Posts Tagged ‘Property’

Yet another real estate spruiking by mainstream news media

Thursday, March 4th, 2010

Today, as we look up the Sydney Morning Herald (SMH), we saw yet another blatant attempt at real estate spruiking. The offending article reported,

It’s a figure to break the hearts of first home buyers: Sydney’s median house price is inching towards $600,000 – almost double what it was a decade ago.

The subliminal message to prospective home buyers is clear: buy property now before it is too late.

The article reported that ‘wherever’ you look, the supply of housing is low and prices are going up. Then it picked a few locations here and there and sought the opinions of real estate agents (of all people) as examples to ‘prove’ that point.

Really? Is it really ‘wherever?’

If you read the comments below that article, one person wrote,

I just did a quick search on the Internet for properties available in Upper North shore Sydney and found over 200 in about 5 seconds. How this counts as a shortage I’m unsure… If there is a shortage wouldn’t it be hard to find a place?

Indeed, this is journalism on the cheap. Get a median (while conveniently leaving out the details and context), spin a story by taking the biased opinions of a few real estate agents located in a few places and then hope that readers will fall for the story through a mental pitfall called lazy induction.

We have one comment about the median. For those who are initiated, the median is obtained by lining up all the sale prices in ascending order and then pick the one right in the middle.

There are two facts about first home buyers:

  1. They tend to go for the lower end of the market.
  2. Since the first home-owner grant was phased out in 2010, first home-buyer activity declined significantly.

These two facts implies that sales are skewed towards the higher end of the market. That means the median figure will move upwards by definition. Conveniently, this basic analysis is omitted from the SMH article.

It’s bad enough to read cheap journalism. It’s worse to read cheap and biased journalism. We wouldn’t be surprised if the real estate industry is one of their biggest advertisers.

RBA committing logical errors regarding Australian household finance

Tuesday, March 31st, 2009

Ric Battellino, the deputy governor of the Reserve Bank of Australia (RBA) gave a speech today. Regarding Australia’s household finance, he said,

We continue to believe that the market here will hold up better than overseas. There are a number of reasons why this is likely to be so, but perhaps the most important is that we did not have the same deterioration in lending standards that occurred elsewhere. By and large, the great bulk of Australians who took out housing loans have been able to afford the repayments. Notwithstanding some rise over the past year, the 90?day arrears rate on housing loans is only 0.5 per cent, which is broadly in line with its long?run average and well below that in countries such as the US and UK.

As he said that, we imagine he was thinking somewhere along the line like this:

  1. US sub-prime loans resulted in bad debts
  2. Bad debts busted the US economy
  3. A busted US economy led to higher unemployment
  4. Higher unemployment led to more bad debts
  5. And so on…
  6. Because Australia has very little sub-prime debt
  7. Therefore Australia’s economy is not likely to be as busted as the US

If this is what he’s thinking, we think Ric Battellino has made a very grave error in logic. He’s mixing up cause and effect.

No doubt, in the US, it’s sub-prime (which by the way is yesterday’s story) that triggered the bust in the US economy in 2007. But for Australia, it’s the deterioration of  the global economy that will trigger the bust of the Australian economy. The effects of a bust will be rising unemployment, followed by bad debts, then debt deflation and then finally falling asset prices. In other words, the triggers are different, but the effects will be the same because Australia has the same debt disease as the US and UK.

Given Australia’s high household debt (see Aussie household debt not as bad as it seems?), prime debt can easily turn sub-prime when unemployment rises. As unemployment rises (which all mainstream economists in the government and private sector are forecasting), it will eventually reach a critical mass of prime debts turning sub-prime. Once this critical mass is reached, the deterioration in the Australian economy will accelerate (see what’s happening in the US and UK today). This is the point we made in March 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.

To make matters worse, the First Home Owners’ Grant (FHOG), while giving housing sector a temporary boost, are increasing the proportion of potential sub-prime loans in the financial system.

The fact that those at the helm of the RBA are committing such logical errors does not engender our confidence.

If property prices follow long-term inflation, will prices not fall in the long-term?

Monday, October 20th, 2008

Back in Do property price always go up?, we have looked into a Dutch study, which found out that in a period of more than 300 years, property prices ultimately follow the general price levels. In other words, in the long-run, property prices are flat in real terms.

For today’s discussion, let us suppose that this is true.

