more info from Professor Steve Keen

[incisor]

ouch! (http://www.news.com.au/business/story/0,27753,24476398-462,00.html)

[Captain_Rightfoot]

Yep, he said the 700 bill bailout was equivalent to standing on the deck of the Titanic and trying to bail with a thimble. :o

Have you all seen Steve Keen's debtwatch (http://www.debtdeflation.com/blogs/) site?

It's starting to happen in Brisbane now. One of the big unit buildings has been canned due to the money running out. See here. (http://blogs.news.com.au/couriermail/publicproperty/index.php/)

[Captain_Rightfoot]

Steve had updated debtwatch (http://www.debtdeflation.com/blogs/). An interesting read.

"All that is, of course, for the future. The immediate problem is what to do now, if, as so many more expect than once did, this market crash is the prelude to the world’s second Great Depression"

[Sprint]

the part that really makes me laugh is all the people who are whinging about thier investments and share prices going down the drain....

IMO if you're in a position to lose any substantial amount of money, you should either know not to put that money at risk to start with, and if you do risk it, accept that the blame is all your own


the b igger problem is that too many people are playing with fictional money, at the end of the day, if you cant go to the bank and get it delivered to you in cold hard currency, its simply a fictional item, playing with money that only has a percieved value is only going to end in tears, as is expecting your money to make more money from a finite resource

whilst i enjoy nothing more than seeing the big banks lose out from it, its disheartening to see them looking after the same investors that put them in such a bad position in the first place, while mr and mrs joe average get screwed

[p38arover]

the part that really makes me laugh is all the people who are whinging about thier investments and share prices going down the drain....

IMO if you're in a position to lose any substantial amount of money, you should either know not to put that money at risk to start with, and if you do risk it, accept that the blame is all your own

I'm afraid that's exactly where most of us have our superannuation - in funds that do play the markets. If they were only in cash, they wouldn't keep up with inflation.

In hindsight, it would have been nice to have moved all my super to cash a year ago.

[Sprint]

the ones who have thier super in high risk super funds who have dropped a packet are the ones i do feel sorry for, even tho its only on the basis that its a compulsory thing and its a bit of drama to switch funds

but as i said...... the bigger the risk, the bigger the loss

[DeeJay]

I have grown wise after many years and have - fortunately - learnt to only pay attention to scholars with regard to economy matters. Whenever someone from a bank or gov't, has some "wisdom" I consider them vested comments. The Age also has excellent articles.
I converted my Super to cash portfolio last November,it was hard to do when it was growing so much. It took them 6 weeks to carry out my simple instructions & cost me $14,000 by the time it went through.
It would be more than 10 times that now:eek:
I only hope that the whole fund does'nt collapse.

[p38arover]

Yes, I listened to the financial advisor to whom I pay big dollars. I guess he'll earn less this year.

[DiscoStew]

the part that really makes me laugh is all the people who are whinging about thier investments and share prices going down the drain....

IMO if you're in a position to lose any substantial amount of money, you should either know not to put that money at risk to start with, and if you do risk it, accept that the blame is all your own


the b igger problem is that too many people are playing with fictional money, at the end of the day, if you cant go to the bank and get it delivered to you in cold hard currency, its simply a fictional item, playing with money that only has a percieved value is only going to end in tears, as is expecting your money to make more money from a finite resource

whilst i enjoy nothing more than seeing the big banks lose out from it, its disheartening to see them looking after the same investors that put them in such a bad position in the first place, while mr and mrs joe average get screwed

Buying shares is not playing with fictional money, it is in fact nothing more than investing in Australian business. When you buy a share portfolio you do so with the belief that Australian businesses will, in general, grow. We need people to invest in business, it is good for everyone for business to grow and employ people. If the business you invest in does not grow then you lose and you have a bit of a whinge, especially if it is super cause you have very little control over it. Having a bit of a whinge doesn't mean you blame anyone else and most of us accept the lows with the highs.

Even with recent losses I am still ahead of where I would be if I had left the money in a term deposit since 2000, which is when I started buying small amounts through managed funds. I still have confidence in Australian businesses to come through all this so am still buying small amounts.

