View From The Couch - 21/Mar/2017

It's Not A Bubble If You Don't Call It That

Day after day, there's this concern about the Property Bubble. Looked through the hosing affordability prism, the bubble looks enormous, but looked through the prism of investments, housing-as- asset still looks safe to the majority of investors piling into the market. If you're hoping to get you quarter acre block and raise your kids in the manner that your parents did, in a neighbour that resembles the one in which you grew up, the likelihood has diminished to unlikely to zero chance doing it on your own.

If you're in the real estate racket, then it's in your interest to talk it down like it's not big deal.
This made me laugh:

Australia's banking regulator says the country's housing market is in an environment of "heightened risk", but he won't say there's a housing bubble. 

Australian Prudential Regulatory Authority chairman Wayne Byres told a Sydney conference that he wouldn't use "the B-word" to describe the housing market. 

"I don't use the B-word. I refuse to use the B-word. It implies a binary, that's too simplistic," Mr Byres said speaking at the Australian Securities and Investments Commission annual forum. 

"We are in an environment of heightened risk. House prices are high and particularly in this one (Sydney) they're rapidly rising," Mr Byres said.
"If everyone is not careful the risks are going to rise," Mr Byres said.

Mr Byres said APRA was watching the housing market, but he stopped short of saying the authority would bring in new curbs on investment lending.

I guess it's not a Bubble if you don't call it that. That's a bit like saying Tony Abbott isn't a dickhead because he's not called Dick Head, but Tony Abbott.

"What Bubble?" They Asked

Outside of Sydney and Melbourne, real estate pricing has not risen at the same dizzying rates. Of course, Australia's a very big place but GDP growth is concentrated in pockets. That is to say, there are only a few places in Australia worth being. You can go live in Tenterfield Queensland in a shack priced at 20k, which is the middle of nowhere, for instance, but it is days from amenities one expects of civilisation and if you didn't get your NBN connection out there, why, living conditions could approximate the 19th century more than the 21st.

Something like 8% worth of Australia's GDP's economic activity takes place in the precinct surrounding Wynyard and Town Hall stations. Think about that: 1/12.5ths of Australia's economy converges on 2 railway stations (I happen to know this because I talk to people at the UTS TRC). The whole point of Sydney is to service the 2 stations, and to that end, the public transport system has grown into radial spokes around the surrounding land all the way out to the hinterlands. It grew that way through a combination of factors, some of which included lack of vision by the NSW government; the small-ness of scope given to a precinct known as The City of Sydney which covers these two stations, but nowhere near far out enough to urban coordinate planning or transport planning; the fact that the Sydney basin as a whole had no urban planning for a good two decades in the middle of the 20th century; and general class sniping which has persisted from English Colonial times.

Unfortunately the physical need for participants in the economy to converge on the two stations is so immense it has absolutely warped the perception of value in Sydney. The CBDs of Melbourne and Brisbane also present similar problems. Combined, the central districts of the three cities would contribute to a quarter of Australia' GDP, perhaps a third -all of it sitting in a clutch of about 5-6 train stations. That's a lot of economic activity that needs to be serviced by public transport.

In a sense, it is like light. For every doubling of distance away from these hot cores of the Australian economy, the value of the land would lose by a square root. While this is common sense, the way the property prices have been growing is anything but. If Sydney's economic output as a whole is not growing by 18%, it's hard to justify 18% rises in the property - and that's just comparing like with like. If you compare the GDP output of Sydney with world cities, it is hardly worth the prices its property is fetching. I mean, Sydney's a nice-ish place to live, but it's not that nice. People are having themselves on if they're putting it up higher than NYC, London or even Santa Barbara, California.

Except perspective is very hard to come by when you've decided where you are so damn wonderful, and the market is full of these people. Do you wonder why some people think it's all going to end in tears?

Bad Ideas Still Get To Run

There's this argument going around that maybe first time home owners should be able to access their superannuation in order to put a deposit down for a house. Paul Keating thinks this is a terrible idea. Others are in favour.

