Is Australia double–dipping? We all need to KISS (keep it simple stupid!)

Is Australia double–dipping? We all need to KISS (keep it simple stupid!)

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Here we go again – Mad Monday wiped $40 billion from our shock – markets and once again, hedge funds ran amok with an  insatiable desire to short stocks. Throw in the calamities of Europe, a highly sensitive super tax on mining and  a federal election and we see emotions running high.  What is abundantly clear is, that financial markets now, more than ever before, will dictate property markets results for quite a few years to come.  As they say “money makes the world go around” and it would be fair to suggest that currently, it is spinning much slower.

With world economies delicately poised and many drowning with self induced sovereign debt,  parts of Europe are crawling on the banking bridge of bankruptcy. Greece laid low by its decadence it was quick to blame US banks for debt woes. Brace for China’s heavy breaking was concerning also given the revelation that Germany still fears a meltdown.

What we are presently seeing from China will play a dominant role on the Australian economy, since China is trimming its commodity shopping list – hence a weaning off Aussie minerals. This suggests that Fort Fumble’s (federal government) resources super profit tax will be revoked due to international circumstances. Not exactly a great week for The Emperor (Kevin Rudd) when shares hit a nine – month low then our Aussie dollar nosedives as Europe worries bite. It should be noted that plenty of investors are actively buying up US dollars (USD) – the CCC – Current Calamity Currency.

toughclimbing

BUY PRINT

Not a great week for Fort Grumble (federal opposition) Abbott put to the sword over ‘gospel truth’ gaffe which I thought was best summed up with even the honest ones find it hard to lie straight in bed. Whichever way you look at it the next federal election will be a brutal contest, won or lost in Queensland which I don’t necessarily agree with as this election is about money – Rudd’s budget trick: pie in the sky when you die.

Much is being said about what is happening in the Australian property markets so let’s attempt to clear the picture. The Reserve Bank of Australia (RBA) released Recent Developments in the Housing Market and its Financing by Luci Ellis Head of Financial Stability Department – now that would be one tough job. “Housing is a big deal. It’s the biggest purchase most of us will make. It’s an asset class worth almost $4 trillion, accounting for around 60 per cent of household assets in Australia. Loans to buy property account for nearly 90 per cent of all household debt and around 40 per cent of the assets of Australian banks and other deposit – takers.”

Now it gets interesting as “housing prices in Australia have more than recovered from their small decline in 2008. In the first three months of 2010, prices were growing quite smartly.”

18-05-2010 4-18-45 PM

Demand – side Drivers

Unprecedented low interest rates marinated with Government policies of First Home Buyer Grants where the RBA has raised the cash rate by +0.25 per cent from six of its last seven meetings. The HIA/Commonwealth Bank survey of first – home buyer affordability dropped four per cent in the March quarter to its lowest since the September quarter of 2008. HIA senior economist Ben Phillips predicted that the RBA’s  interest rate rises in April and May would probably see housing affordability sink to the record lows of 2007 when mortgage rates rose above 9 per cent.

The First Home Owners Grant was introduced in July 2000; the Australian quarterly weighted average median house price was $220,443. The Australian weighted average median house price in the most recent quarter for which data is available, December 2009, was $514,599.

With interest I read this week in the Macquarie Economics Research Report

  • The RBA recently upgraded its medium – term inflation forecasts to three per cent, which suggests that there is certainly more work to do regarding the tightening of monetary policy in this cycle.
  • As a result, we expect that the RBA will recommence tightening later in the year, taking the cash rate to 5.00 per cent by the end of 2010 and 6.00 per cent by the end of 2011.

That  said, I would  like to hear its views given that Wayne Swan predicted (in current budget papers) that it would remain around 2.5 per cent in 2011. I will make a prediction of 3.5 per cent for the June 2010 quarter, 4.2 per cent for the September quarter 2010 and 5.0 per cent for December quarter 2010. Who would have thought double – digit inflation a possibility?