And the adage that the higher the risk the higher the loss is not necessarily true. Over long periods, a high risk super option has less chance of losing money than a low risk option (according to someone much smarter and qualified in this area than me assures me).

and I think most of us are more worried about where this is leading rather than our personal losses. Potentially a depression can make life very miserable for a lot of people.

[Lotz-A-Landies]

Paul

I would love to invest in Australian business and watch them grow, but when we see CEO's and institutions like Macquarie Bank execs paying themselves obscene millions of dollars in salaries each year I remember that all those millions are coming straight out of the dividends that the shareholder investors aren't getting.

On Thursday I looked at this years superannuation statement, (remember this was to 30 June before the bottom fell out of the market,) my Super Guarantee and personal sacrifice inputs have put better than $14K into my super since June 2007 and now the balance was only about $500 better than a year ago. The result is in fact a $14K loss for last financial year and I have probably lost at least than much again in the last couple of weeks.

I would be better to give the money as an investment to uncle Harry's small business and directly help an Aussie business, than risk my retirement to the markets.

Diana

[DiscoStew]

Paul

I would love to invest in Australian business and watch them grow, but when we see CEO's and institutions like Macquarie Bank execs paying themselves obscene millions of dollars in salaries each year I remember that all those millions are coming straight out of the dividends that the shareholder investors aren't getting.

Diana

Please don't think for a moment I was giving advice, I really don't know what I am talking about. I was just highlighting that shares are a legitimate investment and not fictional money plus I have confidence that most Aussie businesses will survive and bounce back. This could be blind optimism though. I too have lost a lot over the last 12 months, I'm just not too worried about it (yet).

As far as the greedy, unethical CEOs are concerned, never mind as this is not the mudpit:mad: But they only get away with it because the shareholders let them.

[PAT303]

Can someone explain how we got here?.It seems to me that everyone borrowed money they can't pay back and that is the reason.I feel I was the only person who had concerns when you could borrow 100% of your loan as well as the deposit. Pat

[jx2mad]

i'm retired on an allocated pension. yet to get this I am forced to put my super into funds that operate on the stock market. Only recently has the gov't allowed the purchase of property, but having had the fund set up it is extremely difficult and costly to change. As we are forced to use these "sharemarket" funds for retirement, I feel the gov't sholud protect these from loss like bank accounts. After all how else can you get an allocated pension?

[Captain_Rightfoot]

Can someone explain how we got here?.It seems to me that everyone borrowed money they can't pay back and that is the reason.I feel I was the only person who had concerns when you could borrow 100% of your loan as well as the deposit. Pat

You aren't entirely alone :o We've stayed in our tiny little house because the market didn't feel right. Some economists have been warning us for some time.

Read this and pay particular attention to the bits by Gerard Minack (http://businesssunday.ninemsn.com.au/article.aspx?id=96757)

October 2006
"Despite that, I mean, I wish I'd have put it in the stock market a year ago but if I had a dollar today I'd pay down my mortgage."

[Captain_Rightfoot]

And more on that line... here is an economist that also got it right in the US. Listen to the denial from the other advisor (to Ronald Regan)! The problems are exactly the same here.

http://www.youtube.com/watch?v=IU6PamCQ6zw

[Dmmos]

Whilst I can understand the sentiment of a few members here, I'd like to make a few points;

As a final year economics student (University of Sydney), majoring in economics & finance, personally I find it absolutely astounding that the ABC granted Steven Keen access to a national audience. As a member of the 'rage against mainstream economics because we're all going to hell' brigade, his analysis of the general economic situation is often off the mark (to say the least), however this does not, of course, mean that he is wrong (I'll post more soon).

Individuals like Steven Keen decry capitalism through pop-economics books (his is 'Debunking Economics', written 'in a fashion accessible to the intelligent non-economist') that journalists appear to enjoy, maybe getting him a review on the back page of the SMH or a reference in a Glenn Milne article (although they would perhaps be strange bedfellows, Milne tries so hard to get the federal Liberal party - almost more left wing than the federal Labor party these days - into office that you never really know). With the utmost respect for those who have not studied economics, the field is vastly more complicated than most people appear to believe, and people such as Keen who break everything down into a throw away line or two do not help what should be an intelligent debate.

