Archive for August, 2008

Why are Australian banks not willing to lower mortgage rates?

Sunday, August 17th, 2008

Australian banks have been under pressure from many fronts to lower their mortgage rates in response to a possible interest rate cuts from the Reserve Bank of Australia (RBA). The government and opposition parties are demanding that the banks should do the ‘right’ thing by easing the strain of the working majority. The RBA added to the pressure by declaring that it sees no reason why mortgage rates should not lowered in response to monetary easing. The media poured fuel into the fire by accusing the banks of greed.

So far, none of the banks are committed to do so- none pledged to lower their lending rates to match the RBA’s cut in the cash rate. As we said before in Too eager for an interest rate cut?,

Fourth, an interest rate cut by the RBA need not necessary mean a cut in the mortgage rate. In fact, the opposite can occur.

Understandably, with Australian households under unprecedented debt stress, this has fuelled popular sentiments against the banks. They have become the new bogeyman to target. But as one of our readers said very well in Would the RBA?s rate cut do any good?,

It is not so much bank bashing (kind of pointless beyond the immediate feel good and but easy to slip into) but the realities do need to be looked at, and yes, I agree it may be far too late for the banks to do much else and are themselves to an extent pawns in the bigger global picture.

Here, we try not to pass moral judgements on banks. After all, banks are just impersonal profit-making institutions. Therefore, it is inappropriate to apply moral motives on non-person entities. What can expect from entities in which their clearly stated objectives is to make profits?

While it is true that the money market rates for the banks have fallen since the market’s expectation of an interest rate cuts has risen, does that automatically mean that this alone is a good reason to cut mortgage rates? Motives aside, what are the possible reasons why banks are not willing to lower mortgage rates? We can think of a few reasons here:

  1. Mortgages are long-term debt (typically up to 30 years). Cash raised from money markets are short-term credit (which ranges from 1 month to 1 year). How can we expect the banks to lower their long-term lending rates just because the cost of their short-term credit has fallen? Indeed, as the situation for the non-bank lenders like RAMS had shown, borrowing short-term money to fund long-term lending is a good way to become bankrupt, thanks to the credit crunch. This flows on to the next point…
  2. Because of the risk involved with funding long-term debt entirely with short-term credit, banks have to diversify their lending source. As this news article said,

    Our banks raise about half their cash from local deposits, a quarter from local bonds and the rest from the global market.

    While the RBA may have some influence on the domestic short-term money market rates, we can assure you that they have no influence on the global markets. Indeed, as we explained before in Can falling interest rates and rising mortgage rate come together?, there is insufficient savings domestically to fund all the loans. Therefore, the banks have to get the shortfall from overseas and submit themselves to the global credit conditions. The global credit conditions are far from settled and major eruptions can still occur any time. As we said before in The next financial time bomb- Credit Default Swaps, CDS is the next global time bomb to explode. Indeed as this news article reported,

    Most institutional investors expect another failure of a major financial services firm in the coming year and view credit default swaps as a serious threat to market stability, according to a survey by Greenwich Associates.

    Once the banks cut their mortgage rates, it will be very unpopular for them to raise them again in the event of further ructions in the global credit markets.

  3. What if the banks expect more bad debts in the future? Lending rates are proportional to the risk of default of the loans. The banks’ unwillingness to lower mortgage rates could be a sign that they are pricing in more risks on their loans.
  4. It is open knowledge that price inflation is still on the rise in Australia. In fact, the RBA expects price inflation to peak at around 5% before turning down again. For any given nominal rate, rising price inflation implies a lowering of real rate. As we explained before in Is property a good hedge against hyperinflation?, during times of hyperinflation,

    At the same time, you can expect bankers to raise borrowing rates very quickly to protect their profits.

    By not raising their lending rates when price inflation are trending upwards, banks are actually losing money in real terms.

Finally, we would like to point out that we are by no means defending the banks. Neither should this be construed as ‘predictions’ that banks will never lower their mortgage rates.

