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Monday, May 18, 2009

What of the next 10 years in South Africa?

By Cees Bruggemans, Chief Economist FNB
18 May 2009

A Zuma Presidency could surprise with some remarkably positive outcomes during its period of office.

Here follows a modest attempt at short-listing a few obvious outcomes to look out for, this in addition to any gains or losses from new policy emphasis, direction or efforts.

Given popular demand, Mr Zuma could conceivably be a two-term President, taking him potentially to 2019.

But Mr Zuma apparently indicated before winning the presidency that he only aspires to one presidential term, potentially wishing to bow out in 2014. Were he to do so, he would be following in Mr Mandela’s footsteps.

There is already in place a safe pair of proven hands in the form of Deputy-President Motlanthe to whom to pass the reigns in 2014. And if not him, there apparently are many more such potential torchbearers able and willing. Thus the Zuma legacy could potentially extent at least to 2019 and even beyond.

What could stand out about the Zuma era at the end of the 2010s, a mere decade from now, when looking back in time, besides the many things we hear about daily?

Besides potentially ceding power early while still loved rather than late when overdue, and thereafter going on to become a cherished elder statesman, Mr Zuma is starting his first term at the absolute global low point of the Greatest Recession since the Great Depression.

Few could improve on such timing. For like in Bill Clinton’s case, who took over as the Bush recession was ending in 1992 and thereafter witnessed one of the longest economic expansions in the 20th century, Mr Zuma may find himself the beneficiary of a similar phenomenon.

The world economy is starting its next cycle heavily repressed and probably with only a gradual ascent, taking time to build momentum and reaching a new peak crescendo. Provided nothing malfunctions, this could again become a long expansion, given substantial resource slack on call.

With China especially likely to be a star performer in the coming global expansion, commodity exporters should also again be riding high eventually.

This promises an early easing of our balance of payments constraint, and a return to potential growth of at least 3.5% annually, and possibly somewhat more for the middle and latter parts of the journey.

Even so, overachievement will probably be limited by a somewhat restrained consumer sector, more disciplined banks, a less accommodating monetary policy given an early return of commodity inflation, and a restraining fiscal policy determined to reduce its budget deficit.

When allowing for catch-up from our current recessionary underperformance, real GDP will probably again expand by some 40%-50% in the coming decade.

Given a modest increase in population from 48 million today to 50 million or so then, plus an uncertain net immigration tally, this suggests a gain of some 30%-40% per capita over the period.

This compares with a 47% expansion in real GDP, a 55% increase in real household disposable income and 26% gain in real per capita income in the 1998-2008 decade.

The main difference for the coming decade will hopefully be that it will be more fixed investment-led with consumption gains traveling economy class in the caboose (rather than the other way around as in the past decade).

This past decade was of course book-ended by the Asian Contagion disruption at its beginning and the global banking and credit crisis at its end holding things back, but with an enormous Chinese advance and accompanying commodity and capital flow windfall in between these crises driving our overall performance.

Replicating all that precisely would be tricky, of course, as history never repeats itself exactly, even if the past and next decade look remarkably like the two halves of a spirited world cup soccer final. Certainly some elements (a crisis beginning and a renewed Chinese boom eventually favouring us for most of the coming decade) may well again be there.

The national income gains in the coming decade will of course again be unevenly shared, but there will also be fundamental structural changes.

This should include good job growth and significant real income gains in the productive parts of society.

In contrast, at the lower end of the income scale we are unlikely to quite repeat the four-fold increase in welfare recipients from 3 to 13 million of the past decade. Even so, welfare numbers haven’t stopped rising yet (think of 15-20 million territory eventually), and especially their scale of benefits could still expand happily along with a richer growing country, just as in its West European model of old.

Formal employment will probably increase by 2%-3% annually through 2019. Even when allowing for the present job losses, the overall job gain will probably be some 2.5 million for the decade, taking formal employment from 9.5 million today to 12 million then.

With the white population demographically stagnant (though losing young people to emigration), the entire increase in net new employment this coming decade could accrue to Indian, Coloured and especially Black people.

Informal employment should also grow, with its non-farm component probably doing 3%-4% annually through 2019. Even with its farm component relatively unchanged, its overall job gain may be some 1.5 million for the decade, taking informal employment from about 4.5 million today to some 6 million then.

Thus the ranks of the middle and working classes are set to expand further, increasing their relative weightings in the labour force as unemployment gradually reduces while also changing the ethnic composition of these social classes. This aside of any politically inspired social engineering still making a mark.

Another important reality will be urbanization. South Africa is currently about 50% urbanized, but in a growing economy this should still steadily increase further.

If the urban areas were to keep expanding at 3%-4% annually, another ten million people can be expected to urbanise this coming decade. In the process they will bolster the growth process, making their labour available for more productive use compared to their rural origins, and boost market size for many products and services.

The Zuma Era will also inherit the fruit of the great infrastructure efforts of these years. Not only will we host a soccer world cup, but some of us will be riding Gautrain and the modernized taxi fleet. We will also improve our electricity supply buffer and modernize and expand our road network, ports and airports.

Taken together, huge national income gains, expansion of the middle and working classes and of the regional urban concentrations and a greatly expanded infrastructure won’t be small gains compared to recent times.

To this can probably be added a radically changed situation in Zimbabwe as Bob’s legacy gradually gives way to renewed public sanity in that tortured country, importantly assisted by South Africa and the outside world through aid, trade and investment.

To understand the opportunities in South Africa go to

Friday, May 8, 2009

What is going to happen to the Rand?

I thought that this Bloomberg article may be of interest to everyone:

Rand’s Comeback Spurs Bets South Africa Is No Brazil (Update1)

May 5 (Bloomberg) -- No currency has performed better this year than South Africa’s rand, and a growing number of traders and strategists say the rally is about to reverse.