Related to this, I would like to point out that the speed with which journalists of all political persuasions (and the public) appear to make their economic insights is disturbing. The recent collective 'I told you so' directed towards the RBA, in particular Glenn Stevens, has been at best ignorant and at worst malicious. Monetary policy in any setting is difficult, and only more so over the last year or so, as inflationary pressures have been increasingly high & the foundations of the international monetary system itself have been tested on a number of occasions. Managing inflationary expectations (more often than not tightening monetary policy - increasing the cash rate) is a mongrel, especially when central bank credibility is undermined by the aforementioned.

(Nearing end of rant ;))

The best description of monetary policy (essentially one of the only economic tools available, using data at best a month old) that I have heard compares it to driving on a freeway looking only at the rear-view mirror.

Anyway, back to the start - despite Keens' hippy factor, he raises points that are certainly relevant to the situation, and should/will be discussed and analysed, preferably by individuals with a variety of perspectives and knowledge (this has just been mine).

I hope some of this helped.

PS. Investment bankers, CEOs and other executives are as greedy as a single mum with a hard luck story going to the ACTU for help. The ones I know have families, and the sole purpose of their dedication is to provide the maximum possible living standard & safety to them possible. Furthermore, 'tall poppy syndrome' often fails to recognise who pays the greatest proportion of their income as tax (despite their fair attempts at legal minimisation) - high income earners who have worked above and beyond the average.

PPS. Unfortunately I'm not one of them, lol.

END OF RANT

[waynep]

Buying shares is not playing with fictional money, it is in fact nothing more than investing in Australian business. When you buy a share portfolio you do so with the belief that Australian businesses will, in general, grow. We need people to invest in business, it is good for everyone for business to grow and employ people.

I couldn't have put it better. Many people will say investing in shares is purely gambling, you might as well go to the casino. I may be old fashioned, but I think of buying shares as buying in to the business. My father in law still reads the annual reports of each company he has invested in from cover to cover. Don't forget also that many companies pay good dividends ( might be a bit less next year ) and the P/E ratio of many is now excellent.
There are of course the day traders, derivatives traders etc. who are only in it for the quick buck, and the "gambling" investors and chartists who really have not much interest in the underlying company. Hopefully after this they'll look elsewhere to get their "fix" and leave the sharemarket to the genuine investors.

[mns488]

Hi,

some CBA Q&A's i received over the emails about the current market problems.

11243

[Captain_Rightfoot]

Whilst I can understand the sentiment of a few members here, I'd like to make a few points;

<SNIP>

END OF RANT

Can I thank you for that excellent post!

You may well be right and he may well be an economic heretic. As you say, he does raise a number of salient points to our situation though.

To be honest my instincts have been telling me that the escalating property prices have been a recipe for disaster for some time now. It is only recently that I've found Steve Keen and maybe he is a convenient front for the many people that think as I do.

If he is right and we do have a property crash (and I think he is right and it's happening now) then there is going to be massive societal pain. This is not going to be pleasant. However what scares me more is that we don't have a correction and that this continues for some years. If that happens it's got to make things several times worse.

Australia has one of the highest household debt ratios (http://www.anz.com/aus/aboutanz/Community/Programs/pdf/Household_Debt.pdf) of anywhere in the world. This has been noticed by more than one man.

People say Australia doesn't have sub-prime mortgages. Maybe, but as acknowledged by the RBA the banks standards have slipped notably in recent times. I was at the hairdresser tonight chatting about this. She said her single 24 year old girlfriend had just been loaned 330,000 to buy a house with no deposit in an outlying Bris suburb. Her repayments are $600 a week. Her net income is $900 a week. I'm afraid I don't think that is a responsible thing for the bank to do. They used to say 25% of net was the max. But now it appears it's 60%. It's only going to take a slight slowdown and the house of cards is going down and taking so many people with it. Horrible outcomes.

