was some carry regather but its been aversion to commodities mostly. Do your research.

Australia domestically over-leveraged and in debt beyond its years? massively!

Australian houses over valued by 60-80% and mostly over leveraged? What do you think?

Maybe Australias manufacturing base will save us? Remember Hoover and AWA plants?

Australia produces very few if any consumer big ticket items. TVs, Dryers, Sound Systems, Washers, Dishwashers etc...all foreign owned and often manufactured overseas (I think my Kiwi Fisher and Paykel top end stuff may be made here).

Sweden and Denmark. They make things of value, own them as as companies and export them.

Does that answer all Mr Firecat?

OK so how does that affect Australia's economy if China slows down?

Why no change (When you are almost 100+% geared in domest demand and we are almost now totally dependant on foreign demand of ...well...our DIRT)?

If you have a freehold house, and a big garden, then no problem.Not going to be able to widen your horizons for a while, but so what???
Lucky man Mr Prospector!