The rand appreciated 15 percent this year to 8.2621 per dollar, fueled by rising demand for higher-risk assets and export-driven currencies amid signs the global recession has bottomed. The South African currency even beat the Brazilian real, which offers higher money-market rates.

Traders are now stepping up bets that the country’s manufacturers won’t be able to withstand a stronger rand, which makes their goods more expensive to foreign buyers. Options show the rand has a greater potential to depreciate over the next six months than any other currency. Anglo Platinum Ltd., the Johannesburg-based producer of two-fifths of the world’s supply of the metal, said April 30 it cut about 5 percent of its workforce as production and prices fell.

“The rand at current levels looks too strong and overvalued,” said Flavia Cattan-Naslausky, a currency strategist with RBS Securities Inc. in Greenwich, Connecticut.
Traders are more bearish on the rand through October than any of the other 15 most-traded currencies versus the dollar tracked by Bloomberg, according to so-called risk-reversal rates.

Risk Reversals

The premium investors are willing to pay for six-month rand “put” options, which protect against currency depreciation, is 6.4 percentage points. That compares with 5.75 points for the Mexican peso, the country at the center of the swine flu epidemic, and 5.25 points for the Brazilian real.

The rand’s gains, which follow a 28 percent drop against the dollar in 2008, underscore a rally this year in export- driven currencies from the Chilean peso to the Indonesian rupiah that’s been stoked by optimism the worst of the global financial crisis is over. Finance ministers from the Group of Seven industrialized nations issued a statement on April 24 that said they see “signs of stabilization” in the world economy and that a recovery should begin to take hold later this year.
Such comments have boosted the appetite for higher-risk assets, such as emerging market currencies and stocks. Morgan Stanley’s MSCI World Index and the Standard & Poor’s 500 Index have soared almost 30 percent since their lows this year on March 9.
Risk Proxy

As one of the more widely traded emerging-market currencies, the rand is often viewed as a proxy for investors’ appetite for risk. The rand traded in tandem with the S&P 500 index 63 percent of the time in the past two years, compared with 55 percent for Brazil’s real and 51 percent for the Hungarian forint.

“The rand is the strongest evidence that the risk rally has been too quick,” said Beat Siegenthaler, chief strategist for emerging markets at TD Securities Ltd. in London. “It’s the one asset which has benefited the most without much fundamental reason.”

Foreign investors bought 25 billion rand of South African assets more than they sold this year, with most purchases being made in March, according to the nation’s stock and bond exchanges. South Africa’s FTSE/JSE Africa All Share Index has risen almost 16 percent since the end of February.

South Africa’s economy will shrink 0.3 percent in 2009, compared with 4.2 percent for Europe and 6.2 percent in Japan, the Washington-based International Monetary Fund said April 22.

“As long as risk appetite holds up, the rand could end the first half of this year stronger,” gaining to 7.50 per dollar by the end of June, said Carlin Doyle, an emerging-market currency strategist at State Street Global Markets in London. Doyle began advising clients on April 15 to bet that the rand may appreciate.

‘Hit us Hard’

Manufacturers in South Africa are not as sanguine. Exports account for about 28 percent of the nation’s $278 billion economy, figures from the South African Revenue Service show. Manufacturing, which makes up 16 percent of the economy, slumped a record 15 percent in February, according to Statistics South Africa. ArcelorMittal South Africa Ltd., Africa’s biggest steel producer, and Volkswagen AG have cut production.

“The strength of the rand is going to hit us hard because it compromises the competitiveness of our exports, which are already under pressure from the downturn in the global economy,” said Roger Pitot, executive director of the Johannesburg-based National Association of Automotive Component and Allied Manufacturers.
Naacam, whose members make 14 percent of the world’s catalytic converters, estimates the rand must weaken to 11 per dollar and 14 per euro to make South Africa’s vehicle-component exports “truly competitive,” Pitot said. The rand was at 11.0939 per euro today.

Morgan Stanley Bears

The currency may weaken to 10 per dollar as a “sharp fall” in revenue from commodity exports widens the trade deficit, Morgan Stanley analysts wrote in a note to clients dated April 30. “We maintain our bearish view on the rand.”

A 10 percent gain in the rand may shave 0.2 percentage points off gross domestic product if “sustained,” according to Andre Roux, who helps oversee about $50 billion as head of fixed income at Investec Asset Management in Cape Town.

South African Reserve Bank Governor Tito Mboweni said April 7 he “would not be surprised” if the economy shrank for a second consecutive quarter in the three months through March, following a 1.8 percent contraction in the fourth quarter. The bank cut its main interest rate 3.5 percentage points in the past five months to 8.5 percent, the lowest since Dec 2003.

Rate Outlook

Lower interest rates can make a country’s currency less attractive to investors and traders on a relative basis. Brazil’s benchmark rate is 10.25 percent, while its level of unemployment is 9 percent, compared with 23.5 percent in South Africa.
“There is a risk that the stronger rand will be followed by much deeper interest-rate cuts,” Rian le Roux, chief economist at Cape Town-based Old Mutual Investment Group, South Africa’s biggest private money manager, said in an April 28 speech. “If rates fall faster we could see another consumer boom, but a harder landing later.”
Traders are also concerned that Jacob Zuma, due to be inaugurated as president May 9, will destroy the nation’s reputation for fiscal discipline, said Peter Rosenstreich, chief market analyst in Geneva at ACM Advanced Currency Markets.
Zuma’s rise to power, which saw him acquitted of rape and escape graft charges, was backed by trade unions and the South African Communist Party, which want the government to ease budget restrictions and amend economic policies.

Zuma’s Pledge

As leader of South Africa’s ruling African National Congress, Zuma has pledged to create 1.4 million jobs by 2014 to reduce South Africa’s unemployment rate, the highest of 62 countries tracked by Bloomberg, and expand monthly welfare payments to children as old as 18, instead of 15 now. He also promised on May 2 to establish a rural infrastructure development program to create “decent work opportunities.”
“Zuma is the X-factor that makes South Africa worse than other emerging markets,” said Rosenstreich, who predicts the rand may depreciate to 10 per dollar by year-end.