Fighting for resources in the Caucasus

Thursday, August 14th, 2008

As we know, on the day of the Beijing Olympics 2008 opening ceremony, a war was brewing between Georgia and Russia. We do not know what the quarrel between Georgia, Russia and the disputed provinces of South Ossetia and Abkhazia was all about. Claims of genocide by Georgia on South Ossetia were made by the Russia, while Georgia claimed that Russia was trying to bully its tiny neighbour. Who is in the right?

We do not know.

But as we said before in Are we in a long-term inflationary environment?,

The implication is extremely unpalatable: some nations will have to rise at the expense of the others, which may result in armed conflicts (touch wood, heaven forbid!).

We believe the conflict was at the root about jostling and pushing for the influence and control of natural resources. Russia is an energy rich nation- much of Europe is dependent on Russia for its gas supplies. It also has abundant reserves of oil too. And disturbingly, Russia has shown to have no qualms in using energy to bully its neighbours and settle disputes.

In terms of natural resources, the Caucasus is a very strategic region. As this map in the Wikipedia shows,

Detailed map of the Caucasus region (1994), including locations of economicaly important energy and mineral resources: South Ossetia has reserves of lead and zinc, Abkhazia has coal, and Georgia has oil, gold, copper, manganese, and coal.

In terms of oil, this article from The Age explains,

While Georgia does not produce oil itself, US and European energy firms have counted on the pro-Western country – sandwiched between Russia and Iran further south – to host a conduit for oil and gas exports from Azerbaijan.

Since President Mikheil Saakashvili took power in 2004 two new pipes have been built, and the explosion of violence between Georgia and huge northern neighbour is threatening those, notably the Baku-Tbilisi-Ceyhan (BTC) pipeline.

Transporting oil through the Caucasus is designed to make the West less dependent on supplies from Russia, which has shown worrying willingness to close the taps in disputes with other ex-Soviet states in recent years.

Make no mistake about this: in the years to come, countries that own and control energy reserves (and natural resources in general) will be the ones calling the shots. As we said before in The Problem that can throw us back into the age of horse-drawn carriages,

… supplying environmentally sustainable energy indefinitely at a rate fast enough is a colossal global problem that must be solved. If not, the latter generations will not live better than the current generation.

Many of the oil fields located in US-friendly oil producing nations are in decline. The implication is that as the years goes by, more and more of the world’s energy are produced in nations that are not so receptive to the US and its Western allies.

It is no coincidence that we are seeing conflicts in such regions of the world.

How dodgy is Adelaide Bank’s lending practice?

Wednesday, August 13th, 2008

Yesterday, in The dark side of rising bank profits, we reported on the profit surge of Bendigo-Adelaide Bank’s profit surge. One of our readers know something about Adelaide Bank better than us and has kindly let us publish his/her story:

A friend of mine has been working for Adelaide Bank the past few years. In 2003 we had a conversation about loan standards and what he said shocked me. He worked in the business/commercial loan department of the bank approving loans over 1.5m in size. He said that they only checked the documents visually when an application came in. No other due diligence was made apart from the credit check.

He said that people would send in obviously doctored tax statements, some even dodgied up on a home computer, but they would still be approved.

Remember this was in 2003. Now we can start to understand how that guy from Perth, Mr ?Richie Sambora?, was able to make such large multi million dollar commercial loans. As long as the numbers looked right and matched up to what you wanted to purchase, Banks like AB would approve it.

When Bendigo Bank bought Adelaide bank there were a few articles in the mainstream press lambasting the move based on the fact the AB loan pool is the most riskiest and low quality. When the tide goes out, and commercial loans start defaulting Bendigo Bank will regret their purchase.

As an aside, I remember in 2005 the majority of Adelaide used car yards would recommend Adelaide Bank as the fastest and easiest way to get finance. It was basically on the same day you could get approved, with only a credit check and no other documentation needed.

P.S. Please note that this is an unverified story. Read it with a grain of salt.

