News That's Fit To Punt - 03/Jun/2015

There Is A Housing Bubble Going On, Yo'

Sometime this year, the top end of the economics bureaucracy has started to admit there is a housing bubble going on. It's guarded as admissions go, and they limit the scope to high end properties in Sydney and Melbourne, but they're talking about it fairly openly. The funny thing is that the figures that tell us there's a property bubble going haven't changed all that much since the middle of last decade when Steve Keen was telling us there was a property bubble going on; and we know he lost that bet and had to walk to a mountain and back like some Hobbit.

What seems to have happened to change the view of the economic bureaucrats is that there isn't any consumer spending even with the drastically cut interest rates which sit at historic lows. That's right, TwIRP isn't cutting it. So far the RBA has run TwIRP for a couple of months  but it is making all the noises to say it won't go lower.

the RBA's expressed concern that at this stage of the game, cutting rates is boosting asset prices but not investment. It's investment that the country needs, not higher asset prices per se. 

As usual, much of the commentary on monetary policy, being Sydney based, is seen only through the prism of Sydney real estate. National monetary policy can't be set to suit Sydneysiders. 

The Sydney housing bubble is real enough, everyone except the Prime Minister and Treasurer seem to agree, but that can't be the RBA's prime consideration. Funny though that the bias has been dropped when business investment continues to refuse to come to the party.

So yes, it would go back to that problem where people don't seem to be spending their money. If TwIRP won't set you running out thereto buyer new fridge from Harvey Norman on one of those dealswhefre you pay nothing for 12months, then there might be something more profound going on. Steve Keen's theory is that there's simply too much household debt to take on more for the sake of consumption.

Mrs. Pleiades told me a story about the newly built suburb near where she lives, which is chock-full of McMansions that sell for amazing prices. The families move in and deck them out with modern furniture straight out of catalogues. Three years go by, and suddenly money is tight as they have to start repaying for all the stuff they bought when they moved in and deferred the payments. Money gets tight, they fight, they divorce, and pretty soon the block is up for sale again. The point is, a lot of people out there with mortgages buying into the property boom, are up to their eyeballs in debt. They're not going to be spending. The rate cuts are nice if you're a debtor, but we're really seeing the limits of this kind of economic control.

What Happened When the Bubble Popped In Tokyo? (Part 2)

Leading up to the Japanese property bubble popping in 1989 was this period in the media where everybody was talking about how unaffordable property had become. Young couples were deferring starting a family because of this, just at the same time Japan's working population peaked. In the aftermath, property prices plummeted back to historic norms - but on the authorised of the slide down were crippled banks who would then not issue any new loans. So the best educated generation in Japan basically got priced out of property, and then got given short shrift in the aftermath when employment prospects and wages both went down the drain.

All this mess put yet another dent in the population of Japan because that generation simply couldn't reproduce at the same rate as the historic norm, which today has translated into an even smaller pool of workers. What's weird is that wages haven't risen correspondingly because productivity increases ate up the jobs that might haven there in industrial times. Since then, Japan has had a "lost decade" followed by another one just like it, ran into the GFC and all the while had a zero interest rate policy going which sustained a lot of banks and zombie businesses.

Without population growth and with the increase productivity brought about computers, it's not surprising demand stagnated and with it the whole economy, and that's before we look at the mounting debt by both government and private sector. The decision to hold on to as much of the status quo through out this time essentially fixed the economy like a bug in amber. In all that mess, housing prices went back down to historic norms. In Australian terms, we're talking about 1990 prices.

Should the housing bubble burst here and all the debt payments start rolling in and there is massive pressure for the sleazed to sell, the RBA no longer has much of a way to go from TwIRP to ZIRP. Any attempt at quantitative easing will be an attempt to shore up asset prices, but that will inevitably lead to the slow growth future exactly because it will preserve the indebted, uncompetitive zombie firms. Whatever happens next, the property bubble bursting is going to have profound effects for decades to come.

Of course, Tony Abbott seems to think, no, the property bubble is a good thing because he's invested in it (he didn't exactly offer any other reason, and there likely isn't).
Amusingly, the idiot cheerleader-in-chief Daren Goodsir thinks the bubble is a problem and Tony Abbott's comment is part of the problem.

You Ain't Worth What You Used To Be

You know Australia's is in some kind of consumption decline when the GDP grows, company revenues grow and real wages stagnate and go backwards:

Wednesday's gross domestic product numbers revealed a growing and already significant gap between rising company profits and declining employee pay. 

Australia's GDP grew faster than expected over the first three months of the year, by 0.9 per cent on the previous quarter instead of the consensus estimate of 0.7 per cent, driven by greater mining output and increased inventories.

But nominal GDP, which is a better indicator of wages and personal income growth, expanded by only 0.4 per cent over the March quarter, and was up only 1.2 year-on-year. 

"We're working harder, producing more but we're earning less," Macquarie Group chief economist James McIntyre said. 

Mr McIntyre described the gap between company growth and employee wages as "the income challenge" and the key economic challenge of 2015.
Real gross domestic income, which adjusts for the terms of trade, rose 0.2 per cent quarter-on-quarter and was 0.2 per cent lower over the year. 

Australian workers earned an average of 0.5 per cent less over the three months.
Mr McIntyre said waning commodity prices and the dwindling mining boom were pushing incomes and employment growth down.
"It's a slow moving, continual drain," he said.

If major companies don't pass on their profits to workers presumably they are being passed on to investors as dividends. In any case they aren't investing that money as we know from the shrinking CapEx in this country. Beyond the mining sector, growth is feeble and meagre.

But what can I say, restaurants and events are growing. Bread and circuses, people, bread and circuses.

FIFA, Septic Sepp, Corruption And All That

Possibly the most welcome news this past month was that American agencies were investigating 6 top level FIFA officials for corruption, racketeering, and a host of other charges.  If there was an international sporting lobby that truly deserved this incursion, it was FIFA, followed closely by the IOC. FIFA has done more questionable things in therapist decade than the IOC has, such as awarding the World Cup to Russia, then Qatar over much better bids. With staggering amounts of money flying around chasing these bids, it's no surprise that somebody decided to give it a bit more scrutiny.

For a span of a couple of weeks Blatter insisted that he was not involved with any corruption and then promptly went on to wind his fifth term as president of FIFA. Naturally this drew a resounding negative reaction from around the globe, to the point that the Americas and Europe might secede from FIFA. Sepp Blatter is now resigning in the wake of this massive backlash. now it turns out the FBI are investigating Blatter as well.

Frankly, it couldn't have happened soon enough.