The succinct summation of why it's a bad idea is here (take it away, Mr. Keating!):

The average superannuation balance of those aged between 25 and 40 hovers around $45,000. Were this to be taken from a saver's account to be employed as a housing deposit, it would effectively destroy that person's ability to compound any future sum into a meaningful retirement supplement. 

More than that, once the preservation rule has been breached, the whole investment system would be compromised as superannuation trustees were required to make provision for short-term withdrawals from an otherwise, fully preserved system. This would be completely disruptive to professional funds management.

If you look at it from a longer time frame, you'd have to say property prices will not keep going up, or even stay above their historic trend forever. it's doubtful it would stay that way over a working life. The insane price rises we're seeing are based on the delusion that these markets never go down. People are forgetting what an economic contraction looks like, what a recession looks like, and how it impacts prices of things.

It's kind of crazy to pull your money out of diversified funds and stick it into one asset. Not one asset class, but one asset. And then you assume that one asset will keep going up enough that you could liquidate it at the time of your retirement to fund your retirement. If you believe that, I have a bridge I want to sell you. 

Economic Growth, They Say

They're Doing It Wrong

Nick Xenophon made an interesting remark last week that the RBA should shift its focus from inflation and on to nominal GDP growth. This is one of those interesting shifts worth considering because which ever way you look at it, inflation isn't the problem it used to be when Keating cut the RBA independent of government, so that it could independently set rates with the ai of controlling inflation. We're at a far cry from the era when Paul Volcker tamed inflation in America through jacking up interest rates. That world seems quaint, for we haven't been in that environment sense before the Dotcom Bubble burst at the turn of the Millennium.

Anyway, here's something interesting by Greg Jericho, going into the rationale for why Nick Xenophon might push for that change:

With the current policy, the worry is always that were inflation to rise due to fiscal policies, then the RBA would raise interest rates.

Thus we had the absurd situation last year where then Treasurer Joe Hockey was claiming the RBA had “room” to cut interest rates because the Abbott government’s spending cuts meant it “had been able to control the inflation genie”.
He said this at a point when underlying inflation hadn’t been above 3% for five years and nominal GDP was growing by just 1.3%.

Targeting nominal GDP resets the conversation.

Rather than having the government cutting spending (which reduces growth) in order to allow the RBA to cut interest rates to stimulate growth, both the fiscal and monetary arms could focus on improving growth – and it would put more pressure on the government rather than the current situation where it is leaving most of the work up to the RBA. 

Given government revenue has been hit due to the decline in nominal GDP growth, making that a focus would also assist with improving the budget balance.

Yes, it would make too much sense but of course the system isn't built for quick handbrake turns of policy like that, no, no.

It's worth going back to Glenn Stevens' last speech as Governor of the Reserve Bank.

Reserve Bank governor Glenn Stevens has used his farewell speech to implore the Turnbull government to take on more debt, saying that rate cuts alone can no longer "dial up the growth we need". 

Although interest rate cuts still had some effect, they worked through encouraging private borrowers to borrow more and had "possibly less" effect than in the past.

"The problem now is that there is a limit to how much we can expect to achieve by relying on already indebted entities taking on more debt," he said.
The government had far more room to borrow and spend than the private sector – owing only 40 per cent of GDP instead of 125 per cent.

"Let me be clear that I am not advocating an increase in deficit financing of day-to-day government spending," he said. "The case for governments being prepared to borrow for the right investment assets – long-lived assets that yield an economic return – does not extend to borrowing to pay pensions, welfare and routine government expenses, other than under the most exceptional circumstances. 

"The point I am trying to inject here is simply that popular debate in Australia about government debt and how we limit or reduce it seems so often to be conducted while largely ignoring the size of private debt. Foreign visitors to the Bank over the years have tended to raise questions about household debt much more frequently than they have raised questions about government debt."

So it's one thing for Nick Xenophon to say we need the RBA to prioritise growth rather than whacking signs of inflation. Given the toolset available to the Reserve Bank, which is basically raising or lowering the interest rates, there's really not much more the RBA can do to help growth.

That is to say, the limits of RBA policy - any Central Bank policy - resides at the zero-bound where Zero-Interest-Rate Policy lives. Glen Stevens may well retort to Nick Xenophon, "what the hell do you think we've been doing for the last 8years since the GFC, with historically low interest rates?"

Indeed, that's exactly where the Bank of Japan is at, trying to get economic growth to happen. It's trying massive "trans-dimensional" quantitative easing and yet there are minimal signs that the Japanese economy is coming out of its long slump. The conservative Prime Minster of Japan is telling the heads of the major corporations to raise wages instead of sitting on hoarded profits. It's a wild frontier of Central Banking experiments over in Japan, and really, I'm sure they wouldn't care which came good first, growth figures or inflation figures.

I'm going to go out on climb and say something that would scare fiscal conservatives and hawkish bankers. What Australia needs is a kind of debt forgiveness. So if the economy ends up at the Zero-bound with ZIRP, the RBA needs to forgive the private sector debt and helicopter that printed money into banks. People are going to hate that because basically they'll scream "moral hazard",   except when the economy has flatlined at the zero-bound, then the whole show needs a complete re-boot; and if there's one thing that keeps any economy from re-booting, it's debt.

Ben Bernanke's 'Helicopter Money', Applied

The logic for doing Helicopter money in Australia is pretty simple. People are not spending money because they're busy paying down mortgages as fast as they can. This isn't doing much good because it means the money goes from the bank to employer to employee and back to the bank without going through the economy. So you alleviate the mortgage stress, and the people will be inclined to spend their money. The government hands the printed money to the banks, buying out the debt on paper. Immediately there should be inflation because people now have money to go spend it on the next asset, That's when the Central Bank can re-set the interest rates at a more historic normal level.

Of course, it won't go that way because the bankers would lose out on long term money, but that would be the point. Somebody has to take a loss and the bank would have to get its money while losing out on future profit based on the booked loans. It hasn't happened because ultimately the economy is owned by the 1% and the 1% stands to make nothing out of "helicopter money". But the alternative is the current, comatose, low-growth low-inflation state in which we find ourselves.

The problem with QE as it's been carried out to date, and lots of it, they're finding in Japan, is that the money simply doesn't go to where it's supposed to go. The BOJ stuff the banks full of money, but the banks don't lend to sell businesses and entrepreneur. The lending practices still tend to lead the banks towards lending for fixed assets like property - and even then there's just not as much of that going around. The big companies of Japan's old industrial growth era are still profitable but they don't pay out dividends, and they don't give out pay-rises. They tend to sit on the big piles of cash and say they see nothing in which they want to invest.

The only way to make sure the money gets out an about in the economy is to hand it to the consumer and have them spend. In other words, it's like Capillarity Up economics. They cam very close to pulling the trigger on 'Helicopter money' this year in Japan, but at the last minute they held back. I guess there is something fundamentally weird for government stop simply be giving people money. Be that as it may, the Japanese may eventually have to do it; and if the precedent is set, other countries will do it. It's not like it's a new idea.

The Wisdom Of Solon And All That

It doesn't get discussed a whole lot unless you read a bit of ancient history. Solon, famously forgave debts. He also forbade the export foods except olives. He encouraged the cultivation of olives specifically as en export commodity. Meanwhile he forbade the export of foods because if staples got sent away, the poor would starve and that had terrible consequences for society. If you asked Solon, he'd object to 'Helicopter Money' as a policy but his big thing was debt forgiveness.

The ancient world is full of instances of debt forgiveness. The people in power in the ancient world probably looked at debt as something that becomes intractable and kills the economy. The Romans famously refuse to forgive debt and of course the aftermath of the Roman civilisation were the Dark Ages. So it is worth pondering what the hell we're going to do with a financial system that has created so much debt the world's GDP cannot begin to repay it. It's not likest's a problem that's going to go away. The more it sits there, it's going to chew away at the future, just as it is doing right now, only worse.

That's the historic context of all this bickering about debt. Something tells me the debt won't be forgiven, there won't be Helicopter Money, it's all going to crack up and turn to shit right before our very eyes. So much for civilisation.