Australia's Housing Frenzy

https://www.bloomberg.com/news/articles/2017-11-23/australia-faces-housing-hangover-twice-size-of-u-s-subprime-era

by mathgenius • 9 years ago

118 146 9 years ago

House prices in Australia are insane. We have not had a recession for almost 30 years and most people here under 40 have no idea what a recession means. When this party ends the hangover is going to be horrendous.

alfiedotwtf2• 9 years ago

I still remember driving home one day from work during the GFC, and was completely shocked that (from memory) every second to third house was for sale.

With a lot of hot money going around Melbourne these days, low interest rates, and a daily influx of Chinese investors, it's a bubble that's inevitable going to implode.

...on Chinese investors - I used to be on Williams street by 6am every day, and without fail there two busloads of Chinese investors ready to look at the new apartments being built there.

The game now is, which side dries up first - supply of houses/appartments, or the demand of Chinese investors.

shshhdhs• 9 years ago

Australia’s obsession with property is firmly entrenched in the nation’s economy and psyche..

The article's quote seems to be accurate from my anecdote. I visited Sydney recently, and the tour guide taking me to the blue mountains started his trip by driving through neighborhoods to point out the ridiculous home prices. I thought it was strange, but then everyone I met was eager to discuss the home prices, or asked me the price of my home (in the US). It seemed the housing market is on everyone's minds.

chris_wot3• 9 years ago

Yep. I bought in a newer area, quite a distance from the city. I paid about $760,000 for it. It's not huge, and apparently after 2 years it's close to $840,000. That's insane.

cletus2• 9 years ago

That's an annualized growth rate of 5.13%. How exactly is that insane? If you assume inflation is 2-3% the real rate of return is ~2.5%.

The YTD return for the S&P 500 is 18.6%. Now that's insane.

teddyh• 9 years ago

— When the market is on everyone’s mind, it’s time to sell.

Joseph P. Kennedy, 1929 (paraphrased)

conanbatt13• 9 years ago

I want to say that in argentina, housing prices doubled in a few years up to 2009. Argentina housing was not hit by the Great Recession because we had no debt associated with housing. Housing prices didnt drop at all, and they were still very high by people's income.

I predicted that prices would drop, the same way people predict now that housing prices will drop. 8 years in, and prices grew organically from that point.

It is exceedingly difficult to lower housing prices without a direct hit.

nl2• 9 years ago

The only thing more important to the Australian economy than China is housing.

Many seem to think that the Australian property market will crash like the US market did during the financial crisis.

It'll be interesting to see. I'm sure the apartment markets in Sydney, Melbourne and Brisbane will see some falling prices at some point, but few professionals are forecasting a US-style crash. Instead, most think prices will just stop growing.

I see lots of people saying "the bubble will burst", but it seems to me many of them are hoping to get into the market rather than looking at any evidence.

strken• 9 years ago

The evidence presented is usually the (very high) levels of consumer debt, the (very high) exposure of Australian banks to property, the lack of economic diversification, and the effects of foreign speculation.

I'm not working in finance, but whether false or true, this seems like an attempt at some kind of evidence of the potential for cascading failure.

nl2• 9 years ago

Yeah, civilians take that to imply a crash in prices. It's not.

hguhghuff5• 9 years ago

House prices won't go down in Australia. There's an infinite supply of corrupt Chinese cash that needs to be laundered, and every Australian is entitled to sell their piece of Australia to get their fair share.

Ha ha downvotes from those with a vested interest in getting those sweet sweet Chinese dollars.

chris_wot3• 9 years ago

I suspect you are being downvoted because of your simplistic worldview.

hguhghuff5• 9 years ago

Those who hope for high house prices downvote - they know their paper wealth depends on the Chinese keeping house prices propped high.

Those who feel Australian society ruined by the housing obsession vote back up.

Nice and simple.

Arnt3• 9 years ago

I think you mean "the Chinese authorities cannot possibly get a list of Australian property owners and jail a few thousand of the ones that can't explain the origin of their money".

hguhghuff5• 9 years ago

No, I mean that there is on onus in Australian law to prove other forms of investment are not from criminal origin, but no such onus on real estate.

That's because no one wants to look at the fact that our housing boom is driven by the proceeds of crime on a gargantuan scale.

18973254233• 9 years ago

The most corrupt people are the older upper middle class Australians. They are happy to do nothing at all other than "own property" and rake in ridiculous amounts of money. All they are doing is sucking the money from younger or poorer people and transferring it to themselves without actually doing any work or adding any productivity to society.