Does this mean that it does not matter when one purchase the property (assuming that one is only concerned about real capital preservation) because in the long-run, it will always preserve your wealth by tracking the price inflation rate? If one thinks that the answer is yes, then one has fallen into a mental pitfall called Lazy Induction. Back in Mental pitfall: Lazy Induction, we explained that

The trouble starts when the sample that we used for our observations is drawn from our own personal bias. Then, from the observations of the biased sample, we make generalisations based on our flawed observations. Lazy Induction allows us to prove anything that we want to be true. All we have to do is to pick a sample of observations that conforms to our bias and then generalise from there.

The error in the logic of that answer lies in the crucial fact that one implicitly assumes the long-term price appreciation starts on the day that one bought the property. To explain this point more clearly, we will use Professor Steve Keen’s graph of property prices relative to CPI:

ABS Established Home Price Index vs CPI

Source: Rescuing the Economy or the Bubble?

This graph shows that property prices have been tracking CPI till around 1998, after which it took off.

Now, let’s imagine that you have a time machine and travel forward 300 years. Let’s say that our assumption that property prices follow long-term inflation rate still holds true in 300 years. What will we see? Assuming that long-term price levels follow a nice gentle rise (i.e. no hyper-inflation), we will see that the prices from 1998 to, say 2008, is part of a small blip before returning to the long-term price levels.

So, what is the implication of this? If surge in prices over the past 10 years (1998 to 2008) is a huge aberration away from the long-term up-trend, then it will have to fall in due time in order to follow the long-term price levels. That is, property price can still fall a lot in real terms if it has a prior huge run-up in real prices. If price inflation is relatively benign, then this will mean a fall in nominal terms too.

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.

Interviewing Steve Keen for the upcoming property forum debate

Thursday, September 25th, 2008

In Upcoming forum debate: ?Property 2009: Crash, Boom or Stagnate?!?, we announced that for the upcoming property debate on 15 October 2008, we will be “inviting the various high-profile experts to this debate.”

Today, we would like to announce that Associate Professor of Economics and Finance from the University of Western Sydney, Dr. Steve Keen, will be one of the special guests in this forum debate. For those who have yet to know about him, we have conducted a short interview with him:


What are you currently doing in your line of work?
Currently, I’m revising a paper on how money is endogenously created by the financial system for the journal Physica A- the journal of interdisciplinary physics, where the so called “econophysics” school has evolved.

Once that’s done, I will start work on my magnum opus “Finance and Economic Breakdown”, a book-length development of Hyman Minsky’s “financial instability hypothesis” which will be published by Edward Elgar Publishers.

So, can you share a bit about your life journey that brings you to what you are currently doing?
I began as a believer in conventional neoclassical economics while doing my undergraduate degree and then had my confidence in this theory shattered by exposure to Lancaster’s “theory of the second best” in my first year at Sydney University. This theory, which shows that a move closer to the neoclassical nirvana of competitive markets everywhere may actually reduce welfare, made me aware of the theory’s fragility and I then embarked on my own learning odessey to work out why.

In the process I started the Political Economy movement at Sydney University.

After my student days I worked as an overseas aid education officer, a computer programmer, computer journalist, conference organiser, and then finally was employed by one of the Accord bodies under the Hawke Government. The way the Accord was hijacked by conventional economists within Treasury and the bureaucracy in general convinced me that I had to return to academia and take this nonsense theory on on its home turf.

That led to the publication of Debunking Economics, which was commercially successful, and made me a prominent member of the non-orthodox fringe of the economics profession.

It has been noted that your viewpoints on economics are very much different from the mainstream economics. In a nutshell, can you explain how and why they are different?
I reject the equilibrium modelling that dominates conventional economic analysis, and since I did mathematics as an undergrad and postgrad student, I knew how to apply nonlinear dynamic modelling methods to economics–basically using Differential Equations and Systems Theory. I also use Hyman Minsky’s “Financial Instability Hypothesis” as my fundamental model, supplemented with lashings of Schumpeter and a unconventional reading of Marx.

What is your stand on the current state of Australia’s debt levels?
We have reached a level of excess that is historically unprecedented–literally twice the level (compared to GDP) that caused the Great Depression. I have zero confidence in our ability to avoid a serious downturn as the great de-leveraging begins.


We will have another special guest for this forum debate. We will reveal who he/she is next week. Keep in tune!

Property 2009: Crash, Boom or Stagnate?!

Upcoming forum debate: “Property 2009: Crash, Boom or Stagnate?!”

Monday, September 8th, 2008

Note: This is an announcement for an event that we are co-hosting with OurFinanceBlogs:

Property has been a popular route to wealth for many Australians for many years. Buying their own home is often the first investment many people make; purchasing another property may well be the second even before shares and other assets.

