Posts Tagged ‘BIS Shrapnel’

Unknown unknowns trips up many turkey forecasters

Sunday, October 12th, 2008

As we explained in our previous article, Real economy suffers while financial markets stuff around with prices, the massive deflationary forces from the free market is being (and will continually be) counteracted by government attempts at inflation (see our guide, What is inflation and deflation?). The result will be great volatility in prices, which will undermine business calculations and long-term planning by the free-market.

At the same time, many economic forecasters will have their forecasts and ‘predictions’ completely stuffed up, which will mean that their credibility will be severely undermined. Many of these forecasters simply fail to see that the ground has been shifting as they make their projections. The recent deterioration of the global financial system will cause many of them to back-flip on their views. Those who cling on stubbornly on their previous (and erroneous) positions will have their credibility rubbished by history. Simply put, these forecasters completely failed to see turning points at the economic cycle. We really marvel at the fact that some of these forecasters are paid highly to produce expensive reports that turned out to be wrong. How could they possibly not see such an obvious looming financial disaster? It really takes a special effort to put on the blinkers in order NOT to see it coming. We are so marvelled that we have to write up a guide (Why are the majority so wrong at the same time and in the same ways?) to explain why.

As you will have heard the news by now, Prime Minister Kevin Rudd announced that the Australian government will guarantee all (a change from the $20,000 guarantee last Friday) bank deposits for 3 years. Also, there is other bad news in that announcement as this news report says,

Prime Minister Kevin Rudd has warned that economic growth and job security could be in jeopardy as the global financial crisis entered a “new and dangerous” phase.

As he equated the current financial turmoil to a national security crisis, Mr Rudd today signalled the jobless rate for next year was likely to be higher than originally forecast in the May budget.

`So, unemployment is likely to be higher. That’s just levelling with people … It’s likely to be higher than has been projected. We don’t have numbers on that.

Associate Professor Steve Keen believed that the unemployment rate could reach around ten percent range or more. The economic implication for this is very ugly. As we explained back in March last year (2007) at Can Australia?s deflating property bubble deflate even further?,

In Australia?s case, with her towering levels of debt, any external shock can easily tip her over to a recession, which can lead to further asset (e.g. real estates and stocks) deflation.

By now, it should be clear that whatever the external shock is not the issue?the point is that Australia is highly vulnerable.

The global financial crisis is an example of an external shock that we warned back then.

As we further explained in June 2007 at What can tip Australia into a downward property price spiral?,

With the Australian debt levels so high, a recession (with an accompanied increase in unemployment) will result in more distress property sales and further downward pressure on property prices. In such a scenario, what is happening right now in Western and South-Western Sydney can be extended to the rest of Australia.

The Australian economy is very highly leveraged towards the residential property sector. Rising unemployment will exert a downward pressure on property prices (due to the high leverage of the household sector), which along with that will expose the weakness in the Australian banking system (it has been said that mortgages made up of 50% of Australian banks’ loans- you may want to check up on that figure). A major weakening of the banking system will result in a major tightening in credit standards, which can even result in the deflation of credit growth (credit growth is already slowing down significantly in Australia). This will then feedback into the economy as a sharp drop in consumer spending, which along with the ongoing de-leveraging process (see De-leveraging in the real economy- mortgages), will put a major pressure on the retail sector (in addition to the financial sector already under a serious stress). This in turn will feedback into rising unemployment, resulting in another round of vicious cycle.

Now, let’s take a look at some of the economic forecasters and have some humour along the way.

In this news report, Bad day for house sales as jitters spread,

Angie Zigomanis of BIS Shrapnel said people were increasingly worried about their future: “If you don’t think your job is secure then no matter how low mortgage rates go, you are not necessarily going to enter the market.”

Remember BIS Shrapnel? Back then, they were writing forecast reports with erroneous and nonsensical logic (see Can lower interest rates re-inflate the property price bubble? and Another faulty analysis: BIS Shrapnel on house prices). It looks that they are beginning to back-flip on their views.