Zuma-led spending increases may widen South Africa’s largest budget deficit in more than a decade, which the government estimates will reach 3.8 percent of gross domestic product this year. Even so, the rand has rallied since Zuma’s ANC won South Africa’s fourth democratic elections on April 22, gaining about 7 percent.
“It doesn’t help South Africa’s export prospects,” said Murat Toprak, a senior strategist at Societe Generale SA in London who recommends investors sell the rand because it will weaken to 9.30 per dollar in three months. “You don’t want a currency that’s too strong if you want to take advantage of a global economic recovery.”

As a South African now is the time to be looking at opportunities offshore. The Rand is strong and there are fantastic opportunities offshore. Go to for more information.

Sunday, May 3, 2009

What is happening in the UK property market?

Copyright © 2009 The Press Association.

The annual rate at which house prices are falling is showing signs of moderating as buyers return to the market, figures have revealed.

The Land Registry said house prices dropped by only 0.4% during March, the lowest monthly fall for 11 months, while the annual rate of declined eased from a record 16.6% to 16.2%.

Nationwide also reported a slight decrease in year-on-year price falls, with these running at 15% in April, down from 15.7% in March.

But the Nationwide index, which covers the whole of the UK, reported a price fall of 0.4% for April itself, wiping out some of the 0.9% gain seen in March.

Figures from the Land Registry, which only include England and Wales, also showed sales volumes continued to decline during January, the latest month for which figures are available.

The number of homes changing hands dropped to 24,770 during the month, down from 36,341 in December, although some of the fall is likely to represent the seasonal slowdown around Christmas. Sales levels are now 57% lower than they were in January last year.

The Land Registry data showed a mixed pattern across the regions, with the North East seeing prices rise by 1.8% in March, while in the South West they rose by 1.1%.
Wales and London also saw monthly price rises of 1% and 0.6% respectively.
But at the other end of the scale, property lost a further 2% of its value in the West Midlands, with prices dropping by 1.6% in the East and falling by 1.4% in both Yorkshire and the Humber and the South East.

Nationwide surprised economists by reporting the first house price rise for 16 months in March, marking the start of a run of positive data on the market. Last week the Council of Mortgage Lenders said lending rose by 16% during the month, and HM Revenue and Customs publishing figures showing the number of homes changing hands soared by 40% in March.

For more information and opportunities go to

UK pension funds set to move back into property

Friday 1st May 2009

In a move which could give the UK property sector a solid foundation for future growth it has been revealed that pension funds and investment companies in the UK are currently in talks with the government about acquiring large scale housing developments. The idea is to create an institutional private rented sector which will see pension funds and investment companies buying up whole housing estates to reduce the stress on the UK housing sector.

It appears the government is willing to offer certain guarantees in exchange for supporting the sector which could include guaranteed rent and reduced stamp duty payments for bulk housing purchases. Even though the UK property sector is still under pressure at this moment in time, the long-term potential for appreciation from the current level is very significant. As pension funds and many investment companies tend to look longer term there is a growing belief that there is value in the UK property sector and this together with the government guarantees under discussion make the situation more attractive than ever.

How ironic that the UK government is now looking to work hand-in-hand with the financial institutions it has been criticising over the last 6 to 12 months!

Go to for more information and opportunities. IPS is about to bring a product to the market which will take account of this opportunity.

An analysis of the Australian Property Market

By L.P. Shadow

Part 1: Why it really is ‘different here’

With both Residex and RPData statistics currently indicating that Australian house prices are on the rise again (or at least that they have stabilised, after a total peak to trough fall of only 3-4 per cent), now is a good time to review the state of the property market in Australia, and especially the important differences between Australia and some other countries that have experienced a more significant decline in property values.

The doom & gloom crowd frequently state that we are 'just like the USA' or 'just like Japan' or ‘just like the UK’ etc. They do this in order to convince each other that house prices in Australia must inevitably follow the same path. However, what they fail to recognise are the many significant points of difference between the housing markets in each country.

First of all, consider population growth. The Australian population is currently growing at 1.84 per cent per annum, while the UK growth rate is only 0.4 per cent per annum, less than a quarter of our growth rate. The USA growth rate is only 0.9 per cent (half of our growth rate), and finally the growth rate in Japan is negative. The Japanese population is actually in decline. Japan is a great example of a country where supply of housing really does exceed demand. Since Japan's population is shrinking, over time this must inevitably lead to an oversupply of housing.

Australia’s population expanded by a record amount last year, due to an increased birth rate and an influx of migrants. The population grew by 390,000 to 21.5 million. This 1.84 percent growth rate was the highest since 1970. Sixty percent of the increase was due to migration.

Even though the Rudd government has recently indicated that overseas migration will be cut by 18,500 people, this means that Australia’s growth rate will still be around 1.7 per cent, which is still one of the highest growth rates in the developed world (in fact, even higher than many developing countries).

Another important factor is the quality of our overseas migrants. Australia has always had quite a restrictive policy of encouraging 'skilled' migrants, while the UK has instead been bringing in a very large share of poorly educated and low paid migrants from Eastern Europe, who tend to send a large portion of their wages back home to family instead of spending it in the UK economy, unlike our own skilled migrants who contribute towards the Australian economy to a much greater extent and can better afford to buy/rent houses. Many of those UK migrants simply packed their bags and went home when the UK economy started to weaken.

In addition, Australia has never had the oversupply of housing that exists in the USA. The USA built far more new houses than required to meet their underlying demand, whereas in Australia the reverse occurred. We do not have enough dwellings to meet underlying demand. Australia does not have the massive oversupply of foreclosed dwellings that is the primary cause of downward pressure on US house prices. Rental vacancy rates in the USA are running at well over 10 per cent, compared to less than 2 per cent across most of Australia.