It has been said that property prices can be less volatile than share prices though not always and it tends to be regarded as a safe haven when other assets are declining in value. Property has the potential to generate capital growth as well as rental income. In addition, there are the tax advantages associated with negative gearing and capital tax concessions.

No wonder property investing is one of the favourite mainstays of investments for Australians.

But there is the dark side of property as well. Over the past 10 years, property prices have been surging faster than the rise in wages. Consequently, the level of debt that comes with this phenomenon has increased significantly for Australians, putting many of them in serious debt situations. As a result, the Australian dream of home ownership has become an elusive hope as housing becomes more and more unaffordable, along with soaring rents.

Without a doubt, this issue is polarising Australia, as there is an increasing perception that some in the community are benefiting from property at the expense of others. Whether this perception is justified or not, it is a making property more and more into a vested emotional issue for the Australian community. Consequently, with the Australian economy at the turning point after 17 years of uninterrupted growth and the global financial system rocked by a credit crisis, we are seeing conflicting forecasts by various experts on the future of Australian property prices.

So, what is the future for Australian property prices?

It is in such a time that clear thinking is urgently required. And so, on the 15th of October 2008, we are inviting members of the Australian online community to a debate on property at ?Property 2009: Crash, Boom or Stagnate?!? We will be inviting the various high-profile experts to this debate. Stay tuned as we reveal who they are!

Property 2009: Crash, Boom or Stagnate?!

Is it better for potential first home-owner to save first or jump first?

Tuesday, August 26th, 2008

Among the different class of property buyers, first home-owners are the most vulnerable. This is because they have the least outstanding equity, which means there is a greater chance of negative equity should they have to sell their home in a hurry. The equity portion of your property is its market price less the outstanding debt you owe on it. Let’s say the market price of a property is $500,000 and you have an outstanding debt of $450,000 remaining on the mortgage debt, your equity is $50,000. Negative equity occurs when the market price of the property falls so much that it is below your outstanding debt. This means that if you liquidate the property, you will still owe the bank money.

Worse still, for first home-owner, at the initial stage of the debt repayment, most of the payments goes to servicing the interest, leaving very little for reducing the principal of the debt. For example, for a 30-year $450,000 at 8.5% interest p.a., the first monthly repayment of $3460.11 consists of $3187.50 of interest payment. At the end of 3 years, the interest payment is $3111.11. In other words, in the first 3 years, the first home-owner gets to reduce the outstanding debt by only $11,000 while paying a total of around $124,000!

So, given the amount of bad news regarding the economy lately, many potential first home-owners are becoming more cautious about jumping into the property ladder. Some may opt to delay their purchase in order to save more to ensure that they have a greater equity when the time comes to buy the property. But what if the property prices climb too fast while they save, resulting in them being priced out of the market by the time they are ready to buy? Or, should they jump in now or should they delay?

Well, the answer to this question will depend on these factors:

  1. How much they save
  2. Savings interest rate
  3. Mortgage rate
  4. How fast property price rise
  5. How much deposit they already have

To answer this question, we constructed an Excel model to simulate the financial outcome between jumping in now or delaying to save. Our Excel model contains the following parameters:

  1. Wage inflation rate- this determines the growth of monthly savings due to wage rise
  2. Property price inflation rate- this is the rate at which property price rise per year
  3. Savings rate- this is the interest paid on the savings
  4. Mortgage rate
  5. Initial deposit for the property
  6. Extra repayment- the extra amount above the mortgage repayment that you can pay/save
  7. Amount of to borrow
  8. Loan period in number of years

So, we punch in the following numbers for our simulator:

  1. Loan period- 30 years
  2. Amount to borrow- $450,000
  3. Initial deposit- $50,000 (i.e. 10% deposit for a $500,000 home)
  4. Mortgage rate- 7% (this is far below the current mortgage rate)
  5. Savings rate- 5% (this is far below the current term deposit rate)
  6. Property price inflation- 6% (this assumes that property prices will increase 6% p.a. forever and ever)
  7. Wage inflation rate- 0% (this assumes that your wage rate get frozen for 30 years and thus, cannot increase your monthly savings amount or make extra monthly repayment for the next 30 years).
  8. Extra repayment-0

These numbers are intentionally unrealistic to illustrate a point. Guess what is the outcome? By the 359th month, the property price will be $2,709,193.95. If you choose to save, your savings will be $2,711,133.30. This means, if you buy with cash on that month, you will have $1935.35 left over. But if you choose the borrowing route, you will still have $2,976.50 in outstanding debt.