Let’s take a look at the views of a perennial bull, Craig James senior equities economists of CommSec,

Mr James said the recent report from the International Monetary Fund stressed that the Australian housing market would not experience the same dramatic falls as the US and Britain because of the nation’s strong population growth, fuelled by immigration.

Oh really? Strong immigration will help to keep upward pressure on housing demand in Australian? Well, let us take a read at another news report, Aust rethinks immigration boost as global financial crisis buffets economy,

Australia said on Friday it will re-think a large boost to immigration as the global financial crisis buffets the economy and places a brake against years of strong growth.

Mr James fails to understand that:

  1. Immigration tends to be very cyclical along with the economic cycle.
  2. In the face of rising unemployment and slowing economic growth, new migrants will put additional on the Australian economy. That is the reason for the government re-think on immigration.

It is obvious that extrapolation of current immigration figures into the indefinite future is flawed.


The ruction in the global financial system will put a spanner in the works of many forecasters. In the months and years to come, we will see the rise and fall of many forecasters as reputations are made and destroyed and credibility gained and lost. The first shall be the last and the last shall be the first.

Do property price always go up?

Monday, August 25th, 2008

One of the most entrenched superstitions is that property is a safe and secure asset class that always go up in price over time. It has come to a point that some people believe that property prices never come down. Some people will even cite the trend of the past 10 years to prove the point of this superstition.

But as Nassim Nicholas Taleb said in his book, The Black Swan: The Impact of the Highly Improbable, all you need to prove that not all swans are white is to find a black swan. In the same vein, all we need to prove this superstition false is to come up with examples of the opposite happening. The fact is, history is on our side- with the bursting of the Japanese bubble economy of the 1990s, property prices in Tokyo was said to have collapsed by 70% over the course of the decade. As of today, median house prices in the US has fallen around the order of 15% in one year.

For today’s article, we will draw out another big gun to blast away this superstition. At the beginning of the year, the ABC had a documentary about 350 years of Dutch experience- Dutch history pointing to real estate fall. In that documentary, it reported

The house sugar merchant Cornelis Sasbout built in 1617 at number 150 on Amsterdam’s Herengracht canal tells a cautionary tale about investing in property – prices fluctuate wildly, but are ultimately flat.

In that documentary, when it said “flat” prices, it means “flat” in real terms.

Mind you, the Herengracht is not some piece of forsaken real estate built in the middle of nowhere. It is a prime real estate for over 350 years, as this documentary reported:

Eichholtz says what makes his index stand out from house price histories in other cities is what he calls “constant quality” – the Herengracht has always been prime real estate. The index corrects for rising consumer prices but not wages.

What is the lesson here for Australia? Well, Australia is still sitting on an unprecedented debt bubble. For those who still need convincing, please take a look at Professor Steve Keen’s scary debt charts at Debtwatch No. 25: How much worse can ?It? get? and our commentary at Aussie household debt not as bad as it seems?. When the debt bubble burst eventually, we can be sure the frequently parroted justifications of this superstition (e.g. housing ‘shortage,’ immigration, etc.) will be revealed as hogwash. We would love to see those ‘experts’ who wrote reports that justify this superstition be paraded as clowns when they are proved wrong in due time (see Another faulty analysis: BIS Shrapnel on house prices).

Can lower interest rates re-inflate the property price bubble?

Thursday, June 26th, 2008

Recently, those people at BIS Shrapnel are busy spreading misinformation in the mainstream media again (see this mainstream news article: House prices set to climb despite rates). Their first ‘analysis’ regarding house prices was first released in March this year. This month, their ‘analysis’ was again reported in the mainstream media. We had already criticised their flawed ‘analysis’ earlier in Another faulty analysis: BIS Shrapnel on house prices and would not repeat them again in this article.

