Who wants to guess what comes next?

Is it:

(a) More house price falls;

(b) A chorus of property spruikers saying now is the time to buy;

(c) Another free kick / hospital handpass for the Government, a la to Ruddy’s First Home Owner Boost; or

(d) All of the above.

All we have in Australia, at its simplest, is a credit bubble built upon a commodity boom dependent for its sustenance on an even greater credit bubble in China. Of all the bubbles I have seen over the last 30 years in this industry, this one is even more obvious than the rather prominent nose on my increasingly haggard face.

Ouch… Tell us what you really think!

Why, oh why, does the mainstream media (not to mention the majority of the populace) celebrate the Reserve Bank’s announcement of a 0.5% rate cut today…?

At its meeting today, the Board decided to lower the cash rate by 50 basis points to 3.75 per cent, effective 2 May 2012. This decision is based on information received over the past few months that suggests that economic conditions have been somewhat weaker than expected, while inflation has moderated.

Slashing interest rates is a bad sign. It means things are already worse than the RBA had expected, and they’re likely to get tougher. This is not a cause for celebration!

According to the ATO, there were a total of 1.75 million property investors in 2009-10 claiming aggregate rental losses of $4,810 million, or $2,746 each…

Some interesting (worrying?) facts can be deduced from the (Australian Taxation Office) data:

• 1 in 7 Australian taxpayers are a property investor (either negatively geared or positively geared);
• 1 in 11 Australian taxpayers are negatively geared, representing 63% of property investors;
• 74% (825,284) of negatively geared investors earned less than $80,000 in 2009-10; and
• The average loss for a negatively geared property investor in 2009-10 was $9,132.

The big question remains: with Australian housing values down over 5% since 2009-10, and with the outlook for capital growth subdued, will Australia’s 825,000 middle to lower income earners continue pay their property a dividend in the hope that it repays them with capital growth?

Once upon a time, in a land called Australia, the average person could actually afford to rent a house or a flat.

They could even pay this rent with a part-time job, working behind the bar or stacking shelves at the local supermarket. It was usually enough for a little on the side, too. You know, for stuff like food and paying the electricity and gas.

Here in 2012, that fairytale is over. Three million Aussie households are forced to live in rental properties they are struggling to pay for, and most people are coughing up more than 30 per cent of the average wage to do so.

Young people are among the worst affected…

This article is bang on the money:

I like old people. Some of my favourite people in the world are, on any independent measure, old. Society benefits little from the so-called ”generational wars” that artificially pit young against old. Young people are invariably portrayed as selfish and greedy. Old people as hard-working contributors to society and pillars of the community.

But Australia’s tax system is hopelessly skewed against the young in favour of the old.

Young people really do get a bad rap. Is there any more maligned group of people than Generation X and Y? (I’m on the cusp.) We’re flighty. We change jobs too often. We move house. We rent. We won’t settle down. We won’t get married and provide those longed-for grandchildren. We are only interested in ourselves. We play computer games all day.

But consider, just for a moment, the view from the other side of the fence. Young people have watched helplessly as the generations before them have been showered with one-off senior’s payments, family payments, baby bonuses, tax-exemptions on family homes and superannuation tax breaks.

We’ve also watched as house prices skyrocketed, meaning we can’t afford to buy homes - or if we can, only under the weight of crippling mortgages.

We started our working lives burdened by HECS debts that add between 4 and 8 percentage points to our marginal tax rates.

The trade-off for younger generations was always the assumption that we’d earn our government entitlements when we had children, bought a house and sprouted grey hairs. The bonuses, the tax breaks and exemptions would be ours, too.

But with wafer-thin budget surpluses and an ageing population, it is increasingly clear the largesse of the past few decades cannot be sustained. The jig is up and young people will have to make do without the government help afforded to previous generations. By compulsion, they’ll have more super when they retire but they’ll be less likely to own their homes outright. They will be called upon to pay the income taxes needed to fund the needs of an ageing population and there will be fewer of them to do it.

Ouch!

Courtesy of FT Alphaville, comes the following hatchet job on Australia from Society General analyst, Dylan Grice:

When you scratch the surface of the Australian ‘miracle’ you don’’t just find an unmiraculous commodity super-cycle: you also find an equally unmiraculous credit super-cycle as well. A credit bubble built on a commodity market built on an even bigger Chinese credit bubble, Australia looks like leveraged leverage, a CDO squared.

It’s a simple concept, but one which almost no policymaker has had the gumption to raise:

(T)he trouble with housing policy is that housing politics is just so damn hard. What might seem like self-evident solutions to housing experts and academics will affect the wellbeing (perceived or otherwise) of over eight million Australian households - the vast majority of whom are home owners and have, on average, nearly half of their household wealth invested in their home. 

When we talk about improving housing affordability, we’re talking about slowing down house price growth and, with it, the growth of investments and wealth for almost seven out of every 10 households. That’s a hard sell.

The problem is this individual investment in housing wealth is causing pretty serious problems for non home owners, and future generations.

Because the housing market is interlinked, the astronomical growth in house prices is locking future generations out of home ownership, driving up rents and linking households financial security (investment) to their physical security (housing), an inherently risky strategy if one takes a quick look at the United States.

The bigger picture is that while an individual home owner might gain in wealth, this craving for investing in housing actually reduces our overall economic prosperity.

We need to change some attitudes towards home ownership and renting, and to understand that housing is first and foremost shelter, something everyone needs.

Article Of The Month!

There is no doubt that slashing 2.5% of GDP worth of spending next year will free up economic resources – that is, deflate parts of the economy – so that other parts can potentially grow more strongly without sparking inflation. And the rates “sensitive” sectors are those that will be potentially in a position to “benefit”. They do include households, who carry the nation’s huge mortgage burden, and the external sector that’s been getting hammered by the higher dollar, including manufacturing and services like tourism.

The question is, is this in the national interest? Here are some scenarios if rates fall 1% as a result of Budget cuts:

• will households save the extra cash as they are doing now? If so, the government is bringing on a recession which is clearly bad
• will households spend their extra income, providing some relief to the beleaguered retail sector? If so, growth will accelerate which is potentially good and you can expect a rally in retail stocks on this possibility. However, it would be much better to see the newly created economic space filled by expanding exporters
• will households spend the extra income and resume borrowing for housing, causing house prices to rise again? If so, the rate of deposit accumulation at the banks will fall and they will accumulate further wholesale debts in foreign markets. This would also fire up a short term cyclical stocks rally which would include the home builders. But it is very bad in the medium term and would very quickly result in either ratings agencies or the RBA stomping on the brakes
• what degree of downwards pressure will a 1% fall in interest rates place upon the dollar? This is not an easy question to answer. Interest rate differentials are only one of Deus Forex Machina’s five drivers of dollar value.  My guess is that such a level of cuts would push the dollar into a new trading range somewhere below parity assuming global growth remained decent, but not much lower. Thus, we’d see a boost in currency exposed stocks and some boost to the export sector more generally

In other words, the Government’s planned Budget cuts are a big gamble. The Australian economy is caught in a trap that has been fifteen years or so in the making. The teeth on one side of the trap is offshore borrowing and the teeth on other is housing deflation.

In 2002 and again in 2003, more than 600,000 houses and apartments changed hands according to RP Data. During the First Home Owner Boost frenzy of 2009, the figure topped 500,000. Last year it was just 370,000, the lowest since the mid-1990s.

New house sales have collapsed; housing credit growth has slowed; renovations are being postponed; and prices have started to slide.

Housing has been the outstanding risk-weighted investment of the last decade. But the expectation of capital gain, which has underpinned the Australian wealth creation dream for generations, is evaporating.