The dark side of rising bank profits

Tuesday, August 12th, 2008

On Monday, the financial press reported in Bendigo Adelaide Bank profit surges that

Bendigo and Adelaide Bank, Australia’s seventh-biggest lender by market value, reported a 40% rise in full-year net profit, but said financial markets remained a challenge.

That sounds like good news right? Well, we do not know enough about Adelaide Bank to give any informed comments. But for those who want to dig deeper, here is one factor you may want to think about.

First, how does a bank make money? As we explained in Banking for dummies,

At its very core, a bank borrows money at lower interest rates and lends them out at higher interest rates.

One way to make more money is to increase lending. In order to do so, the bank may borrow more (from depositors, for example). But the problem with this is that this also increases the risk of default for the loans. Therefore, in an effort to increase profits, the bank may increase their loans by lowering their lending standards. In a booming economy, bad lending practices can be masked by rising asset prices (e.g. stocks, property) as the banks can easily recover the full amount of bad debts by selling the assets used as collaterals. But when the economy tip into a bust, unemployment will rise along with falling asset prices. That’s when bad lending practices will lead to trouble. If the bank is highly leveraged, bad debts can quickly lead to a more than proportionate hole in its balance sheet (see Effect of write-down on bank balance sheet).

Rising bank profits may sound nice, but watch out for its dark side. Some cynics reckon that it is in the interest of current bank CEO to raise profits, collect millions in payout and then pass the mess of future bad debt problems to the next CEO to handle.

Second bear market rally on the works

Sunday, August 10th, 2008

Last Friday, while China was having its Beijing Olympics opening ceremony, US Dow Jones made a 300 point rally on the excuse that tumbling oil prices are good for the economy, and hence, good for stocks. As you observe the mainstream financial news media, you will find two recent contradictory themes:

  1. Rising stock prices due to falling oil prices
  2. Larger than expected losses for Fannie Mae (see Fannie Mae unveils loss of $2.3bn).

The rally showed that the financial market embraced the former and ignores the latter. In reaction to the former, the US dollar rose, base metals and gold prices fell and stock prices rose.

Now, take a look at what we wrote back in March this year at Confidence back? Beware of bear market rally:

Last week, gold prices fell from a high of around US$1020 to around US$910 at the time of writing. Oil prices fell from a high of around $US110 to around US$100. Commodities from copper, zinc, nickel, wheat to corn also fell suddenly. The US dollar then rallied.

You will notice that the story back in March was similar to last Friday’s story. The only differences are the numbers for the prices.

Let’s say the stock market rally extended into the next week- we believe it is very possible that it will happen. As a result, the mainstream financial news media will then quote the ‘wise’ sayings of pundits, explaining why this should happen. Already, this is happening in this news story, Aussie dollar falls to six-month low on rate worries,

Some strategists said the Aussie had been oversold, down almost 5 per cent over the week, with traders now saying the US dollar had now bottomed as talk of a Fed rate hike intensified.

“The health of the US banking sector has been averted with the Government stepping in and defending Freddie Mac and Fannie Mae and the SEC outlawing naked short shelling of financial stocks — and the US dollar has been following the financials already,” Commonwealth Bank chief currency strategist Richard Grace said yesterday.

Indeed, it is very entertaining to see the market reacting illogically and having the mainstream financial news media scrambling to explain the market’s illogical behaviour. Both failed to think and join the dots together.

We see things differently from the mainstream. We see that the two above-mentioned contradictory themes are related. Since they are related, it is an error to believe that the worst is over and rush in to buy stocks. In other words, we believe this is another bear market rally. Because it is a bear market rally, you will see fools rushing in where angels fear to tread.

So, our dear readers, you may wonder how falling oil prices and larger than expected loss at Fannie Mae are related. Well, the latter is an example of the ongoing deflation that is still unfolding. As we explained back in March 2007 at Warning: gold price can still fall significantly,

When the inevitable liquidity contraction occurs, gold price will fall as well.