Anyway, as some of you have pointed out it matters not what I think. Or anyone else thinks. It's what the majority of people think. And at the moment the majority of people think house prices are going to go down. Anyone with doubts should read the comments pages hooked to this site alone. (http://www.news.com.au/couriermail/property/)

The only people that still think house prices are on the up (at least in the next few years) are those involved in realestate, and property speculators. Maybe we will be one of the only first world countries to not have a asset devaluation. Maybe not.

EDIT: Read these comments (http://www.news.com.au/couriermail/comments/0,23836,24481897-5011140,00.html) I think the majority of people think real estate is overvalued!

[Dmmos]

Captain Rightfoot - the thanks is recognition that although I went on and on, I didn't actually present an economic argument (like a true economist ;))...

Hope to discuss it more very soon...

[adm333]

EDIT: Read these comments (http://www.news.com.au/couriermail/comments/0,23836,24481897-5011140,00.html) I think the majority of people think real estate is overvalued!

Aaaahhh C'mon Captian. I don't disagree with your general position, albeit I think it is a little pessimistic. I agree there are many people out there who have pushed the envelope with mortgage borrowing and may be in trouble if they are forced to sell up.

However, there are 49 comments posted up with this article, all by people who have the time and inclination to respond to a Courier Mail article. Hardly a good sample base.

My slightly more optimistic view is that the risk/reward can sometimes pay off though. Even your hairdresser friend could make it through this by keeping up the payments and come out the other side in 2 or 3 years with substantial equity in her home, that she could never have saved by herself. Even a small increase would be better than having paid rent for 3 years with nothing to show for it.

After all, even in such economic turmoil, those people who are not losing their hair, probably still need to get a haircut every now and again.

:D

Dave

Edit: I now acknowledge that it wasn't the hairdresser herself that bought the house

[discopete]

My slightly more optimistic view is that the risk/reward can sometimes pay off though. Even your hairdresser friend could make it through this by keeping up the payments and come out the other side in 2 or 3 years with substantial equity in her home, that she could never have saved by herself. Even a small increase would be better than having paid rent for 3 years with nothing to show for it.



G'day Dave,
isn't this type of speculation one of the main causes of the current crisis ie that property prices only go up so jump in or you will miss out.

Pete

[adm333]

Not exactly.

It's not speculation when you are buying a place to live in, it's simply a bonus.

My point is, you have to live somewhere. Why pay rent to someone else, when you can finance a purchase yourself and maybe after a few years you find yourself with equity in an asset, which you wouldn't otherwise have. Historically there is a 100% chance your property will have increased over a longer term.

If Captain_Rightfoot is correct, then a 50 or 60 year statistical trend is about to be reversed.

[Dmmos]

Why pay rent to someone else, when you can finance a purchase yourself and maybe after a few years you find yourself with equity in an asset, which you wouldn't otherwise have. Historically there is a 100% chance your property will have increased over a longer term.


It is apparent, however, that the culture of home ownership is at the root of sub-prime, and therefore partly the current situation.

By trying to ensure the highest rate of home ownership (itself a very dubious phrase) possible, various politicians going back to President Carter have encouraged lending at low rates (especially with adjustable rate mortgages - ARM's), or to individuals whose credit rating is less than ideal. Don't get me wrong, it appears that various financial intermediaries took the idea too far - but I think the point you may have missed is that you might have equity in the asset, but an (increasingly) significant amount of debt, possibly greater than the equity.

With sub-prime in the US, banks (and other financial institutions) gave mortgages to poorer individuals, especially minority groups. The trigger for the issues, going back to last year, was when the initial interest rate on the mortgage 'reset' to a higher level, often about 4-5% higher than at the beginning of the mortgage. Although perfectly legal, many people now argue that the actions of lenders bordered on, or were, predatory (which does have particular legal ramifications in the US).

Anyway, these mortgages, once signed, were securitized - i.e. bundled and sold as securities, contributing directly to the turmoil seen today. As house prices continued to rise in the US, these practices increased as investors joined the 'search for yield'. As long as house prices continued the upward trend - which virtually everybody thought they would - everything appeared to work rather successfully. When the housing market started to go down at the beginning of last year, refinancing a loan became much more difficult for sub-prime borrowers - when the price was rising, the owner's equity rose too, making it easier for low-income earners to refinance at a competitive rate.