I live in an area with lots of these investors and they don't work. They talk about it in hushed tones like it is a scheme or a rort, which is obviously is.

boznz• 9 years ago

not sure corrupt is the right word, but I get your point

dang• 9 years ago

Ha ha downvotes from those with a

This breaks the site guidelines. Could you please read them and not do that again?

https://news.ycombinator.com/newsguidelines.html

hyperpallium• 9 years ago

Article is pretty comprehensive. Just add that the government in power during a housing price collapse will be out, so they'll do whatever they can to forestall it.

High immigration rates mentioned in the article are because Australia is a great place to live; this will comtinue.

We did have a housing correction a decade or two ago, with a mostly soft-landing. But instead of prices actually falling, people avoided selling of they could.

The only way prices will fall in practice is if the economy implodes - while this could happen, like a nuclear war, there would be much more serious problems to consider than house prices if it did.

dageshi• 9 years ago

Presumably interest rates will just be slashed to near zero in order to alleviate the pain and boost inflation in order to erode the debt. Basically what happened in the UK/US post 2008 crash.

Gatsky• 9 years ago

Pronouncements like this come out all the time in Australia, for at least the last 7 years. This is an example of a headline that can't lose - you are telling people that can't afford a house what they want to hear, at the same time spreading fear amongst those that do own property, and eventually you'll be 'right'.

The problem primarily exists in Sydney and Melbourne. Melbourne in particular is experiencing high population growth, and the city is already sprawling, without the ability to dramatically increase housing density around the central city. Growth in land prices is likely to continue for a while because of this, perhaps not at the same high rate. Apartment prices are more at risk. The ridiculous price growth in property over the last 10 years has created many asset rich baby boomers, who will continue to invest in property and transfer wealth to their children. It certainly is nothing like the sub prime loan crisis - Australian banks have remained quite selective in giving out home loans.

alfiedotwtf2• 9 years ago

No. I've had banks throw money at me... to the point where he knew I couldn't extend myself to afford repayments, so he bumped my rental's rent to above market prices in order to approve the loan! I've heard this confirmed from others too.

Gobsmacked... lucky I walked away :/

stephen_g2• 9 years ago

There are some analysts and economists I've read who are looking at the situation and warning that there is a lot more fraudulent lending than most would think. On an anecdotal level I've also heard more than a few people say they it was hinted by banks that they could put a bigger number in the 'income' box and borrow more money.

On that, it will be interesting what would come out if a future royal commission into the banking sector happens.

But even if not, it wouldn't matter. You can have the best capital adequacy in the world, and have only lent to people with rock solid ability to service their loans - but you have a real problem if there's a drop in prices and you have hundreds of thousands of people with negative equity on once-million dollar assets.

a_bonobo2• 9 years ago

On an anecdotal level I've also heard more than a few people say they it was hinted by banks that they could put a bigger number in the 'income' box and borrow more money.

There is at least one survey showing that liar loans are common in Australia: https://www.domain.com.au/news/australian-housing-market-bui... About 500bn mortgages are based on inaccurate/false information, 1,100bn are 'correct'. Note that these numbers are estimates because they are based on surveys, Australia's banking system does not need to check this.

Liar loans were a big factor in the US' started financial crisis: https://www.nytimes.com/2015/02/13/upshot/how-mortgage-fraud...

sqldba• 9 years ago

Australian here - I agree. HN must realise that this story gets trotted out basically ever week on prime time TV.

And it's true that some people have been really stupid financing multiple properties off of each other and trying to live off of rentals then having it all fall down. But that's hardly more than a tiny minority of idiots.

Furthermore the Australian property market really has at least two completely different levels. You've got Sydney with multi-million dollar hovels. And then you've got pretty much the rest of the country which is reasonably priced. There might be a third one which is "CBD apartments" which are also crazily high priced - but if you live there you're an idiot too.

Guess where most of the media is? Guess where most of the focus on pricing is? Yes... it's Sydney.

Now it's true our houses are relatively expensive. I watch some American shows where they're house-hunting and get pretty much mansions for 1/4 of the price of a normal house here, but, I suspect those are in semi-remote places.

But is it a party? Not really. Is it over? Not by a long shot. You can't trust any of this news.

Of course if you're buying a house way beyond your budget, or buying multiple houses, you're an idiot and get what you deserve. Also there's always the risk you do everything right but then lose your job, run out of savings, and can't make repayments - but we're all in that position.

grogenaut3• 9 years ago

What is "CBD apartments"? It just turns up a development in the Big Easy for me when I search it.

Edit: Not sure why an honest question after a google gets a down vote.

18973254233• 9 years ago

And then you've got pretty much the rest of the country which is reasonably priced. I watch some American shows where they're house-hunting and get pretty much mansions for 1/4 of the price of a normal house here, but, I suspect those are in semi-remote places.

No they are not semi-rural places. They are literally 1/4th the price. I grew up in Logan, which is outside of Brisbane. My parents house was sold for $700k. It takes about 1hr 15min to get to the city in peak hour, and public transport isn't really viable.

