Posts Tagged ‘House prices’
Plunging UK living standards

There are some great charts and comment in this post:

UK deleveraging: “standard of living to plunge at fastest rate since 1920s

Put simply, the UK economy will remain moribund for years to come as the deleveraging process slowly works its way through the system.

The question then is: with Australia’s house prices now the most expensive in the Western world, and our household debt levels similar to the UK at its peak (i.e. 157% of incomes), how long will it take before we suffer the same fate?

Poor old England. How are the Brits going to afford power and food? The UK had to import food during WW2. It’s added 10 million people since – many housed on formerly prime agricultural land. Sure farming is more productive, but is it sufficiently more productive?

As for power, they closed their coal mines under Thatcher and have built no new nuclear power stations since who only knows when. They have invested and keep talking about green power which was too expensive even in the midst of a bubble economy. Without on-going subsidies they are simply a waste of money. In a de-leveraging economy misallocations of capital are really felt – as Americans will find out.

What agriculture the UK does have is heavily industrialized i.e. requires lots of cheap energy. With a collapsing currency and declining North Sea oil production that is going to be a thing of the past.

The pickle the UK, USA and Spain find themselves in clearly show the folly of relying on immigration induced housing demand to create your economic nirvana. A lesson Australia will eventually learn.

But the post begs the question of what the Australian government will do is if serious de-leveraging does occur in Australia? Australia has the advantage of being able to look at other countries further down the curve – Iceland, the UK and USA… etc.

Allowing covered bonds while indefinitely extending the government deposit guarantee scheme makes nationalizing losses a near certainty. The Australian people have locked in transferring wealth to investment bankers with hardly a murmur of protest. Will the government do less when bankers are warning of anarchy and the need for marshal law if they are not given more hand-outs?

Will the Australian government let those who took the risks incur the losses, and thereby husband resources to help those in most need? Or will Australia transfer money to the risk taking wealthy so it will have nothing left in the kitty for the truly deserving?

What the government should do is obvious. What it will do is less so. The UK, USA…etc precedents suggest there is no way will Australia let those who took the risks wear the consequences. But if our decline happens after the consequences of  the bailouts are manifestly obvious, then surely even the Gillard government would hesitate to go down that path. But given the covered bond precedent….

As for governments being able to create wealth by printing, that is simply stealing from the prudent to give to the profligate. It might work for a while, but in the long run it destroys societies. We want stable prices not inflation, even though this will force politicians to admit the mess they have made.

 
More Real Estate Woes

The post on potential Australian Real Estate Woes has been updated to include this:

UPDATE

Remember, America wasn’t the only country with a housing bubble. The world’s central bankers let a global housing bubble development. As I noted in December 2008:

… The bubble was not confined to the U.S.

There was a worldwide bubble in real estate.
Indeed, the Economist magazine wrote in 2005 that the worldwide boom in residential real estate prices in this decade was “the biggest bubble in history“. The Economist noted that – at that time – the total value of residential property in developed countries rose by more than $30 trillion, to $70 trillion, over the past five years – an increase equal to the combined GDPs of those nations.

Housing bubbles are now bursting in China, France, Spain, Ireland, the United Kingdom, Eastern Europe, and many other regions.

And the bubble in commercial real estate is also bursting world-wide. See this.

Source: Naked Capitalism

It warrants its own post because it makes clear that there is no going back to the way things were. Bailouts aimed at restoring recent levels of credit growth and consumption are doomed to fail.

The size of the decline in real estate prices will relate to the magnitude of the rise. A rise equivalent to 100% of GDP in five years is quite a rise. There will be quite a fall. Normal practice will be to have an overshoot on the down side.

Australia is the great exception in having a credit induced housing boom without a bust. How long can it last? To answer this, look to China. For how long will the Chinese continue to buy and hold Australian houses? Not to mention Australian commodities. At least the Australian Government will be hard put to make foreign investors good on any losses, unlike the US with its bailout of Asian investors.

The West needs to wake up and smell the coffee. Reality is imposing itself on their pseudo-socialist dreams

 
Real estate woes

Hat tip to The Big Picture

Does the growth of Chinese real estate purchasers give a lie to these statements?

  • It was the government stimulus that stopped Australia going into recession.
  • Australian house prices reflect immigration led demand. Besides, they are not high compared to income (Don’t ask me how this squares with Australia having the highest house prices in the world).
  • The great Australian exception of a credit expansion fed housing boom without a bust is no problem. Neither is the fact we are running a $50bn deficit in the midst of a mining and agricultural commodities boom. Under the Coalition we ran a $20bn surplus.

The US and UK are both deleveraging. Or at least their private sector is. Government is trying to maintain debt at unsustainable levels. No prizes for guessing how that will work out.

Australian house prices did not really contract. Their bubble has not popped. Our savings rate remains low. We are in effect continuing to dig ourselves into the debt hole. When our credit expansion stops and goes into reverse, we will almost certainly experience declining prices as per the US and UK.

The role China played in our recovery through its demand for our commodities is generally acknowledged. What is not generally acknowledged is that Chinese demand for our housing may have had an even bigger effect.  Chinese demand grew from 14% to 20% of the market over a million dollars in Sydney between 2009 and 2010. Anecdotally they were big purchasers in Melbourne as well.

The demand followed regulatory changes

“Canberra finally caught up with public ire yesterday when the federal government reversed rules – conceived in late 2008 to avoid recession and established in March last year – that relaxed the laws of property ownership by foreigners, in the name of market flexibility”.

The reversal of the laws, together with expected declines in foreign students could remove the prop from under our housing market. We will then see just how sound our banks are. The people of Australia may yet rue the billions the government has wasted.

The chart also reveals just how dependent Australia is on China. Lets hope they do not experience a hick-up, although it is inevitable that they eventually will. Australia could experience the effect of Chinese pulling their money out of our real estate, at exactly the same time they reduce their demand for our commodities.  Either of these under normal circumstances could cause a recession. Together a depression is not out of the question, particularly if we are running deficits before these “shocks” hit the economy.

UPDATE

Remember, America wasn’t the only country with a housing bubble. The world’s central bankers let a global housing bubble development. As I noted in December 2008:

… The bubble was not confined to the U.S.

There was a worldwide bubble in real estate.
Indeed, the Economist magazine wrote in 2005 that the worldwide boom in residential real estate prices in this decade was “the biggest bubble in history“. The Economist noted that – at that time – the total value of residential property in developed countries rose by more than $30 trillion, to $70 trillion, over the past five years – an increase equal to the combined GDPs of those nations.

Housing bubbles are now bursting in China, France, Spain, Ireland, the United Kingdom, Eastern Europe, and many other regions.

And the bubble in commercial real estate is also bursting world-wide. See this.

Source: Naked Capitalism

More on real estate woes here.