So the market went down and (concurrently) sub-prime delinquencies went up, banks cut lending to this segment of the market (worth, by the way, about $US600 billion in 2006), which drove the prices further down, etc. etc. The effects of course were felt throughout the entire housing market (financially & geographically) which basically rooted the firms who had invested in it all. It should be noted that some very, very clever people made billions of dollars (essentially hedge funds that saw it coming, put a lot on the line and got the payoff).

The most recent data, for the year to August (I think), has the Case-Schiller house price index in the US down 16.4% - which is terrifying. As long as this continues - or at least doesn't improve - the general consensus is that the problems will be here for a while.

So although house prices have historically increased, it's essential to remember that years can go by where any financial asset (housing, stocks) remains lower than at some point in the past, and that during this time things can get messed up.

Finally - the good news (in my opinion) with the US bail-out is that despite its problems the fact that the current US administration (i.e. Treasury Secretary Paulson & Fed Chairman Bernanke) and both of the presidential candidates have dedicated themselves to this problem with vast resources behind them shows that what happened to Japan in the 90's (the 'lost decade') won't happen to the US or global economies.

PS. I forgot to say, Captain Rightfoot, that you are right in that many people did pick this thing a long way back, some during the 90s.

PPS. adm333, I've still got all my hair but I get as few haircuts as possible because I'm poor, lol.

EDIT; Dammit! Forgot my point - that not everybody in society can always afford to own a home, and that this is not necessarily a bad thing.

[landy63]

Just imagine for a moment , if there were no hypothetical situations.

[mike 90 RR]

You guys are working on the principle that property value always go UP ..... This is a hyped up theory pushed forward via the real estate mob

Property is like the stock market .... it ALSO goes down

My bench mark is that the value of a home should be 5 years of a workers wage

[Captain_Rightfoot]

Not exactly.

It's not speculation when you are buying a place to live in, it's simply a bonus.

My point is, you have to live somewhere. Why pay rent to someone else, when you can finance a purchase yourself and maybe after a few years you find yourself with equity in an asset, which you wouldn't otherwise have. Historically there is a 100% chance your property will have increased over a longer term.

If Captain_Rightfoot is correct, then a 50 or 60 year statistical trend is about to be reversed.

Dave firstly thanks for jumping in. You are probably right that the people that contribute to the CM out probably aren't completely representative of society. However I still believe the expectation of a drop is out there in society right now.

The example of the girl was to illustrate that even though we don't have sub prime per se we have had some very very dubious lending practices in the last few years. 30% of net income is considered mortgage stress and banks are borrowing double that. The fact that the documentation is not in doubt I think is even worse. It's saying "We know you'll have problems but if you do your asset should be worth more than you paid so we'll be right".

I've attached the house prices from this page. (http://www.housepricefacts.com/) It's not the best source but I haven't found anywhere better that I can link to.
According to RPDATA house prices fell in QLD in June (2%) and in July by (3.8%). Their data lags (I suspect to hide the truth at the moment) but you can already see the prices starting to drop off. The last time they did this was in the 1990 recession.

http://www.myrp.com.au/images/city_graphs/brisbane_house_prices_graph.jpg

Basically my assertion is that property is overvalued by a very large amount. No one I've found seems to argue this point. As you've said, the people are told to just buy it as in a few years time someone will come along that will pay even more money to take it off your hands.

I've been following this very closely and my assertion is that it's not investing but in fact merely debt enabled speculation. This is somewhat akin to pyramid selling. Basically everything goes great until no-one else comes along and pays an even more absurd price and then it all rolls itself up in a ball.

What I'm saying is that we have record debt, and we are at the tipping point due to the massive amount of debt. People can't borrow anymore and so I think the whole thing is about to go pear shaped.

We have seen this year the slowing of the market (by 50%) and the stabilisation in prices. Now we are seeing a further reduction in volumes (two weeks ago the auction volume in Bris was 1/5th of last year). Prices are now starting to drop around the country. With this current credit crisis debt will be harder to get and people will loose jobs.