$700k is about 7.5x the average income. Homes used to be larger, within 30 minutes drive of the city during peak hour, and 3x average income. Taking 7 years to just save for a deposit and taking out a 600k loan and paying it off over decades is not affordable in any language.

18973254233• 9 years ago

Pronouncements like this come out all the time in Australia, for at least the last 7 years. This is an example of a headline that can't lose - you are telling people that can't afford a house what they want to hear, at the same time spreading fear amongst those that do own property, and eventually you'll be 'right'.

Well no, it is true. A shock to the economy will obviously create a major effect in high-cost structure societies compared to low cost structure societies. That is what I like about some places like China. Here in Australia, people just think "well my wage pays for it so who cares". They don't see how it exposes you when you suddenly don't get the wage or when you want to do something other than get paid a wage.

What is not true is that this is some kind of bubble due to house prices and wages being out of sync. In reality, house prices can continue to rise even if wages don't rise simply because the definition of a house is not a constant. A house becomes a small house, becomes an apartment. You can keep creating affordable housing simply by increasing density.

The problem primarily exists in Sydney and Melbourne.

and Brisbane and surrounding areas, which encompasses most of Australia's population.

who will continue to invest in property and transfer wealth to their children

which creates a massive divide.

LoonyBalloony• 9 years ago

"This is an example of a headline that can't lose"

News to sad to fail? Because no one can ignore bad news forever...

IntelMiner• 9 years ago

Having recently returned to Australia after a few years abroad, the state of the nation is on a terrifying precipice. Mostly due to political reasons

The nation is in a run away housing boom, one of which people have been warning will explode since around 2000/2001. The fact it's continued this far has made it more and more alarming

The extremely conservative government in charge since 2013 (ironically called "The Liberal Party") has pushed in blatantly corrupt and utterly abhorrent directions in virtually every political policy since day one

The nation is warning of a "brain drain" taking place as the young and skilled jet off to the US, Europe and others. Australia has become a digital backwater due to the "National Broadband Network" (NBN) becoming a political football and being firmly run into the ground

With a ballooning near half trillion dollar government debt (at the time of writing) and a housing market on the verge of either total collapse under its own weight, or simply running out of runway to continue expanding, an aging populace with its educated young leaving and a government paralyzed by its own incompetence, Australia is heading for some seriously tough times

fit2rule2• 9 years ago

I'm a brain-drainer - born and bred in Perth, but well and truly never lived in Australia. As soon as I could, I left .. and every time I return, it is as a tourist.

That said, I hope there are some houses left to buy, at the end of a long dusty road, next to a beach or two, some day in the future. Would be fun to return when the madness is over (i.e. Australia gets real Internet, &etc.)

calsy4• 9 years ago

You were born and bred in Perth, but never truly lived in Australia, that makes no sense.

tomhoward• 9 years ago

As an Australian who has paid close attention to these matters for many years, I share your concern but think the assessment is overblown.

The housing boom is driven by a combination of: (a) Australia's cultural devotion to home ownership as a conventional life milestone; (b) foreign investment and immigration, and (c) high incomes due to the mining boom and prolonged overall economic strength. Of those factors, (a) and (b) are not going to end any time soon. A global recession/economic crisis would obviously affect (c), but Australia has weathered several of these in past decades. If/when it happens, it should cause a slowing and/or a correction, but not a total crash, unless the world economy crashes. On the other hand, continued global growth, particularly in China and India, will keep fuelling demand for Australia's resources, products, services and land. Why is the worst-case scenario more likely than the best?

The political situation might seem grim, but it's not nearly as bad as the US or the UK or parts of continental Europe.

The "brain drain" issue has been a concern for many years, but if anything I'm starting to see that reversing; people I know who had left for Silicon Valley or New York or London for better career opportunities are now looking to move back, because Australia seems so idyllic compared to the chaos that's reigning elsewhere. I've noticed a vast improvement in the scale and quality of entrepreneurial activity in Australia in the past few years, and I keep hearing from expats that they're noticing how much better things are getting back home, and how much they'd like to come back and be a part of it.

The NBN is an issue that people love to use to hurl abuse at the government whilst simultaneously complaining about ballooning national debt. You can't have it both ways. It was a costly and risky project from the moment it was conceived by the previous government, and since then it's just been a case of getting it done while keeping cost blowouts and delays to a minimum. As a technology professional who cares about fast broadband as much as anyone, I can tell you that the NBN services I've had at my previous home (FTTB) and my new home (FTTP) are as reliable and fast as I could hope for, and I find cellular and terrestrial internet in Australia to be at least as good, and usually better than what I've experienced on recent trips to the US.

I don't deny there's cause for concern; I've been as mindful of, and worried about the risks as anyone. But painting it as all negative, and pinning all the blame for all the problems on the current government is inaccurate, unfair and excessively pessimistic.

So yes, there are challenges; there are great challenges everywhere in the world, as there always are. But there are also great opportunities and reasons for optimism.

It pays to take a balanced view.

akst• 9 years ago

For non Australians, the “Liberal” in the Liberal parties name stand for economic liberal.

conanbatt13• 9 years ago

Same interpretation in Argentina. Liberals in the U.S. are unique in this regard, they mean exactly the opposite in the economic sphere.

acd• 9 years ago

Why are banks allowed to create cheap credit out of nothing and when the bubble eventually bursts the banks are always saved by the tax payers?

What i an trying to say is private investors in the banks and its debt profits during the good boom time on the loans but the tax payers pays for the losses after bubbles burst. This is not pure capitalism it’s something else.

Big thanks goes out to all coders working on block chain technologies! You will change the world to a better place!

thomasfoster962• 9 years ago

Variations of this headline have been running for years now, so I don’t really think this one is going to be any more accurate regarding timing than any of the other predictions. There seems to be an un-ending political will-power (from both sides of politics and at both the state and federal levels) to continue housing policies that predate Australia’s last recession, and to offer only stop-gap measures to get young people back into the housing market or to maintain prices.

I live in a rental, which is being rented out below what the market rate would be, thanks to an extent to negative gearing. There are at least half a dozen building sites in my street, which is about 20km from the centre of Melbourne. The median house price has soared this year to well over AU$1m (units are more than half that). We get at least a dozen flyers each week, written in both Chinese and English, advertising that there are buyers in the area with budgets up to AU$2m or that houses have sold for more than AU$1m.

When the bubble does burst, there’s no doubt that it will be disastrous in parts of Melbourne and Sydney. It’s unclear whether there is the capacity to make up for a glut in new housing projects with public infrastructure projects. That’s not to mention the enormous hit that huge numbers of home owners will take when their homes drop in value.

No doubt the post-mortem will be quite damning for many policy makers.

Edit: ‘fraction’ was inaccurate, and it’s academic as to the extent negative gearing affects rents.

stephen_g2• 9 years ago

I doubt negative gearing affects the rental rate much. Possibly in the single digit percent kind of area, but nothing like what 'a fraction' implies. Statistically, rental rates have an extremely strong correlation to vacancy rates. Although there are claims that when negative gearing was briefly abolished, rents went up, they actually went down in many markets and up in a few, but all of them were just following vacancy rates like they always have. Part of this may have been that it wasn't abolished for long enough to see the effect of the reduction in new stock encouraged by negative gearing, but it's pretty terrible at doing that (90% of NG investment is in existing property) so that probably wouldn't have been much.

The yields are low because rents have to be affordable to most of the population, whereas banks will lend ridiculous amounts of money to speculators for houses, fuelling the bubble.

All in all, NG (in concert with the capital gains tax discount) mostly encourages speculation, artificially increasing house prices, so it should be at least restricted to new-builds only.

thomasfoster962• 9 years ago

You’re probably right in general re: negative gearing on rents (I’ve edited my comment).

zeristor• 9 years ago

The Open Data Institute did a talk on the correlation between empty properties and high house prices yesterday:

https://www.youtube.com/watch?v=hbua6Ccyguo

conanbatt13• 9 years ago

TL;DW version?

It's a modern take of Georgism to say land speculation is whats causing housing prices to soar.

jesusthatsgreat2• 9 years ago

The problem is ultimately the fact that money is an infinite resource, therefore it's a poor store of value. Property is a more stable / smarter store of value because it's actually needed by everyone in life and is relatively finite (in that land is finite).

We've had unprecedented global quantitative easing over the past decade, so it's quite natural that house prices globally will meet and surpass all time highs.

This is what happens when you keep printing money and set precedents such as bank bail outs and debt write offs. If all money woes can be solved simply by printing money it begs the question why don't we just keep printing more? And the realisation soon hits home that if you were to do that, the price of everything would rise, the rich would get richer and they could simply hoard all land and property indefinitely while sucking every last cent out of people starting out in life...

It works up until the bit where people start getting angry and create a toxic environment in which nobody wants to live or do business...

zxcmx• 9 years ago

But that would be... inflation! High inflation would affect collective bargaining agreements, benefit increases, super increases and all sorts of measures designed to keep compensation increases in line with increased cost of living.

Central bank keeps telling us that inflation is "on target" at just 2% or 3% p/a for about the last 5 years. Meanwhile, housing inflated more like 40% (70% in Sydney!)[2] over that time, so how does that work?

OH WAIT, housing was excluded from CPI[3]. I wonder who decided that, and whose interest(heh) that might possibly be in?

[1] https://www.rba.gov.au/inflation/inflation-target.html

[2] http://www.huffingtonpost.com.au/2017/03/20/this-chart-shows...