But we would like to add one more point with regards to one of their flawed assumptions. When you read the mainstream news media, you will notice that one of their assumptions is that when the RBA eventually cut interest rates (insert: Mr Angie Zigomanis, the report author, said that “As credit conditions recover over the course of 2009…”), it will lead to the further re-inflation of property bubble. Judging from this flawed assumption of theirs, we wondered whether they are really that ignorant about economics.

To understand the flaw in their assumption, we have to first understand the RBA’s latest decision to hold interest rates in June. Currently, the RBA is still keeping an eye on price inflation. As BIS Shrapnel themselves acknowledged, the RBA is likely to raise interest rates again this year to combat price inflation. But the reason why the RBA kept interest rates on hold this month was that they expected the Australian economy to slow down in the coming months. In other words, the RBA is expecting the economy to slow down so that inflation will be kept at bay, which will reduce the necessity to raise interest rates.

When the economy slows down, what happens? You will see rising unemployment, falling profits, declining consumer confidence and so on. Given the astronomical levels of debt Australians owe, en economic slowdown will increase the debt servicing burden, which in turn (1) increases the likelihood of bad debts and thereby, (2) decreases the quality of the loans in the banking system. Effect (1) increases the likelihood of debt deflation (see Aussie household debt not as bad as it seems? for more detailed explanation). Effect (2) will lead to the contraction in the supply of money and credit (or at least a slowdown in its expansion) in the economy (see How money & credit can shrink (i.e. deflation)? for more detailed explanation).

As we said before in Australian property good investment? Part 3?prospects of capital appreciation (written more than a year ago),

Traditionally, it is the rising income levels that drive property prices upwards over the years. Naturally, as people?s general income level increases, the prices paid for property will increase as well. Recently, we have another phenomena that drive property prices upwards?the sudden availability of easy credit and low interest rates, which are manifestations of monetary inflation (?printing? of money). The result is a short-term property price bubble…

So, given that Australian house price inflation are driven mainly by credit (NOT income), shrinking supply of credit will at least put a brake on further price inflation. In fact, we can argue that for every same percentage increase in asset prices, the amount of credit required increases exponentially. Thus, we do not even need a shrinking amount of credit to induce asset price deflation- a slowdown in credit increase is enough to do that job. In Australia’s case, credit is the oxygen for the property market. Without it, no matter how much excess ‘demand’ for housing is out there, there will not be enough people who can afford them.

As we can see from this Bloomberg article, Australian House Prices Fall Most in Five Years on Higher Rates,

Australian house prices fell in the first quarter by the most in five years after the central bank raised interest rates at the fastest pace in more than a decade.

The median price for houses fell to A$458,488 ($439,644) in the March quarter, down 2.7 percent from the previous three months, the Real Estate Institute of Australia and Mortgage Choice Ltd. said. Apartments also fell 2.7 percent to A$355,297.

The statistics at RBA shows that credit growth in Australia is starting to slow due to interest rates rise. And at the same time, we see property price deflation in the first quarter of 2008.

Therefore, a slowing economy is NOT good for house price.

But what if the economy slows down too much for the RBA’s liking? In that case, given the high levels of debt of Australians, if the economy slows down too much, the Australian economy can tip into a dangerous downward deflationary spiral. That was what happened to Japan during the 1990s. Today, the Japanese are still trying to recover from that deflation. When that happens, the RBA will be cutting interest rates just like Ben Bernanke did recently. In short, while the RBA is looking at inflation, it will not cut interest rates unless deflation becomes a serious threat. By the time deflation becomes a serious threat, will cutting interest rates re-ignite the property price bubble?

Again, we doubt so. As we said before in What makes monetary policy ?loose? or ?tight??,

A common misperception is to assume that any rise in interest rates automatically implies a monetary tightening (and conversely for a fall in interest rates).

Underneath BIS Shrapnel’s assumption lies the erroneous misconception that the cutting of interest rates automatically result in a loose monetary policy (i.e. increase in the quantity of money and credit in the economy). If deflation gets serious enough, the cutting of interests will still result in a ‘tight’ monetary policy. Japan was an excellent case in point. Another excellent case in point is the United States today. Despite Ben Bernanke cutting interest rates desperately, did it re-inflate the property bubble over there (see this news magazine article, US Home Prices Tumble in April)?