Basically I think we're at the tipping point. We were put there from rising debt levels and I think the current financial crisis this will be enough to launch us down the other side. People have thought me negative or whatever but I've actually been trying to warn you all. :o

How am I going DMMOS? :) I'm also glad I didn't use any economic jargon (probably because I'm not good enough at it!)

[Dmmos]

lol, very well (in my humble opinion)...

This helped me a great deal...



Basically my assertion is that property is overvalued by a very large amount. No one I've found seems to argue this point. As you've said, the people are told to just buy it as in a few years time someone will come along that will pay even more money to take it off your hands.

I've been following this very closely and my assertion is that it's not investing but in fact merely debt enabled speculation. This is somewhat akin to pyramid selling. Basically everything goes great until no-one else comes along and pays an even more absurd price and then it all rolls itself up in a ball.

'Pyramid selling' is a nice way to describe what's happening...

Three points;

1. I agree with you completely, and the personal view that I always take is that whatever happens now to the economy, overall we will still be better off than we were even a few years ago (i.e. similar to adm333 said) - overall.

2. With prolonged exposure to the literature, mixed with a bit of twit, 'housing prices going up' or 'housing bubble' becomes 'asset price inflation' :p

3. Important to mention, even though it sounds stupid, the worlds central bankers - exceptionally intelligent people - still haven't developed a consensus regarding the forced easing of asset price inflation - i.e. how to prevent housing bubbles. Tricky stuff when it comes down to it, I guess.

[inside]

What I'm saying is that we have record debt, and we are at the tipping point due to the massive amount of debt. People can't borrow anymore and so I think the whole thing is about to go pear shaped.
What do you mean by people can't borrow? Or do you mean you think people wont be able to borrow soon? I'm sure people in Australia with a good credit history can still borrow.

[Captain_Rightfoot]

What do you mean by people can't borrow? Or do you mean you think people wont be able to borrow soon? I'm sure people in Australia with a good credit history can still borrow.
Yes you are right. People with good credit and big deposits will still have no trouble borrowing.

What I mean is that people that are on the fringe will find it more difficult. IE banks will ask for bigger deposits, and be more circumspect with how much you can borrow.

To give you an idea if my example above of the 24yo single girl who the bank loaned 330k to with replayments of 66% of her net income. She won't get the loan. They might say ok but provide a 20% deposit which is about 66k. Alternatively they might say we'll only loan you 200k on your income.

This will leave many people on the fringe unable to borrow for property. It's also likely that they might not be so keen to do equity loans and re-valuations on property. We can argue the toss about this but the bottom line will mean less housing demand, accelerating the fall. You can see that an extra 7k from the govt is likely to make little difference to people on the fringe.

I'm sure that if you have a 500k (nominal) house and want to borrow 200k to get a bigger one you won't have problems.

I have another example of dodgy lending. A relative of a friend got a start in property investment (I'm not sure how exactly). Anyway, their scheme has been to keep buying property while loaning the whole amount.

Now the trick is that as we know rent isn't anywhere near enough to pay the interest let alone any capital. So their trick has been to get the older loans re-valued, and then get the bank to give them the difference. They then use this real capital to pay the loans on the properties and draw an income.

To me this seems like outright loonacy. But the banks have been doing this and it's been flowing nicely for them for a number of years now. I'm not sure how many properties they have but I know it's over 10.

Now clearly if property values stop going up things are bad. I didn't discuss it with them but apparently they have worked out the date that they are going bankrupt and it's only a month or two out. :o

What we have to fear is that investment practices like this will impact not only the practitioners but the wider community. You can see that when they go alone there will be 10+ properties on the market for sale at any price.

[inside]

I can see your point by the examples you mention but surely this is not the underpinning of a large real estate downturn in Australia? Maybe in the US where this type of lending was common.

May I suggest Australians are largely prudent borrowers who understand the responsibility they are undertaking when buying a house?

[Captain_Rightfoot]

I can see your point by the examples you mention but surely this is not the underpinning of a large real estate downturn in Australia? Maybe in the US where this type of lending was common.

May I suggest Australians are largely prudent borrowers who understand the responsibility they are undertaking when buying a house?