[3] http://www.abc.net.au/news/2017-04-20/inflation-data-suffers...

skybrian• 9 years ago

I don't know about Australia but if it's like the US, housing is not excluded entirely but there is a lag based on how long it takes for rents to rise.

People are not all affected by changes in housing prices immediately. If you own your home or pay below market rent you won't be affected until later. A survey asking how much people actually pay will have a built-in lag.

conanbatt13• 9 years ago

Interesting idea, but bear in mind stocks and other investment vehicles also have highest historical prices.

We could consider that the inflation that was supposed to happen with QE ended up just inflating assets prices. But that would still be an overall good thing, because asset prices are not what harm the greatest body of people, nor affect their wages like regular inflation does. People will not be thrown into poverty because apple has historic highs.

In terms of housing, we should look at rental prices more than housing prices. Is that going up as fast as house values? I dont think so.

noddy1• 9 years ago

Also, QE has involved giving banks trillions of dollars. The banks then either sit on the money, or use it to inflate the stock market and property markets. The stock market triples or quadruples and everyone says the economy is going well. The money never makes it to non-asset owning working stiffs, and consumer prices as measured by central bank mandated CPI measures don't really change. So the central bank and Keynesian economists brag that "inflation is under 2%! QE stimulus really is a no downside perpetual motion free growth machine!". And the press states that "nobel prize laureates" call for and support these measures, and politicians and the public assume that a "nobel prize laureate" in economics is like a "nobel prize laureate" in hard science, where awards are given for settled progress in science that everyone agrees on. And people don't realise that macro-economics and monetarism are nowhere near settled science, and that there are PLENTY of people still calling bullshit from the austrian/chicago school.

Sadly it looked like this silliness was going to continue forever.

Fortunately, the market has given us inflation-proof cryptocurrency, and these central banking bastards are finally going to have to test their theories and put their ideological balls on the line in a free market with the ability of nation states to control currency as the price for shitty science. Good luck to them - they will need it.

rm445• 9 years ago

Exactly. Inflation is calculated based on a basket of goods that excludes all kinds of expensive and illiquid assets that the average person doesn't buy often or at all.

I guess it's fine if people want to describe that situation as low inflation with an asset bubble. But I think what is actually happening is that, although much of the world now gets to eat well and enjoy consumer goods, all kinds of assets (property, artwork, luxuries and anything requiring rare resources) are moving up and up out of people's reach).

stevenmays• 9 years ago

If money were an infinite resource it would have no value. Sure, governments have the ability to print more but they are constrained by inflation targets. And sure, more liquidity was put into the markets but that's because the markets had no liquidity and we were on the brink of financial disaster and deflation was on the verge of occurring. In deflationary events no one buys anything because the price tomorrow is cheaper then the price today so everyone waits to buy while businesses are unable to move their products and tons of people lose their jobs.

There are other circumstances at work here then more money in circulation, such as land use restrictions, building codes, nimbyism, credit costs/restrictions, tax policies, etc. If investors can build housing and make money they will certainly do it. It's not just the supply of money, but also the supply/demand of a product that effects prices.

mrob• 9 years ago

In deflationary events no one buys anything because the price tomorrow is cheaper then the price today

Computer prices have been rapidly deflating since before I was born, but I've bought several computers. Deflation only prevents purchases when the savings from waiting outweigh the cost of not having the item.

jesusthatsgreat2• 9 years ago

The problem is the rules are made up as we go along. Money is infinite if we want it to be infinite... at the minute it's finite up until a debt ceiling is hit. And as we've seen before, we just keep raising that ceiling if it looks like we'll run out of money and can't afford to keep society operating properly.

People don't have a say in who or what is 'saved' by printing money. Or where the new money goes. A handful of people decide, most of whom are in a very comfortable position in life and quite often have vested interests in maintaining the status quo. After all, it works for them and got them to where they are, so very few people would do something to jeopardize their own wealth / position. How many politicians own more than one property for example? Are they really going to voluntarily introduce measures to lower property prices in the interests of the younger, less well off people / families?

I agree an entirely deflationary monetary system isn't the answer however the more you print money, the more you're effectively saying "It's no big deal if you get in to debt, we'll just create more money to clear it like we did the last time and the time before that".

wallace_f7• 9 years ago

Notable historical figures who gave the central banking cartels the finger are in the minority. They include interesting mix like Abraham Lincoln, Hitler and Gadaffi.

After Lincoln won they just weasled their way back in.

The Fed can just electronically debit an account and create money out of thin air. However, the power to control the US money supply is a constitutional right of Congress. We should take that back. It should be done via a k-percent algorithm. Get rid of fractional reserve banking while you're at it.

grogenaut3• 9 years ago

Could you explain your last paragraph and why you think it's a good idea?