The recent Australian property boom, which ended in 2003, was characterised primarily by the exchange of existing stock, rather than the development of new stock. In other words, it was not a construction-led boom (unlike the recent boom in the USA). This means we now have a shortage of stock in many high-demand locations as we move into the next growth cycle during a period of record population growth, record low vacancy rates, and rising rents.

Another critical factor is interest rates. The UK and USA banks have generally retained a large slice of the official rate cuts for themselves, rather than passing it on to the consumer as mostly happened in Australia (375 of the first 425 basis points worth of cuts were passed on). Furthermore, the UK and USA only started slashing official rates after their house prices were falling sharply and their economies were in serious trouble. The RBA on the other hand has been much more proactive, cutting rates aggressively, ensuring that most of the rate cuts are passed on, and since they were starting from a higher official rate position to begin with, they have had relatively more ammo left in the rate cut gun as well (and even if the banks to not pass on much more from now on, their profits will be increasing encouraging more lending).

The chart below compares the reduction in official rates and mortgage rates across the UK, USA and Australia. It is clear that despite our official rate having fallen by the least amount (meaning we have much more scope for further official cuts), our fixed and variable mortgage rates have fallen by the greatest amount. The key difference here is that a much greater share of the cuts has been passed on to the borrower in Australia.

Source: RBA, Westpac

The UK and USA economic problems began well in advance of their housing market downturn, and their banks had much more significant exposures to the sub-prime assets that triggered the current crisis. Many large UK and USA lenders are heavily reliant on securitisation markets for funding (much more so than Australian banks). When those markets closed, these lenders no longer had access to funds. The Northern Rock collapse removed a very significant UK housing finance provider (with an estimated 10 per cent mortgage market share, and commonly offered 110-120 per cent LVRs). After the Northern Rock collapse, credit was severely tightened by all UK lenders, maximum LVRs were slashed, and finance was no longer made available to 'higher-risk' borrowers.

Lending standards in Australia have always been much stricter than in the UK and USA. Non-conforming loans (our equivalent to sub-prime) represented less than 1 per cent of all mortgages in Australia in mid 2007 according to the RBA, compared to 15 per cent in the USA. Low-doc loans (our equivalent to Alt-A) represent only 7 per cent of all mortgages in Australia, compared to 20 per cent in the USA (and Australian low-doc has much lower default rates).

With regular low-doc loans, even though the borrower is not required to prove income levels, they are required to contribute a large deposit, and possibly pay LMI. This is a key difference between low-doc loans and sub-prime/non-conforming loans - with low-doc loans, the borrower already has a large equity buffer in place.

Furthermore, the RBA did not make the US mistake of keeping interest rates too low for too long in the first half of this decade. This is why far fewer Australians were enticed into taking out mortgages that they would never be able to service when rates returned to normal levels. Also, mortgage lending in the USA is frequently ‘non-recourse’, meaning that in the event of default, the lender may repossess only the property against which the mortgage is secured, but may not make claim against other assets belonging to the defaulting borrower. As a result, homeowners in the USA are more likely to hand back the keys and walk away, which further exacerbates their oversupply of housing.

In the end, these significant differences in lending practices have meant that default rates on Australian loans have remained vastly lower than on US loans (according to the latest RBA data, the Australian 90 day mortgage default rate is just 0.48 per cent compared with the US (nearly 4 per cent) and UK (nearly 2.5 per cent)).

It is also important to consider the government debt position. Australia entered this global downturn from a much stronger position since we had a strong budget surplus and no public debt. We also have the Future Fund and the Infrastructure Fund, which together still contain around $80 billion that can be made available for further stimulus. On the other hand, governments in the UK and USA were saddled with mountains of debt to begin with.

Additionally, the UK (and especially London) economy is very much based around the financial services sector and is therefore more severely impacted by the current global financial crisis. The UK and US economies are in a much worse position than the Australian economy.

And finally, as the chart below demonstrates, the recent UK property boom was considerably larger than ours in the first place. In fact, the IMF has acknowledged that there is no evidence of any significant overvaluation of Australian house prices beyond what would result from the fundamental balance of supply and demand.


Part 2: What does the future hold for the Australian property market?

Nominal house prices are always increasing as inflation devalues the currency, and in recent times the money supply has been increasing at a much higher rate than CPI. The latest RBA figures indicate that the money supply (M3) is growing at 15 per cent year-on-year, which is very strong growth (although not as strong as it had been previously). Interestingly, although the rate of growth in some categories is still in decline, the rate of growth in owner occupied housing finance has started to accelerate. If the money supply is increasing at a faster rate than the increase in prices of consumable goods (as measured by CPI) then this excess money has to go somewhere, and it tends to go into asset prices.

Source: RBA

House prices in desirable locations such as major cities can and will continue to outstrip average incomes due to the following factors (note that I am not talking about house prices in all areas):

– Shortage of supply in desirable locations means that sought after properties tend to flow towards those with most wealth.
– Existing stock is passed down to children, which captures past property wealth for future generations to build upon.
– Natural population increase and immigration, without adequate supply-side response, increases demand for existing stock.
– Disposable household income has been rising faster than wages, and there is a natural tendency to direct this excess income towards housing.
In addition, there are many unique characteristics of the Australian property market that tend to suggest a positive outlook over the medium term:
– Interest rates falling to record lows (hence cash delivering very low returns).
– Investors need somewhere to park their cash, and are wary of equity and commercial property markets due to the global crash.
– Very high overseas immigration.
– Trend towards fewer persons per household (although this is elastic in the short-term and the Federal Housing Minister has noted that there are around 250,000 ‘overcrowded’ households).
– Already very high current pent-up demand for housing.
– Not enough new houses being built.
– Many properties are now cashflow positive.
– Cheaper to buy than rent in many suburbs.
– The falling Australian dollar has made Australian more affordable to foreign investors.
– Rapidly increasing rents encourage investors back to property.
– First Home Owners Grant has been boosted and will likely be extended in a modified form.
– Banks have agreed to mortgage payment holidays for the unemployed.
Furthermore, the Sydney market in particular demonstrates some additional positive characteristics:
– Geographic expansion constraints (Ocean / Mountains / National Park bordering Sydney).
– Resistance to high-density development.
– Prices set to rise after past 6 years of falling prices and stagnation.
– Real prices are 20 per cent below their previous peak level.
– Reversal of the past internal migration trend from NSW to other states.
– Very strong auction clearance rates throughout 2009.

The charts below illustrates the fact that house prices in Sydney are below trend and potentially due for an upwards correction as seen in recent 2009 data (note how the line goes flat in around 2003).

Source: Residex

It is also worth noting that the response to the Westpac Melbourne Institute survey question 'is it a good time to buy a house' has jumped again recently to the highest reading since late 2001. Clearly the many Australians are beginning to realise that this is a good time to buy.

Additionally, AFG recently announced that its March 2009 home loan application volumes (by number and value) were the highest on record.

Finally, probably the most positive sign for Australian property is the recent uptick in housing finance commitments after the sharp decline during 2008, which history suggests is often a precursor to an extended period of further growth. In all six of the previous six major housing finance downturn events over 34 years, the first uptick has been a precursor to future growth. We are now at number seven. This is a bullish signal for the property market as the chart below demonstrates.

Source ABS

So, does this mean that property prices in Australia will never crash? No, in my opinion there may be a crash sometime, but just not yet. Prices may crash if and when the fundamentals change. I believe a property crash could occur after the forthcoming boom. As the credit crunch eases, and house prices start rising strongly again, there is a real possibility that a construction-led boom will kick off in Australia. However, there also is a chance that we will make the same mistake as the US made - i.e. we will eventually build too many new houses (there are currently approx. 18.6 million empty houses in the USA). This oversupply would create a glut of property late next decade, just as the baby boomers start to die off, further increasing supply and reducing demand, and this is what may eventually trigger price falls. But it won't happen until after the next boom.

Part 3: Why the gloomers are wrong!

The doom and gloom crowd frequently make spurious assertions regarding the Australian property market. In particular they like to make up reasons why an imminent crash is inevitable. This article aims to address and correct their most common claims.

False claim number 1: ‘House prices will revert to historic price vs income trends’

The gloomers often claim that property prices have diverged from fundamentals and must revert to historical price vs income ratios. This argument is clearly nonsense. What they fail to recognise is that the fundamentals have changed, and therefore the trend has changed. House prices won’t revert to historical price vs income trends for the following reasons:

The RBA has shifted to inflation targeting model in the 1990s and there has been a permanent downward shift in both inflation expectations and interest rates (refer to Christopher Joye’s article in Business Spectator on this subject). The RBA and Joye have noted that this has resulted in a once-off increase in the house price to income ratio.

More women in the workforce means dual incomes going toward housing is now the norm.
Financial deregulation, product innovation and competition make finance available to a wider range of borrowers.

Lower interest rates on housing loans have improved debt serviceability.
New incentives such as negative gearing, capital gains tax advantages, SMSF can now invest directly in property etc.

Of course, along the way there will be property cycles, booms and busts, but there is no reason to believe that the house price to income ratio will revert back to the levels seen in the 1970s and 1980s.

False claim number 2: ‘There is no shortage of houses in Australia’

Another frequent doomsayer claim is that the critical housing shortage recognised by the RBA, media, major banks, government, HIA, real estate industry, and all property analysts and commentators is actually an illusion. They claim that Australia has a massive number of empty houses that will somehow flood the market at some point in the future when interest rates or unemployment levels get too high. This is of course rubbish – the percentage of empty houses in Australia has barely changed in 30 years as shown below.

Some gloomers even go so far as to suggest that many property ‘speculators’ are hoarding empty houses while claiming negative gearing deductions. This would of course be completely illegal, and in any case does not make sense from a business perspective, since the investor would be losing rental income while risking severe penalties if caught by the ATO.

Australia has always had empty houses, and an excess of bedrooms in occupied houses, however these empty houses are not necessarily available for sale or rent. And they are not necessarily located in places where people want to live. A house is marked empty if it is unoccupied on census night. Many people are on holiday, out with friends, travelling etc. on census night, so their houses are counted as ‘empty’. This does not mean that the house will shortly become available for rent or sale.
Remote coastal towns always have a large number of empty holiday homes and high vacancy rates, but that doesn't help all the people who work and need to live in Sydney or Brisbane. On census night, there may have been plenty of empty villas in Thredbo and empty houseboats on the Hawkesbury, but again, not much use to the majority of the population who live and work in our cities.

As for the empty bedrooms... well, Australians want empty bedrooms in their houses. We're used to them, and we're not going to start inviting people to share our houses and bedrooms unless forced to by extremely adverse conditions (eg, war).
High prices and low rental vacancy rates are a symptom of shortage. We see these symptoms across Australia.

False claim number 3: ‘I see very few homeless people in Australia. How can there be a shortage? Where is everybody living then?’

The number of persons per dwelling in Australia dropped from 2.97 in 1991 to 2.76 in 2001 and to 2.74 in 2006. So after falling considerably over a decade, this metric has basically flat-lined from 2001 (there is some evidence that it has ticked up a bit more recently, but this elasticity is limited). Australians are now bunching up in existing dwellings rather than continuing the trend of forming new households. Why? Because we don't have enough houses to allow people to continue spreading out at the rate they desire.

Construction is currently down and rents are rising strongly in all cities. The Australian population grew by 390,000 people or 1.84 per cent in the past year. This is the largest number added to the population ever.

We can't just keep bunching up into the existing housing stock forever. The government is beginning to recognise this, hence their plan to build 100,000 new 'affordable' houses. But that is a drop in the ocean - we need many more. They will leave that up to the private sector to build (i.e. property investors and private developers).

Unless we develop new stock, we cannot possibly hope to appropriately house the growing population. So where are all these people who contribute to the pent up underlying demand actually living right now? They are:

– Bunched up in existing houses.Sleeping on friends sofas.
– Living in caravan parks and campsites (caravan parks in Australia are overflowing).
– Staying with parents for longer then they desire.
– Hotels, motels, backpacker hostels, guest houses.
– Crisis shelter, homeless centres and public housing.
– A small number of people are living on the streets.

False claim number 4: ‘I have a lot of pent up demand for a Ferrari, but I can’t afford one so my pent up demand is irrelevant, just like pent up demand for housing is irrelevant.’

This is a very common misunderstanding from the gloomers. What they fail to understand is that a Ferrari is a highly discretionary luxury item, while a home is a basic necessity (in fact Rismark and the RBA have classified it as a ‘superior good’). You can't really compare them like this. If a person cannot afford a Ferrari then they have the option of buying a cheap second hand car, or a bicycle, or walking. On the other hand there is no real alternative to living in a house. Shelter is a basic need. If a person is priced out of a particular housing market then they will do one of the following:

– Move further out, to a less desirable suburb.
– Buy a smaller house or unit instead.
– Make use of a shared equity arrangement or partner with another buyer.
– Rent.
– Leave the country.

Unless they choose the last option, then their demand on the Australian property market still exists. This underlying pent up demand doesn't just disappear. Everybody needs to live in a house.

It would be fine to compare a Ferrari with a luxury waterfront mansion, or to compare ‘transport’ in general with ‘shelter’ in general. But to compare ‘Ferrari’ with ‘shelter’ is just ridiculous. One is a highly discretionary luxury item. The other is a basic necessity.

False claim number 5: ‘Australia’s debt to GDP ratio is at 160 per cent. This is unsustainable - the ratio can’t possibly get any higher and must collapse.’

Credit growing faster than GDP is not necessarily a problem and can occur for all sorts of normal reasons. GDP is income received each and every year, while credit is an expense that is only paid once. It makes more sense to either chart GDP against the interest on the debt, or to chart total debt against total assets as the RBA has often noted (refer to Guy Debelle’s speech).

GDP is not really comparable to total credit. If my income rises by $100 and my total debt rises by $110 then even at an interest rate of 10 per cent pa, I’m still ahead by $89 (100 - (0.1 x 110)), even though my total debt has increased at a faster rate than my income. The same analogy applies to Australia’s credit vs GDP ratio.

Although the interest on the total credit must be paid every year, much of this interest is owed to other Australians, so to some degree we are paying the interest to ourselves. From the perspective of the overall economy, debts are not just negative assets. They simply represent a pledge to transfer funds from one person to another at some future point in time. They are as much an asset to the lender as they are a liability to the borrower.

In short, Australia’s credit vs GDP ratio is not necessarily a problem. Many countries have a much higher credit vs GDP ratio than Australia. The ratio is over 300 per cent for some countries. There is no reason why our ratio can’t continue to grow. As Christopher Joye notes in his Business Spectator article, Australia’s credit outpaced GDP during the 1990s due to the massive reduction in the cost of debt. Here is an interesting comment from the RBA on Australia’s debt situation.
“Has the expansion of household credit run its course? Will it reverse? We cannot know the answer to these questions with any certainty, but my guess is that the democratisation of finance which has underpinned this rise in household debt probably has not yet run its course. In the past, the lack of access to credit had resulted in Australian household sector finances being very conservative. Even as recently as the 1960s, the overall gearing of the household sector (taking account of all household debt and all household assets) was only about 5 per cent – that is, households owned 95 per cent of their assets, including houses, outright. This meant that the household sector had significant untapped capacity to service debt and large unencumbered holdings of assets to use as collateral for borrowings. Financial institutions recognised this and found ways to allow households to utilise this capacity. The increase in debt in recent years has lifted the ratio of household debt to assets to 17½ per cent (Graph 6)3. I don’t think anybody knows what the sustainable level of gearing is for the household sector in aggregate, but given that there are still large sections of the household sector with no debt, it is likely to be higher than current levels.”

False claim number 6: ‘Many economists have said that property values in Australia will fall by 40 per cent’

The only public figure who is claiming that property prices will fall by 40 per cent is Steve Keen, an associate professor from a Western Sydney university. Mr Keen has not actually based this 40 per cent figure on any real data, but rather has suggested that because this is approximately how much prices fell in Japan. On that basis, and given Keen’s view that unemployment will rise to 15-30 per cent, 40 per cent sounds good for Australia too. Here are Keen’s words:

“Japan also had a bubble economy in the 1980s, and its house prices have since fallen 42 per cent in real terms, and more in nominal terms since consumer prices have fallen over the 90s and 00s courtesy of Japan's long-running Depression. That's the reason I give a 40 per cent figure for a price decline in the press: our bubble was larger than Japan's in general (though much smaller than Tokyo's), and a fall of that magnitude would seem a good ball park estimate even though it would take a greater fall to restore the median house price to median income ratio to 3, which is Demographia's estimate of the peak level for affordability.”

It seems strange to compare Australia to the Japan experience, when there are so many differences between the property markets in each country. It does not make sense to expect the same outcome from different inputs.

One key point of difference is that while Japan’s population is projected to fall by around 25-30 per cent over the next 40 years, Australia’s is forecast by the ABS to increase by more than 50 per cent.

The other notable identity who gained some notoriety in 2008 for his claim of a 40 per cent fall was an internet blogger known as Edward Karan. Karan asserted that property prices in Australia would fall by 40 per cent over two years, starting from the ‘tipping point’ of Q1 2008. With only 8 months to go until his deadline, and prices down only 3 per cent (and rising again), it is obvious why we no longer hear from Edward Karan in the media.