It is in the context of deflation that oil, gold, silver and commodity prices are falling. As we explained before in Connecting monetary inflation with speculation, monetary inflation, speculation and rising oil prices are related. Conversely, deflation, de-leveraging, debt defaults and falling oil prices are related too. Therefore, in the context of deflation, it is foolish to bet on rising stock prices.

Note about using Contrarian Investors’ News

Sunday, August 10th, 2008

For those who are using Contrarian Investors’ News (CIN), we have some clarifications and explanations on our policies and useful tips on its use.

Personally, we do not mind bloggers who submit their blog’s investment-related articles into CIN1. For example, we enjoy the submissions by Investorazzi because we like to keep track of some of the best (or rather, high profile) investors. His submissions save us the hassle of having to check out his blog everyday for new posts. We may not necessarily find every submission useful all the time, but some of them always catch our attention. Anyway, that’s just our own personal preference only– we do not expect everyone else to have the same tastes and preference as us.

Thus, for every submission to CIN, we judge them based on the usefulness/quality/etc content of the submission on a case-by-case basis. In other words, we do not judge it negatively just simply because it’s a blogger’s submission of his/her own blogs’ articles. If that article is of good quality/useful/etc, we will give thumbs up. But having said that, we also encourage bloggers to submit articles outside the realm of their own blog site. That’s because it will enhance their credibility and look much better in the CIN community.

When will we give a submission a thumbs down? Let’s say we believe a particular article is evil/bad quality/nonsense/rubbish/etc after having check it out ourselves. Then we will vote it down.

But what happens if that submission is not to our personal preference but yet, we believe may perhaps be useful to some others? In that case, it is likely that we will not even bother to check out these submissions. Because we will not be checking them out, there is no way we can judge the submission’s usefulness/quality/etc. For example, let’s say someone submits an article analysing oil price’s movement based on technical analysis and you are not personally into technical analysis. Or let’s say due to your lifestyle requirement, you are a long-term investor and the submission is about a short-term trading opportunity. In such situations, you may have a dilemma because on one hand, these submissions are not to your personal taste, and yet, on the other hand, you may not want to give them a thumbs down because you will not be checking them out to assess them. What can you do in such situations?

Well, we have a very useful tip for handling such situations. You see, in every submission to CIN, there’s a link called “Add xyz as a source.” If you want to subscribe to xyz’s submissions (e.g. you may have the same tastes as xyz), all you have to do is to add xyz as your source. For example, in our case, since we want to keep track of Investorazzi’s submissions, we will add him as one of our sources. This addition of sources is a feature of CIN that allows you to ‘tune in’ or ‘tune out’ the submissions of others. You can see the submissions of all of your sources (and even the sources of your sources!) in your “My Sources” tab. Those submissions that do not come from your sources will be ‘invisible.’

For bloggers, we have a tip for you. It will be in your interest to have as many fans as possible (fans are those who cite you as a source). Therefore, you will want to do things that will enhance your trust and reputation within the CIN community. This may include leaving useful and quality feedback on submissions via the comments, taking part in comment discussions, putting the submissions in the correct category (if the category does not exist, let us know- we will add them), voting others’ submission (but please don’t vote down in retaliation), submitting useful articles outside the realm of your blogs, and so on.

So, we believe that every one of us here can work together to make Contrarian Investors’ News a very useful and fun place to help you in your investing endeavour. 🙂

P.S.

1We actually requested some bloggers to submit their posts to CIN. We are sorry that this gives some of the users of CIN the impression that these bloggers are trying to drive traffic. For this, we suggest a compromise instead:

  1. For users, look past the fact they are submitting their own articles and judge the quality of their submissions based on their own merits in a case-by-case basis.
  2. For bloggers, take a more active role as described in the above paragraphs.

Refuting Michael Pascoe’s optimism about continued growth

Thursday, August 7th, 2008

As we all know, there are a lot of chatters about recessions in the Australian media recently. As always the case, there are two opposing camps of perennial optimists and committed doomsayers on this recession debate. The question is, will there be a recession in Australia?

Our answer is, a recession is not a matter of if but a matter of when. In other words, we still believe that the economy moves in cycles. We do not believe there is such a thing as ever-lasting growth forever and ever till infinity. In fact, we made the first recession call back in February 2007 in Where are we in the business cycle?:

Thus, we believe that Australia (and the US as well) is at the top of the business cycle. For investors, we have to bear in mind that we are now probably at the cyclical top. If we assume that the current trend of companies? profit growth will extend indefinitely into the future, we will be in for a nasty surprise.

Due to some quirk in human nature, it is very easy to fall into turkey thinking as we explained in Failure to understand Black Swan leads to fallacious thinking. Therefore, it is in this context that we wish to refute Michael Pascoe’s punditry on recession, Doomsayers to the fore. We have been hearing his commentary for a couple of years already and know that he had made many wrong calls in the past, including the comments he made last year about the sub-prime crisis being just a “storm in a tea-cup.” Below are our refutations on his “10 reasons for why we won’t suffer a national recession any time soon”:

The Reserve Bank has lots and lots of dry powder if it needs it. As a result of bumping up interest rates, the RBA can easily cut and cut quite dramatically if it thinks the economy is slowing too fast.

This was the same argument made by Shane Oliver, the chief economist of AMP. As we refuted Oliver’s factual error in Aussie household debt not as bad as it seems?,

[Reflation] did not work in Japan! Remember Japan?s infamous zero-interest rate monetary policy as well as massive government spending fiscal policy? Yet, deflation dogged the nation for more than 16 years. There is only one way to fight deflation and that way leads to hyperinflation (see Recipe for hyperinflation).

Central to Michael Pascoe’s idea is the belief that the pushing of the short-term overnight cash-rates levers by the RBA is a kind of do-it-all snake oil that can solve every economic malaise. But as we sarcastically put forth this question in Why does the central bank (RBA) need to punish the Australian economy with rising interest rates?,

Think about this: if raising interest rates is ?bad? and cutting interest rates is ?good,? then why don?t the RBA set interest rates to zero, thereby putting the economy into a path of eternal boom (plus runaway inflation)? For those who think this is a good idea, then this article will set to let you understand why this is a bad idea.

Also, as we quoted Ludwig von Mises in How will asset-driven ?growth? eventually harm the economy?,

The economists were and are still today confronted with the superstitious belief that the scarcity of factors of production could be brushed away, either entirely or at least to some extent, by increasing the amount of money in circulation and by credit expansion.

To make a final debunking of this idea, consider this present fact: the US Federal Reserve raising interest rates in baby steps from 1% to 5.25% under Alan Greenspan. Then, in reaction to the credit crisis, it began slashing interest rates quickly to 2% today. Did that solve the core of the rot in the US economy? As we explained yesterday in Would the RBA?s rate cut do any good?, a too hasty and massive cuts in interest rates will have a very negative effect on the Australian dollar, which will not be good news for the Australian economy.

Next, Michael Pascoe said,

The RBA is ready to push money at the banks if necessary. Cutting interest rates isn’t the Governor’s only option. He also is set up to lend the banks money in exchange for mortgages if liquidity gets too tight.

Well, take a look at how the US is faring right now. This step may save the banks, but it may not be good for the Australian people. Furthermore, when debt deflation takes hold, shoving money to banks will not be enough to persuade the economy to take on more debt. As we said before in What makes monetary policy ?loose? or ?tight??,

… we have to remember that the central bank cannot control the demand for money and credit. It can supply whatever amount of them that it wants, but it cannot force business and people to desire them. Put it simply, you can lead a horse to the water, but you cannot force it to drink.

Michael Pascoe said,

We’re not the US or the UK. While a couple of our banks have ‘fessed up to big write offs and provisions, they all remain fabulously profitable and their loan book is in much better shape.

We have this to say at How safe are Australian banks?.

Next, he said,

If the unemployment starts to rise uncomfortably, the government has the option of turning off or at least turning down the big immigration inflow it’s presently encouraging. Australia’s gross immigration is running at more than 300,000 people a year.