WalterBright3• 9 years ago

However, the power to control the US money supply is a constitutional right of Congress.

Actually, it isn't. The Fed was created as an end run around the Constitution. The Constitution does not grant this power because of the experience with the Continental Congress and their profligacy at printing money.

Get rid of fractional reserve banking while you're at it.

Nothing wrong with that. Its excesses are held in check under a free banking system.

ganeshkrishnan3• 9 years ago

Get rid of fractional reserve banking while you're at it.

And replace it with what? The barter system?

beaverkiwi• 9 years ago

and what happens when you allow the land you live on to be traded as an asset in the global marketplace, suddenly your not competing against your neighbor for that big house down the street, your competing against 8 billion. Land should be for locals only (exception the business district).

T2_t2• 9 years ago

The problem with property is that property uniquely spans the personal, the deeply economic (interest rates are used to mediate inflation and growth), deeply emotional (I own this), usually the single most important asset for the vast majority of people, and one where all these factors compete.

The problem with only locals buying property are many, but mainly that prices stagnate. That is not bad per se, but there is a voting sector that doesn't want price stagnation (older people basically). Governments in Australia have used foreign investment rules as a kind of secondary economic switch to keep prices going up, to the benefit of some, the chagrin of others, and ultimately maintain a status quo that benefits politicians.

It's a tough problem, property prices, and one with no clear right or wrong answer.

timthelion• 9 years ago

Housing prices would rise even if money wasn't being printed. Because when I buy a house, the money doesn't disappear, it goes to the seller.

Imagine there was only one bank, we'll call it Banky Mc Investment Inc. or BMI.

Fred wants to buy a house. That house "costs" $1 trillion dollars. Bob owns the house and decides to sell.

Fred goes to BMI and says, "can I have a loan for $1 trillion?" BMI says "sure thing Fred" and BMI transfers "$1 trillion" to Bob's account. BMI then goes to Bob, and says "hey Bob, it looks like you've got a lot of cash in your account. Would you like to invest it in the BMI morgage investment pool, ultra low risk, backed by valuable real-estate? Bob says "sure thing!" and BMI's books balance. Sure, Fred now has a lot of debt, but there is no reason why this couldn't happen, even with a "limited money supply".

You don't need cash to put IOUs on the books.

aangjie2• 9 years ago

you're correct. And that's why the fractional reserve lending system creates problems.(To be fair, it creates more credit and risk-taking behaviour).

KKKKkkkk1• 9 years ago

How does printing money make the rich richer? Isn't it exactly the opposite?

inpdx• 9 years ago

With salaries not rising enough to keep up with inflation, the money ends up at the top.

branchless2• 9 years ago

the rich are not in cash, they are in assets. Workers lose out under inflation (and I mean real inflation not some bullshit figure the state concocts).

conanbatt13• 9 years ago

The real winners of classic inflation are debt holders. The high inflation in the 70's contributed enormously to a generation that purchased a home and paid a lot less in real terms.

Spooky233• 9 years ago

Rich people borrow lots of money and buy assets.

Look at Donald Trump’s son in law as an example — I use him not to make a political point but because there’s alot of public information out there. He uses cheap capital to buy lots of cash flow in the form of apartment complexes. Being deeply in debt means that his liabilities get discounted by inflation, while inflation allows his company to escalate rents.

If you have cash or equity now, the smartest move you can to make is to borrow as much as you can afford and buy assets like real property or businesses that generate cash flow. Businesses like laundromats are probably more valuable than tech investments in the next decade.

sgt1012• 9 years ago

Money isn't infinite, fiat currency is a token of future tax raising power.

The solution to the rich hording everything is taxation and redistribution.

conanbatt13• 9 years ago

The solution to the rich hording everything is taxation and redistribution.

How did that work out in countries with almost 100% tax and full distribution policies?

wz1000• 9 years ago

We've had unprecedented global quantitative easing over the past decade, so it's quite natural that house prices globally will meet and surpass all time highs.

QE is not "printing money". It is exchange of interest bearing assets from the financial assets like government bonds from the private sector, for non interest bearing assets(cash). The net financial assets(money) owned by the private sector remain exactly the same, so there is no direct correlation with inflation.

QE is a strategy to manipulate/lower long term interest rates by changing the asset portfolio of the private sector. Traditionally, central banks only directly controlled short term interest rates. However, in the wake of the financial crisis, credit markets were still tight despite central banks reducing overnight interest rates to zero(the "liquidity trap"). Since you really cant go (much) lower than zero, new techniques were needed to stimulate the economy.