For prices to drop by 40 per cent we would need to see massive levels of forced sales. Unless you are a forced seller, why on earth would you sell for a 40 per cent loss? For prices to fall by 40 per cent there needs to be no buyers at 5 per cent down... no buyers at 10 per cent down... no buyers at 15 per cent down. However there are plenty of buyers ready to jump in right now (even before any significant falls) and even more would be ready to jump in at 10 per cent down. Most people simply want a house to live in and will buy when they can afford it. Many can afford it right now. Property investors are already seeing many cashflow positive opportunities due to the historically low interest rates. There is simply no mechanism by which prices can fall 40 per cent in the current environment.
If I live in a street with 200 houses, and even if two of those houses were forced sales to lucky buyers for a 40 per cent discount, while 10 others sold for a 5 per cent discount (because those vendors didn't need to sell, and the buyers were willing to buy at 5 per cent down), then my valuation would come in at a 5 per cent reduction. For median prices to fall by 40 per cent, then 40 per cent down sales need to become the norm, not the exception. This means massive levels of forced sales. This simply will not happen, especially with the government and major banks agreeing to payment holidays for the unemployed.

False claim number 7: ‘Australian house prices are the highest in the world’

This is another factually incorrect statement, generally based on the discredited Demographia survey. The Demographia survey has been thoroughly debunked due to its massive flaws. It uses a very basic measure of 'affordability' - i.e. median house price to median income. This is an extremely misleading tool. Demographia compares house price to income ratios across various countries, however there is no reason why house price to income ratios would even be consistent across different countries, because there are substantial differences between the housing markets in each country. The survey fails to consider the following factors:

– Disposable/discretionary income
– Employment rate
– General cost of living
– Interest rates
– Rental yield
– Availability of public housing
– Marginal tax rates
– Mortgage default rates (Australian defaults are way below UK and USA default rates)
– Tax incentives such as negative gearing, FHOG, CGT reductions
– Land/Block size
– Dwelling size and quality
– Proximity to transport and infrastructure
– Currency exchange rates
– Economic and political stability
– Home ownership rates
– Urbanisation (much higher in Australia than in US, UK or Japan)
– Population growth - Australia (1.84 per cent), compared to USA (0.9 per cent), UK (0.4 per cent) and Japan (negative)
– Demographics (it is ironic that a survey called Demographia ignores demographics!)

Of course, no survey is perfect and no survey can possibly hope to account for all these factors. Our best option is to examine as many different surveys as possible, each of which may address several of these factors, and this will provide a better general impression of comparative affordability in each country, rather than looking at just one survey in isolation.

Regarding the 'demographic' failings of the Demographia survey, take for example its assertion that a certain 'sea-change' town in Australia is particularly unaffordable. Demographia bases this on the median house price to medium income in that town. What they fail to consider is that the median income there is largely irrelevant, because much of the population are cashed-up retirees (no income) who have saved up for their whole lives and purchased a nice big beach house, often with very low borrowings. Sure, these beach houses may be unaffordable for a first home buyer who lives there and works in the local supermarket, but that's not the primary demographic driving prices that town. In reality, the Demographia survey is comparing apples with oranges.

Another key issue with Demographia is that it only compares Australia with five other countries, yet the gloomers proceed to claim that Australia is the 'most expensive country in the world'. The survey conveniently ignores all the many cities around the world with much higher house prices than Australia. For example Moscow, Tokyo, Oslo, Seoul, Hong Kong, Geneva, Zurich, Milan, Paris, Singapore, Monaco. Here are some alternative studies:

World's Top 10 Priciest Cities To Own A Home
Sydney - Not in the top 10

GlobalProperty Most Expensive Cities 2008 (apartment price per sqm):
Sydney - Number 13

Mercer Most Expensive Cities (cost of living, including housing)
Sydney - Number 21

CityMayors Expensive Cities
Sydney - Number 24

Knight Frank Survey (prime residential property)
Sydney - Number 8

Overseas Property Mall Survey
Aneki (most expensive countries to live in)
Australia - Not shown in the top 20

Most expensive countries in the world
Australia - Not on the list

Most expensive rental markets
Australia - Not on the list

False claim number 8: ‘Australian house prices are unaffordable’

The majority of Australians are well ahead on their loan repayments. Less than 0.5 per cent of borrowers are 90 days in arrears on loan repayments. The RBA has demonstrated that 25-40 year olds today have more disposable income left over after buying a 30th percentile house than at any time in the past. Clearly the majority of Australians are not finding property unaffordable.

False claim number 9: ‘Australian house prices will crash when unemployment rises’

The unemployment rate has been at historic lows and could not realistically do anything other than rise. Obviously there will be job losses across Australia over the medium term, however house prices have boomed through much higher unemployment levels in previous years. The people most impacted by a rise in unemployment tend to be those who do not own a home anyway, and those who do own a home may be covered by the mortgage payment holiday recently announced by the government and major banks. Christopher Joye has offered an excellent analysis of what happened to house prices in the 1991 recession when the unemployment rate rose from 5.6 per cent to 11 per cent…They actually increased!

False claim number 10: ‘Nigel Stapledon’s data shows that real house prices in Australia were flat thoughout the 1800s and early to mid 1900s’

Stapledon's work has been largely discredited. Nobody was actually collecting Australian median house price statistics in the 1800s and early 1900s. Stapledon’s methodology for collecting the statistics is described in his thesis.
Stapledon collected the data by visiting the library and reading one old Sydney newspaper for one day of each year from the 1800s. Then he looked at the advertised price of properties for sale in that paper. Then he extrapolated this out to create an Australia-wide house price index. He based the whole thing on a handful of advertised sale prices in one newspaper from one city on one day of each year, and somehow arrived at a house price index for Australia. He preformed no compositional adjustment and failed to recognise that one city in Australia may be booming while another is stagnant. In addition, Stapledon's measure of inflation in the 1800s bears no semblance to anything we would call CPI today, never mind the fact that houses were purchased using a completely different currency in the 1800s. Stapledon's data is meaningless when analysed critically.