The problem is not one of over or under employment. Rather, it is the structure (or configuration) of employment. Take a read at Overproduction or mis-configuration of production?. Also, if Australia falls into serious unemployment problems, do you think migrants will still want to come here?

Next, he said,

The Federal Government has surpluses it can turn into spending if it looks like we’re heading for the recession door. Kevin Rudd wants to be Prime Minister for a lot more than one term.

If the government spends too much money too early (by turning the budget surplus into deficit), it will not solve the problems of mal-investments and mis-configuration of production in the economy. Instead, price inflation will be the main effect. Remember, at this point in time, Australia is close to full employment.

Next, he said,

The oil price could well continue to fall, providing some needed psychological relief for consumers feeling battered by prices prices and, what’s worse, the media screaming doom and gloom about oil.

Mere short-term psychological factors will not solve the basic economic problem of scarcity of factors of production and mal-investments. Take a read at our guide, What causes economic booms and busts?.

Next, he said,

The big picture hasn’t changed – Beijing still wants to see about 200 million peasants move into the cities from subsistence existences down on the farm over about 10 years. Think about the infrastructure demands for housing and moving that many people every year and you won’t be panicked into worrying too much about the United States not buying as many Chinese-made shirts and sandshoes.

And therefore demand for our resources remains strong. The surging iron ore and coal prices are yet to fully emerge from the statistical noise and be shown as the great stimulus that the terms of trade are providing.

He got this half-right. Our views on China is summarised in Crisis and the China growth story. Let’s say China’s economic growth slowed down from around 12% to say, 5%. Relative to the ailing US economy, it is still a fantastic growth rate. But relative to itself, it is a major recession. What will this do to commodity prices in the short to medium term?

Next, he said,

Remember where our economy has come from. Yes, there has been a sharp slowdown in retail sales and credit growth – but they’re coming off very high bases. And the economy overall was running at near capacity – the RBA had to make room for the resources boom impetus.

Michael Pascoe forgot that Australia’s debt level had gone too far from the mean by a far margin. The “base” that he mentioned should be the mean, which is somewhere very much lower that where it is today.

Finally, he said,

And, finally, we do learn from our mistakes. The doomsayers tend to be so busy screaming about any potential disaster that they overlook moves buy the government and RBA to counteract them. We have to give the mandarins just a little credit – the RBA certainly doesn’t want a repeat of the last recession when it was arguably a little slow to put up rates and then far to slow in cutting them.

He forgot that Australia is not an isolated economy. It is a relatively small economy that is very much inter-linked to the global financial system and is at the mercy of global macroeconomic forces. There are some factors that is totally beyond the control of the Australian government and the RBA- for example, oil prices, credit crisis, etc.

Would the RBA’s rate cut do any good?

Wednesday, August 6th, 2008

On Tuesday, the Reserve Bank of Australia (RBA) hinted that the case for an interest rate cut has increased. As this announcement from the RBA said,

Weighing up the available domestic and international information, the Board judged that the cash rate should remain unchanged this month. Nonetheless, with demand slowing, the Board?s view is that scope to move towards a less restrictive stance of monetary policy in the period ahead is increasing.

The last sentence gave the financial markets the excuse to punt on interest rates cuts later in the year. No doubt, many would be eagerly waiting for this day to come. They thought, perhaps, rate cuts would help bring in a new boom in asset prices?

The RBA may cut interest rates, but the price of credit may not follow. You see, when the RBA cuts interest rates, they are merely setting the target of the cash-rate, which is the rate of overnight loans between banks. The cash-rate is only one of the many short-term interest rates. As we explained in How does a central bank ?set? interest rates?,

… there are many kinds of interest rates, which can be categorized into either short-term interest rates and long-term interest rates. An example of a long-term interest rates include the 10-year Commonwealth Treasury bond yield.

The cash-rate will then have an influence on the other interest rates in the economy (e.g. bank bills). Unfortunately, thanks to the credit crisis, this influence had waned. The fact that mortgage rate is moving independently from the cash-rate is testament to that fact.

Then, there is another possible danger. As this article,  Debt mutes the horn of plenty, noted,

Bank deposits have not been enough to fund the rise in household borrowing, so the banks have turned to world markets, which have been more than willing to lend. They are still willing, albeit at a much higher interest rate than was being charged a year ago.

“The funding costs can only get worse if we see interest rates come down here and the currency starts to fall, so that the attractiveness of lending to Australia diminishes,” Minack says.

If the Australian dollar falls as a result of interest rate cuts by the RBA, there are two possible adverse results for Australia:

  1. Foreign lending to Australian households may be reduced, which means the cost of credit will go up, as we explained in Can falling interest rates and rising mortgage rate come together?.
  2. The rise of the Australian dollar has shielded Australian households from the worst of the commodity price inflation, most notably oil. A fall in the Australian dollar will imply a rise in the price of these commodities. This will not bode well for the Australian price inflation rate.

As we explained before in Is the credit crisis the end of the beginning?, the de-leveraging process in the global financial system still has to yet to run its full course. Consequently, the price of credit will continue to rise, regardless of central bank’s rate cuts. The rising price of credit and further credit tightening will lead to further deceleration in credit growth, which in turn will be very detrimental to asset prices and the real economy.

We will not taking RBA’s rate cut as ‘good’ news.

News media contradiction regarding the Australian rental crisis?

Tuesday, August 5th, 2008

Let’s have some humour today. Recently, we saw this news article in the Sydney Morning Herald, Rent or buy, families hit a brick wall:

SYDNEYSIDERS are caught in a bind as rising interest rates push more people into mortgage stress at the same time as the rental squeeze makes it impossible for people in some suburbs to find rental accommodation. Young families are particularly exposed.

So, according to that article, we have a rental crisis and a housing shortage in Sydney.

Right.

Then we saw this news article in The Australian, Rental crisis ‘over’ as vacancies rise:

THE rental crisis is a thing of the past in much of Sydney and the nationwide housing shortage is easing, with a 50 per cent surge in listings for rental accommodation in the past year.”

So, according to these two mainstream news media, do we or do we not have a rental crisis? Take a read at this paragraph in The Australian article,

SQM Research’s vacancy rate figures are much higher than those published by the only other major compiler of vacancy rate data, the Real Estate Institute of Australia, the peak property industry body, and its state subsidiaries. According to the REIA’s most recent figures, Sydney’s vacancy rate was 1 per cent in March, less than a third of that reported by SQM Research.

So, who are the guys in the “Real Estate Institute of Australia” (REIA)? Should we trust their figures or SQM Research’s figures? Elsewhere, in another article from the Daily Telegraph, Rental crisis might be overblown,

Mr Christopher is critical of the REIA?s data and said there are potential conflicts of interest in the way the information is collected.

?There are some serious questions that need to be answered surrounding the method used by the various industry bodies in calculating the vacancy rate, their sample sizes and how they compile their vacancy rate data,? he said.

A spokesman for the Real Estate Institute said the vacancy data released by the institute was based on data sent in from its members – real estate agents from around the country. He acknowledged there were flaws in the system and said the institute would welcome independent research on the subject.

So, do you smell a rat here? As we said before in Australian housing shortage myth,

When it comes to solving Australia?s housing problem, there is an entrenched superstition that makes many believe that there is a housing ?shortage? in Australia. This superstition has resulted in many proposed solutions to the housing affordability crisis that are completely useless, wasteful and counter-productive. For many vested interests, it may as well be that such a superstition be propagated. But for the sake of our nation, it is in everyone?s interest that this superstition be demolished.

By the way, this article is in no way pointing the finger at real-estates agents. Rather, we believe that due to the way the human brain is wired, conflict of interests can often result in biased information, especially when the issue concerns money and wealth. That’s why it is unwise for doctors to treat themselves or their family members- few humans can be objective in such situations.