QE does not (directly) lead to inflation, as is further reinforced by the West post 2008 or even Japan in the 2000s. Inflation has consistently stopped short of target during QE. The precise changes to the risk portfolio of the private sector, along with the conditions of the economy means QE can have either inflationary or even deflationary effects.

https://www.princeton.edu/ceps/workingpapers/204blinder.pdf

pdm55• 9 years ago

Take a walk on the wild-side around West End, Brisbane, where I live. Factory-city has become apartment city: https://www.google.com.au/maps/@-27.4845284,152.9998144,3a,6... What you can see there is all the construction going on say six months ago. When I strolled around last week, every apartment building had "For rent" signs out the front. Typical rents seem to be about $500 per week for a two bedroom apartment. The main attraction is the proximity to the CBD. But will they be filled? Perhaps Brisbane's typical 1 hr commute into the CBD will motivate people to move here. I doubt anyone knows.

eliben2• 9 years ago

What I find most amazing about this is Australia being the 10th least population dense country in the world [https://simple.wikipedia.org/wiki/List_of_countries_by_popul...].

It's very interesting to ponder how our proclivity of huddling together in tight cities can cause such anomalies.

ghomrassen• 9 years ago

Well, the vast majority of Australia is the Outback, which people don't really want to live in.

calsy4• 9 years ago

No need to ponder, its very simple, people would rather not live in the desert.

eliben2• 9 years ago

There's plenty of land in Australia which is absolutely not desert. Also there are cities built in deserts these days.

a_bonobo2• 9 years ago

Affordable housing is high density housing, while the majority of Australian cities are suburbs with low density, mostly detached single houses, often with a garden.

For any given 'feature' in a suburb (shopping centre etc.) the houses in walking distance will have a higher value. If you have several multi-family homes or even towers you have a large supply of walking-distance-dwellings. If you have a bunch of single-family houses (the common thing in Australia) then you have low supply.

In other words, Australia tries to huddle together as least as possible which causes many weird anomalies (don't get me started on quality of life/walkable suburbs/rise of US-style drive-everywhere-life with increased obesity/etc)

cletus2• 9 years ago

So I'm from Perth. Well, technically I largely grew up in mining towns but basically I'm from Perth. I've now lived in NYC for 7 years. I've also lived in the London, Zurich and Germany (Cologne).

Perth had a lot going for it 20 years ago. The standard of living was incredibly affordable. The weather was nice. It was a dull place but well-suited to outdoor activities and raising a family.

In the early 2000s the resources boom happened, fueled by China's insatiable appetite. In the space of 5 years, a 1970s brick home <5km from the CBD went from <A$100k to A$400k. One of my biggest regrets was walking away from buying a house in 2002 that overlooked the ocean for A$430k that 4 years later would've been worth probably A$1.5-1.8m.

Now at the time the same headlines reigned. Prices are going to crash. But in hindsight there were four important factors:

1. Housing was previously too cheap and there was a correction;

2. The resources boom created a massive backlog of construction projects that choked supply for building in the housing market meaning building a house took longer and was more expensive. In the 90s you'd have TV ads for house and land packages for A$100k that would take 3-6 months to build. In a short space of time building a house took 12-18 months and cost $300k+ plus land.

3. The resource boom brought an influx of skilled migrants that increased demand.

4. Those in mining and construction got paid a whole lot more which means they could spend a whole lot more and there's only so much inventory of desirable property (near the city or on the coast or river). Trading up to those properties created a windfall from current owners which they then spent and so on.

So the GFC came in 2007. Australia didn't have the subprime problem that the US did. More importantly though, in 2008 China stopped buying as many resources. Again the predictions of doom came. Momentum probably drove the market still up (in parts anyway) for another 2-3 years. Since then it's either gone down (<10% mostly) or stagnated. In the last few years this has caught up with rents and properties that once might have 50 applicants for $500/week now couldn't be filled at $350/week.

This seems to be the Australian norm for property cycles. It happened in Sydney in the 1970s. Sydney became really expensive but probably stagnated until the mid 1990s at least.

While this was all going on in Perth and Brisbane (Western Australia and Queensland are the two big resource states), Sydney and Melbourne were going nowhere.

What changed around 2010-2011 is the same thing that happened in many other places around the world: money came into real estate in the large cities. Particularly foreign money. Particularly Chinese money.

Some will argue low interest rates were driving this but they're wrong. Properties above $3-5m in NYC for example aren't bought by people with a mortgage. They're bought with cash.

It seems like certain people in China built up a large amount of wealth in the 2000s and the government placed restrictions on how that capital could leave. I believe that certain investments including real estate were one such exception. Wealthy Chinese wanted to get money beyond Beijing's control. They also wanted to have an "out" by buying residency/citizenship in other countries.

So in the last 7 years median prices in Sydney went from (IIRC) ~A$680k to A$1.1m. Bear in mind that this is even with large swathes of suburban wastelands in Sydney's West ostensibly bringing the median down. The effect on the harbour, the ocean and in Sydney's inner suburbs and North Shore is even more pronounced.