You are right. The majority are, but a significant number are not. From the RBA report on home lending (http://www.rba.gov.au/PublicationsAndResearch/SubmissionsToParliamentaryCommittees/inquiry_home_loan_lending_prac_proc.pdf)....

Until about the mid 1990s, a common rule-of-thumb was that lenders were willing to lend up to the amount where the debt-servicing ratio – the ratio of interest and principal repayments to gross income – was 30 per cent. It is difficult, however, to know the extent to which this was a constraint upon lending; it was not universally applied, and some borrowers took out a second mortgage that attracted a higher interest rate to finance their property purchase.

Over recent years, this rule-of-thumb has been relaxed. There has been a change in theway that lenders undertake their loan assessments from simple rules based on grossincome to “net-income surplus” models. These models require borrowers to have aminimum amount of after-tax income after taking account of debt-servicing requirements (including some allowance for an increase in interest rates) and a basic level of living expenses. Based on these models, lenders’ online housing loan calculators suggest that lenders are now willing to provide loans with debt-servicing ratios up to around 50 percent for higher income borrowers.

In the US they have good lenders just as we do. The problem is the bad ones can cause a lot of damage when they go.

[DiscoStew]

May I suggest Australians are largely prudent borrowers who understand the responsibility they are undertaking when buying a house?

I am not as confident as you on this one and I don't think it is a new thing. Even before 1990 I was chatting to a bank manager whom pointed out that a large percentage of families who had built their large houses on small blocks in a new estate near us were struggling to feed the kids because they had over-extended and one interest rate rise was enough to see a parade of them coming back to have "discussions".

[Captain_Rightfoot]

Ok, here is one for all the "it won't happen here like everywhere else in the developed world" and "Australia is different" types.

A critical / jealous article about Steve Keen (http://www.brisbanetimes.com.au/news/opinion/doomsayer-gets-instant-fame/2008/10/20/1224351193646.html). :D :D

[adm333]

Well, you've definitely "drunk the Kool-Aid"

:p

[scrambler]

SNIP

I have another example of dodgy lending. A relative of a friend got a start in property investment (I'm not sure how exactly). Anyway, their scheme has been to keep buying property while loaning the whole amount.

Now the trick is that as we know rent isn't anywhere near enough to pay the interest let alone any capital. So their trick has been to get the older loans re-valued, and then get the bank to give them the difference. They then use this real capital to pay the loans on the properties and draw an income.

To me this seems like outright loonacy. But the banks have been doing this and it's been flowing nicely for them for a number of years now. I'm not sure how many properties they have but I know it's over 10.

Now clearly if property values stop going up things are bad.

SNIP


There is the Subprime debacle in miniature. This is pretty much what the banks were doing (although they were onselling the mortgages at inflated values). It all works while the price is risong, it all falls apart for the pack of cards that it is when the market takes a dip. But even a house of cards can stand tall if there's no wind.

People with long memories will recall that my "humble opinion" has been that housing prices couldn't go any higher in Oz unless people worked out a way of getting three (or more) incomes to pay for each house (I have seen such schemes but they only work for singles!) Clearly house prices had to come down, and a general economic downturn will see things get tight for many, and prices will come down further and faster than they might have otherwise.

There were a few comments on the ABC's Lateline a couple of nights ago that I thought were relevent. The feeling was that the increase in first home-buyers grants was to maintain confidence in the housing sector (psychologically moe than financially) to prevent both panic and a general sense that we are all getting poorer. We've all felt richer with house values going up, we all feel poorer when they go down. The actual state of our wallets probably won't change that much.

Over the longer term, I'll be much more worried if unemployment rises dramatcally. And IMHO that's got a lot more to do with the impact of China's slowdown than any housing crisis.

[Captain_Rightfoot]

Well, you've definitely "drunk the Kool-Aid"

:p


:P :D

Steve has replied to this here. (http://www.debtdeflation.com/blogs/2008/10/21/play-the-ball-and-not-the-man/)

Because I know you all miss your doom and gloom :wasntme: :D

Why real estate spending could make Australia the new Iceland (http://www.brisbanetimes.com.au/articles/2008/10/19/1224351113115.html) .
:wasntme: