Finance

Post #45 – The Five Stages of Australia’s Housing Bubble

So recently I blogged about some of the common myths surrounding the Australian housing market. That post also hinted that I believe our housing market is entering a very fragile phase, where finally, after many false prophecies of collapse, our luck might finally run out. I am predicting that the Australian housing market will enter a volatile period within the next 9-12 months, with a drop of approximately 20-40% in the next two to three years after that. And I’m going to borrow the theory of an obscure and oft-forgotten 1960’s economist by the name of Hyman Minsky to explain exactly how this housing market bubble will pop and collapse.

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Hyman Minksy

This man’s ideas have never really been applied to a housing market though, dabbling predominantly in the world of finance. However, I believe that the financialisation of the housing market in Australia means that the leap between his theory and the housing market in Australia can be made. Let me quote BBC News to give you a brief introduction to this man:

American economist Hyman Minsky, who died in 1996, grew up during the Great Depression, an event which shaped his views and set him on a crusade to explain how it happened and how a repeat could be prevented…

Minsky spent his life on the margins of economics but his ideas suddenly gained currency with the 2007-08 financial crisis. To many, it seemed to offer one of the most plausible accounts of why it had happened.

He referred to his theory as the Financial Instability Hypothesis (FIH), and argued that lending goes through certain stages in a capitalist economy. Considering housing in Australia is no longer just a roof over your head, but rather seen as an investment and an asset, it’s easy to apply his different approach to finance to the housing market here. This is how it flows:

1. THE HEDGE POSITION: Your expected inflows are expected to be less than your committed outflows for the foreseeable future. You’re good.

2. THE SPECULATIVE POSITION: Your committed outflows are larger than your inflows, but enough to pay interest. You must refinance to pay the principal. You’re playing with fire, but still… you’re good.

3. THE PONZI POSITION: Your interest payments are greater than your inflows. You’re fucked.

I’m going to outline the steps below, and explain how they can be applied to what we have seen, and what we are currently seeing in the Australian housing market.

PHASE I: RECOVERY

This is the first stage, when banks and borrowers are cautious. They’re usually cautious because the inherent contradictions of capitalism have once again fucked things up, the housing market is a shambles and everybody is broke. You can take your pick which economic downturn you’d like to focus on. For example, (more…)

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Post #43 – 10 Myths of the Australian Housing Market

Every time I try to suggest to my family and friends that the Australian housing market is in a bubble – the likes of which no developed Western nation has ever seen before – I’m dismissed as a bit of a ‘crackpot’. Amongst the sneers and chuckles, I’m told that the Australian housing market is ‘different’. Yes, different. What makes it ‘different’ is something nobody can really tell me – but here are a few of the excuses I’ve heard:

ARGUMENT 1: WE’VE GOT BIG HOUSESLargest in the world by some counts. According to our former Treasurer Joe Hockey, this means that Australia has a fundamentally different ‘asset’ class. Here’s exactly what he said:

A lot of Australians put a lot of new capital into their homes – renovate their homes, upgrade their homes – and we have the largest homes on average perhaps in the Western World, and the world more generally. So it’s a very different asset class in Australia than in other jurisdictions.

This means, naturally, we have to pay more for our houses – because they’re bigger than everyone else’s.

DEBUNKED: Hockey is correct in saying that a bigger house costs more than a smaller house. However, it doesn’t excuse why a median house price in Sydney is $1 million, whilst in Houston, a city of comparable size and wealth, it’s about $US146,600. Americans tend to challenge us for the title of most obnoxiously big houses in the Western world, so we’d hope to see some correlation there. But we don’t, the maths just simply doesn’t add up.

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Post #36 – Why We Should Ban Credit Derivatives

I think we should ban credit derivates. In fact, on one occasion they nearly got me killed. But just what are derivates, and why are they so bad? Well… I’ll get to that in a minute.

To keep this post as deriveting (ha!) as possible, I’m going to adopt at least one more bad pun and pop culture references to illustrate my point. I believe there are six major reasons we need to ban credit derivates – and those points are as follows:

  1. The first is the obvious detriment of counter-party risks.
  2. The second is that they are a sneaky way to hide credit risks from the markets.
  3. The third argument will revolve around regulation being good-for-nothing.
  4. The forth will be an examination of morals (i.e. that thing bankers don’t have) and how credit derivatives play to our worst characteristics.
  5. My fifth point will focus on how these ‘weapons of mass destruction’ as Warren Buffett refers to them – play a major role in the financialisation of labour and the further commodification of the working class.
  6. Last but not least… payback. The conglomerates involved in credit derivatives, and let’s look at the big picture here – there are only a few major players in the game – refused. (more…)