All the while software engineers might still be getting paid the same A$150k + bonus they could get 10-15 years ago.

High property prices really are a disease. It makes rent more expensive. It makes everything you buy more expensive since something has to cover the cost of the premises those goods and services come from.

I believe Switzerland has a far better policy approach to this than many other countries I've seen. The intent seems to be that it is an undesirable outcome to have foreign money come in and buy up the country, basically. Likewise, they don't want a rampant speculative market so short term capital gains on property are taxed punitively. It may have changed but when I was there this meant 100% of gains if sold within 2 years and this eventually scaled down over the next 8 years.

People need somewhere to live. Even if they don't buy, prices drive rent. Only luxury buildings get built in NYC now because it doesn't cost much more than "affordable" buildings but it's a whole lot more profitable. That needs to change. The world's cities can't just be used for money laundering and a holding asset for the ultra-wealthy across the world.

So as for Sydney and Melbourne I don't think the prices are going to come crashing down. They may stagnate for years and even dip. But the Australian banking industry is pretty well-regulated (by comparison to the US anyway) and for those at the high end of the market, they've paid cash anyway so who cares what they do or lose? What I mean is dropping prices won't force them to sell.

sho• 9 years ago

Matt Barrie (founder & CEO of freelancer.com) wrote a far lengthier and more detailed essay on this a week or two ago, which has kicked off this latest round of navel-gazing: https://medium.com/@matt_11659/matt-barrie-australias-econom...

Be warned, it's a long read - but I think he's basically right.

nimish• 9 years ago

That's a lot of words to say that Australia is affected with terminal Dutch disease

On balance however, what exactly would you expect Australia to offer the world better than anywhere else?

rwmj• 9 years ago

Is measuring total housing assets vs GDP [first graph] useful? On the one hand housing is related to the size of the population, and population is related to GDP, so it seems like the two measures should roughly follow each other. On the other hand price and availability of land must be a big factor (hence the US ratio being very low). Also it's unclear that total housing assets is a real thing since the vast majority of houses are not bought or sold regularly so the price can be unduly affected by a frothy minority of sales.

dmh2000• 9 years ago

if Australia ends up like the crash in the US in 2009, that's the time to start buying up the foreclosed houses. Because the market will come back. Folks in the US who didn't panic made out very well.

conanbatt13• 9 years ago

Everyone knows this. People expecting a dip are everywhere.

jgalt212• 9 years ago

Rent component of CPI: is it all rents (lagging indicator) or just newly singed leases (current indicator)?

simonblack• 9 years ago

Australia's house prices are skewed badly by Sydney's house prices. Sydney's is unfortunately roughly one-quarter of the total Australian housing market.

Physically, Sydney is a very long narrow strip squeezed between the mountains and the sea. The poulation of Sydney is constantly expanding. To expand the population, you need to build further and further away from the CBD. Eventually, the commute becomes up to four hours per day. Eliminating that commute puts a lot of demand pressure on the inner Sydney suburbs, and consequently extremely high housing prices.

Melbourne is not quite as constrained physically, so prices there are about 25% lower. But commute times are rising rapidly.

Away from Sydney and Melbourne (where JUST TWO housing markets make up 40% of the Australian housing market) housing prices are much more 'normal'.

For a US analogy, imagine if a quarter of all US houses were trying to squeeze into New York.

closeparen2• 9 years ago

That’s a pretty small skyline for a city where the only way to build is outwards. Sure you’re not forgetting an axis?

cknight2• 9 years ago

There are cultural issues at play there which will take quite some time to overcome. High rises in Sydney are popping up around train stations now, but the vast majority of the metropolitan region's land area is taken up by single or double-storey family homes with yards. Pretty much every new high-rise development in these sorts of areas is met with substantial resistance. I don't blame them either - after living in medium-density places in Europe for a few years, I'm sick of it, and want my own house.

The problem with Australia is that too little thought was given to making viable cities outside of the state capitals. I would love to live in a smaller town but my partner needs a major STEM research university to work at. Europe has such universities in small towns, but Australia does not. Everything is too concentrated in the capitals.

prawn• 9 years ago

I wouldn't call housing in Adelaide "normal" and I imagine the situation in other capitals is similar, even if they're not as extreme as Sydney and Melbourne. The market is overheated. Almost every house in my area is refusing to list a price because the agents could get 15-35% more than they might've guessed a few months ago.

I'd hate to be trying to buy right now.

vasilipupkin2• 9 years ago

all you need to do is buy bitcoin and wait 3 months and you will have enough money to buy a house. Simple.

conanbatt13• 9 years ago

If you had invested 100k in bitcoin in 2011, you would have 300 million today ~

vasilipupkin2• 9 years ago

Exactly, and it's not too late

Australia's Housing Frenzy

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