Let’s tweak the figures a little. Let’s say your wage inflation rate is 3%. This means you can make extra loan repayments or increase your monthly savings as your wage grows. You will then find that your debt balance is always higher if you jump into the market now. Now, let’s make the property price inflation rate be 7%. You will find that it is more advantageous to save than to jump in for the first 6 years.

Playing around with the simulator, we find that if you are a high-powered saver, you can still be better off delaying your purchase for several years even if property prices appreciate (up to a certain point) in those years.

Should you liquidate your asset?

Monday, July 7th, 2008

Back in How do we prepare for a possible economic crisis?, one of our readers asked,

A lot of us, simply do not have free floating (saved) money to worry about. What we have, instead, are huge debts that are closely tied to the so-called, and as yet unrealised, ?equity? we are supposed to have in the assets that we borrowed against.

But for the rest, all I see is a sea of debt with an island in the hazy distance that is supposed to be my ?equity? in assets held hostage by banks as security. So, to simplify it to the bare bones, the first question for many is, not whether one should buy gold or silver, but whether one should liquidate assets in which one supposedly has some equity.

Now, armed with a new understanding of value-investing and what assets truly are (see Value investing for dummies), you may see this problem in a different light. Let’s suppose you bought a property with a market price of $900,000 and an outstanding debt of $600,000 to go with it, leaving you with an ‘equity’ of $300,000.

Your mortgage debt is an asset to the bank because you are ‘selling’ yourself to it by committing part of your future earnings as money to be put into the bank’s pocket. Let’s suppose your mortgage rate is 10%. At that rate, you will be paying $63,185.16 per year to the bank for the next 30 years. Now, let’s calculate the value of you as an asset. Using a discount rate of 10%, the value of $63,185.16 of cash flow per year for 30 years is $595,641.10. This figure is the present value of your debt to the bank.

Now, look at your property as an income-producing asset. Let’s suppose you can rent it out forever and ever at $600 per week ($31,200 per year) initially. Let’s assume thatt income from that asset can grow at an annual rate of 5% forever and ever (i.e. property income more than keep up with the RBA’s upper band of inflation targeting). Again, we apply the same discount rate of 9% (i.e. your employment income is higher risk than the income derived from your asset). Guess what the intrinsic value of your asset is? In this case, given such generous assumption, it works out to only $780,000!

Now, let’s suppose that instead of borrowing to buy a property, you borrow $600,000, plus your $300,000 equity, buy $900,000 worth of risk-free government bond at a rate of return of 6.50%. For this risk-free investment, you will receive $58,500 of yearly income which you re-invest into the government bond immediately. By definition, the value of that $58,500 of yearly re-invested income is $900,000.

In other words, it is simply not rational to invest in property because you are better off putting that money in risk-free government bonds (or better still, term deposits that currently pays as high as 8%). Some ‘investors’ may use the prospect of capital appreciations as a reason for ‘investing’ in property. But this will only work if there is the next fool willing to pay over-inflated and irrational price for your property. As we said before in Difference between ?assets? and real assets,

That is why there are property speculators ?investing? in houses that are far overvalued and getting caught out in a property price bubble when the business cycle turns. In essence, the property price bubble is a Ponzi scheme that collapses when the economy runs out of money through a credit contraction brought about by the credit crisis or rising interest rates.

Once credit deflation sets in the economy, the economy starts to run out of fools. Many ‘investors’ turn out to be the last fool. In times of deflation, many people will find that the ‘value’ (market price) of their property turns out to be illusionary. You may want to read our other article, Aussie household debt not as bad as it seems? for more details on that.

The lesson here is this: if you purchase the property below its intrinsic present value, you need not worry about its market price.

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.

IMF: Risk of property price correction in Australia ‘high’

Friday, April 4th, 2008

Today, we saw this article in the Australian Financial Review: Property correction risk in Australia ‘high’:

The risk of a correction in Australian house prices is high by international standards, the International Monetary Fund says.

The IMF, which says Australian property is among the most overvalued in the developed world, has warned that about 25% of the increase in house prices between 1997 and 2007 cannot be explained by fundamental economic factors such as population growth and income, The Australian Financial Review reports today.

If you want to see the IMF report for yourself, go to the April 2008’s IMF World Economic Outlook report here. This finding is found in page 11 of the report’s Chapter 3 PDF.