In short, BIS Shrapnel has no credibility.

P.S. Temjin & David: We will continue to answer your questions (in What is a crack-up boom?) in the coming articles.

Another faulty analysis: BIS Shrapnel on house prices

Sunday, March 30th, 2008

As reported in this news media article, BIS Shrapnel just released an report,

Australia’s housing affordability crisis is expected to dramatically worsen during the next five years, with property prices forecast to rise by as much as 40 per cent.

Economic forecaster BIS Shrapnel says housing affordability, already at record lows, will decline even further in the years ahead as demand continues to outstrip supply.

This is an example of misinformation and ‘analysis’ by those who should know better.

Firstly, this is an example of turkey thinking (see Example of a financial turkey: Australian Property Monitors), as the article said:

The figures quoted by Mr Gelber are largely in line with Australian Bureau of Statistics (ABS) data.

Calculations, based on the ABS established house price index, show that during the 10 years to December 2007, house prices rose an average of 9.9 per cent a year. The index rose 12.3 per cent in 2007.

In the 10 years before that, house prices rose an average six per cent a year.

In the past 20 years they have risen an average 7.9 per cent a year.

The journalist who wrote that article was implying that since property prices had been rising so many percent over the past so many years, therefore what happened in the past is consistent to what will happen in the future as ‘predicted’ by BIS Shrapnel. Turkey thinking is the primary reason why the majority is always wrong (see our guide Why are the majority so wrong at the same time and in the same ways?).

Secondly, this type of analysis is too simplistic. Basically, it is simplistically saying that since demand is greater than supply, then prices will rise. It looks to us that BIS Shrapnel is looking at the Australian property market as a monolithic whole. In reality, as we said before in Myths on the Australian housing/rental crisis & its implications, the problem is not really simplistically due to outright shortage. Rather, the real problem is the mismatch between demand and supply. In Sydney alone, there are some areas suffering from over-demand and others suffering from over-supply. Blindly increasing the supply alone will not solve the problem.

Can Australia’s already excessive debt levels increase further to feed further property price boom? This is another flaw in BIS Shrapnel’s analysis. The only way for house price to rise further is for debt levels to increase. If Australia’s high levels of debts are already strangling the average Australians with excessive debt stress (e.g. mortgage debts) at a time of record low unemployment, how can debt levels increase any further to feed the further substantial increase in house prices? As the business cycle turns, unemployment will increase, which will result in de-leveraging of the highly leveraged households. The higher the leverage, the more painful the de-leveraging will be. The more painful de-leveraging is, the greater pressure will be on asset prices (see What can tip Australia into a downward property price spiral?).

Where is the housing ‘demand’ going to come from as credit becomes more expensive? The only way for most people to buy a property is to borrow money. If credit becomes more expensive (i.e. harder to borrow money), obviously the ‘demand’ for properties will fall as well. As we said before in Rising price of money through the demise of ?shadow? banking system, the global financial system is undergoing a credit crunch whereby money is getting more and more expensive. Along with that, the ‘demand’ for houses will slowly disappear as well.

BIS Shrapnel had also shown itself to be economically challenged. As the article said,

Mr Gelber says the current environment of rising interest rates has compounded the problem, with people choosing to wait before buying or building property.

This also meant that when interest rates stopped rising or eventually started to fall, there would likely be a surge in demand for housing which could result in another price explosion.

If it ever comes a day when the Reserve Bank of Australia (RBA) has to cut interest rates, it will be a day when the Australian economy is in deep trouble, when debt deflation grips the nation. That will NOT be good for property prices. In fact, this is currently happening in the US right now when money-printer Ben Bernanke (see Peering into the soul of Ben Bernanke) is busy trying to fight asset price deflation (see Recipe for hyperinflation).

We are astounded that even a leading industry research organisation can produce such nonsense.