False claim number 11: ‘House prices in Sydney have peaked and cannot possibly get any higher in real terms’

Five years ago, Sydney house prices were 20 per cent higher in real terms. There is no reason why they cannot get that high again or higher. There is no known limit to house prices. Prices in cities such as Moscow, Tokyo, Oslo, Seoul, Hong Kong, Geneva, Zurich, Milan, Paris, Singapore and Monaco are already much higher than prices in Sydney.

False claim number 12: ‘No subprime in Australia? Ha! I saw an 18 year old on Today Tonight with no job, seven kids and twelve investment properties’

Of course there are isolated instances where lenders have provided finance to people who are unlikely to be able to service their loans over the long term. But these are exceptions. As a rule, Australian lenders have taken far fewer risks than their US and UK counterparts.

False claim number 13: ‘Fundamental supply and demand, population growth etc. is irrelevant. Availability of credit is the only factor responsible for house price growth.’

In 2007, house prices in Melbourne rose by over 20 per cent while prices in Sydney rose by only 8 per cent. Did Melbourne have twice the amount of credit available? No. Prices were driven by supply and demand, not availability of credit. Credit is equally available throughout Australia, but house prices do not rise by equal amounts in each city.

False claim number 14: ‘Interest rates were cut in the UK and USA. It didn’t save their markets and it won’t save the Australian market.’

The UK and US did not start to slash their official rates until after house prices were already falling sharply, and in any case the official rate cuts were generally not passed on to the borrowers to the same extent as they were in Australia.

False claim number 15: ‘The UK and USA had high population growth. It didn’t save their markets and it won’t save the Australian market.’

Annual population growth in the UK is actually very low at 0.4 per cent. The figure is 0.9 per cent for the USA. This is much lower than the Australian growth rate of 1.84 per cent.

Go to for more information and opportunities in Australia.

Aus House prices holding firm despite economic gloom

Friday 01 May 2009 10:23 Patrick Stafford

Despite fears that the Australian property market is suffering under the weight of a deteriorating economy, residential property prices recorded slightly positive growth in the first quarter, according to new figures.

Property research firms RP Data and Australian Property Monitors have released separate sets of data that show property prices experienced slight growth in the first quarter.

The RP Data figures show that housing and unit prices rose nationally 1.6% in the three months ending 31 March, in five out of seven capital cities. APM agrees that prices increased on a national level, but only by 0.10%.

The price movements for each capital city differ slightly between RP Data and APM.

Tim Lawless, research director at RP Data, claims the differences between them are due to the manner in which the data was recorded.

"January was the worst month of the quarter and that's the difference between ours and the AMP data. Ours is quarterly and that month of January really drags things back for them," he says.

Lawless remains confident about the outlook for house prices.

"I wouldn't be surprised if over the months we see a similar trend, we won't see growth ramping up or anything like that. We're seeing a return to stability; it'll fluctuate and I don't think we can call this a growth phase."

He says the continued success of the market depends on how healthy the economy remains overall, but maintains that "the market has demonstrated resilience".

"The health of the market is dependent on the health of the economy and the ability to consumers to service their mortgage," he says.

"The rest of 2009 will see very minimal growth, and coming into 2010 it's hard to suggest what's going to happen that far out - that relies on the economy and unemployment. If it gets above 10% then the property market will suffer, but if it peaks at 8% or 9% then it's not going to be too detrimental."

Lawless's upbeat outlook is in stark contrast to comments from Australian National University economist Quentin Grafton, who says house prices could fall by 20% in the next two years.

Grafton told The Age that house prices could not continue to grow at a faster rate than incomes and consumer prices.

"Ultimately, house prices have to be related to the ordinary prices that we pay for other goods and services and our incomes," he said.

"In the past decade, house prices have gone up about 50% in terms of that ratio. That is not sustainable, and certainly won't be sustainable as the recession bites.

"I wouldn't be surprised if overall we get a 20% decline in nominal house prices over about the next two years."

Friday, May 1, 2009

Want to monitor the UK market? - Recession Recovery Predictor

From Scott Picken and Jonty Cuisack

Scott Picken, IPS CEO lived in London for 9 years and was always very impressed with Ready 2 Invest who helped British people invest in countries around the world. They are always at the forefront of the market and recently they have come out with the statements that they are now getting back into the UK market as there are great opportunities. This is a report by Jonty Cuisack who is the CEO if Ready 2 Invest.

"The media is so full of commentary about the state of the economy that it is difficult to sort the facts from the personal opinion. Because of this we have developed a new predicting model so you can you get a real sense of where the economy is and where it is heading.

The Predictor tracks what I believe to be the best market indicators such as unemployment stats, house sales and the spread between base rates and LIBOR. There are 10 areas in total and, by seeing all these stats in one go, we can get a great visual sense of whether the figures demonstrate crisis, green shoots, recovery or boom. The numbers will be updated every month and a summary presented visually with a narrative by me.

I remain convinced that 2009 is a great property-buying year. My suspicion is that we have hit bottom and that we will bounce along this nadir for the rest of 2009. 2010 will see mild improvements and things will start to recover more seriously in 2011.

What will really get things going again is credit. In homeopathy they treat the illness with a very small dose of the disease. As with credit and debt, the right application of credit, which is also the cause of the crisis, will heal the economy.

The Predictor Model is at

If you want more information please go to and we will be able to assist you to understand the UK market and take advantage of the opportunities.
"If you help enough other people get what they want, you can have anything you want!"

Zig Ziglars