Housing Bubble

• Our bubble is bigger: price to income is higher in Australia than rest of world.

• Our bubble is bigger: longer and faster growth than other countries.

• Our bubble is bigger: further above long term average prices.

• Our bubble is bigger: rental yields are lower.

• Our bubble is bigger: current account deficit is large.

• Our bubble is bigger: The replacement cost (building cost) of a house or unit is probably around $150,000 - $200,000.

• There is a bubble, but it is impossible to know when it will pop.

• Its hard to deflate bubbles slowly - once the weakness is exposed few will buy until they reach fair value - so it happens quickly.

• Cheaper loans contributed to rising house prices.

• A stable economic environment contributed to the belief that house prices always go up.

• Smart growth planning policies contributed to the belief that there is a shortage of land.

• Increasing confidence in rising house prices is self reinforcing until the bubble pops.

• Loose credit is the strongest factor in rising house prices.

Credit Theories

• Credit is too readily available to too many people.

• New credit products enabled cheaper loans to more people.

• Banks will not lend against bubble priced assets during a credit crunch because they know they will not get their money back.

Interest Rates

• Australia has higher interest rates because we pay the currency risk for international investers.

• Australia has higher interest rates because our housing bubble is bigger, causing excess consumption and higher inflation.

• Reserve bank cannot cut rate because international depositors would flee the currency causing less deposits.

• Reserve bank cannot cut rate because international depositors would flee the currency causing a lower exchange rate and higher inflation (fuel, consumables).

• We have higher interest rates, so the reserve bank can cut further.

• Pensioners and savers are big losers when interest rates are lowered. People with big debts are big benefactors.

• Lowering interest rates present a big present and future moral hazard in rewarding debtors and punishing savers.

• There will be no inflation because consumption is lower.

• Printing enough (lots) of currency might cause inflation - despite lower consumption.

• Printing too much currency might cause hyper inflation.

• Hyper inflation is better than deflation because wages can reset more easily.

• Hyper inflation is worse than deflation because currency because worthless and trade / exchange of services difficult.

• Australia does not save enough and relies on foreign funding because we borrow too much to spend on housing.

Wealth and Consumption

• Our level of consumption was unsustainable and relied upon unsustainable (exponential) increase in debt.

• We are not a rich as we thought: shares are worth less than half what we thought.

• We are not a rich as we thought: capital growth in housing is probably -5% (real) per annum for next decade compared to 7% (real) per annum over the last decade

• We are not a rich as we thought: returns on shares are probably 5% (real) per annum for the next decade compared to 12% gains per annum over last decade.

• The rise in house and share market returns were driven by unsustainable loose credit and ponzi scheme behaviours.

• Consumption is down because we are not as rich as we thought, so we need to save more and spend less to pay for both the present and the future (retirement).

• Consumption is not down because of high debt - every dollar of debt is an extra dollar of savings to someone else - the net effect is the same.

• The high percentage of growth in credit has been spent on houses, rather than the general economy, so a reduction in credit should cause a decrease in house prices, rather than a decrease in the general economy.

Housing shortages

• Development approval are not slow, there is too much demand from developer for councils to cope.

• State governments levies are high due to too much demand, and will lower if demand reduces.

• Nimbyism is not slowing development, there is too much demand from developers for the community to accept.

• Communities can tolerate development, but at a resonable speed (1% per annum), but resists at a higher speed, and housing bubble has made development speed too fast.

• There is no shortage of land, there is too much demand from investors.

• There is no shortage of land, rising asset prices encourage landholders to hoard.

• There is no shortage of houses, there is too much demand from buyers.

• There is no shortage of houses, rising asset prices encourage house owners to hoard.

• There is no shortage of houses, rising asset prices allow investors to keep houses empty and still make a profit.

• There is no shortage of houses, the number of empty houses (circa 10%) is above long term averages.

• There is no shortage of bedrooms, the number of empty bedrooms per a person is above the long term average.

• Lowering the interest rate has a neutral effect on consumption because what the debtors gain the savers lose.

Miscellaneous

• Government stimulus has a neutral effect because taxpayers know that every dollar spent needs to be paid back eventually.

• Real wages must drop because we are not a productive as we thought.

• Real wages are difficult to drop in an deflationary scenario.

• The only way to return to full employment is to lower real wages, and re-skill workers from real estate and asset speculation to more productive pursuits.

• Capitalism will not die, non-capitalist states are not better off - capitalism works better over the long term.

• Lower house prices have a neutral effect on the economy - what the house buyer wins the house seller loses.

• Lower rents have a neutral effect on the economy - what the renter wins the landlord loses.