18-05-2010 4-19-41 PM

The Role of the Supply Side

“Together with these demand – side drivers, the supply side is important. The supply of housing is always going to be quite sluggish: most of it is already there. The additional amount of new supply is inherently small relative to the stock.”

Bear in mind banks on global hunt for $ 125 billion where pre global financial crisis long – term funding used by the major banks to finance mortgages, personal loans and business credit will have to be replaced at much higher prices between now and September next year. This signals that the cost of money is getting more expensive, rents will go through the roof and we expect vacancy rates to hit all time lows. Brace yourself for some financial turbulence ahead.

18-05-2010 4-20-55 PM

Property market clues are RBA warns lenders and borrowers to be prudent combined with top homes take double time to sell a natural response given the economic environment. With the Aussie dollar in freefall as our share market smashed down to lowest in nine months which is certainly not helped as European and Japanese investors are selling down due to Fort Fumble’s new mining tax which is significantly affecting the sovereign risk of Australia – the huge bear raid on Australia.

Here is a classic example of why our property markets performed so differently during the global financial crisis. With subprime, the banks in America could not chase on default.  In Australia they can – with vigour and dire consequences, otherwise  known as bankruptcy.

18-05-2010 4-21-57 PM

The Financial Stability Perspective

“Even if household balance sheets were to become overstretched to some extent, historical experience suggests that this, on its own, is unlikely to pose significant risk to Australia’s financial system.

18-05-2010 4-23-01 PM

“If we focus on the group of households with debt that have higher repayment burdens and high loan – to – valuation ratios, we can see that their numbers have risen over time. But overall percentage has remained very low. This was true even in late 2008, the latest available data, when mortgage interest rates, and thus repayments, were at their peak.”

18-05-2010 4-23-40 PM

The Key Role of Lending Standards

“Only a minority of recent home loan borrowers started with a loan – to – valuation ratio above 90 per cent. First home buyers have long faced greater risk than more established home owners who have more equity in their home.” This was clearly evidenced in Mosman during the global financial crisis where ‘mortgagee in possession’ sales could be counted on just two hands (with spare fingers).

This is definitely not a time to be carrying high debt ratios given all that is happening globally and yes, the cost of money is going up due to unprecedented sovereign debt collapses.

Memo to: The Emperor

Subject: Resource Super Profit Tax (RSPT)

We are faced with market suicide – “mining tax ‘contagion’ set to spread globally your resources tax was not designed to frighten, but investors may be scared anyway.  Just take a look at what is happening to the Aussie dollar whacked as debt crisis bites. The global financial crisis not over yet, just delayed so stop upsetting the mining companies and let them – (not you) lead this great nation back down the road to recovery. We need them in Australia – not out of it!

Welcome home – Jessica Watson.  Can you tell The Emperor, that no other Prime Minister has ever sailed solo around the world (clue) and a Pink Lady awaits him for his voyage.

The Real Estate Institute of NSW has just announced that it has secured an undertaking from Barry O’Farrell that he will repeal the ad valorem tax should the NSW Liberals and Nationals be elected in the upcoming state election.

Cheers ^__^

This week’s sales Mosman real estate, Beauty Point real estate, Clifton Gardens real estate, Balmoral real estate, Cremorne real estate, Cremorne Point real estate, Neutral Bay real estate, Cammeray real estate Click Here

17 Responses to “Is Australia double–dipping? We all need to KISS (keep it simple stupid!)”

  • Ann says:

    Robert,

    The sad state of affairs is that we have poor politicians at State and Federal level, who have next to no experience running even a chook raffle. You read the report on the calibre of KRUDD’s front bench and its scary.

    Batten down the hatches it will be a rocky year as you suggest.

    Many retailers are commenting off the record that sales have crash dived since the Mining Tax announcement.

  • Snow White says:

    Like life itself, one day Kevin Rudd’s Prime Ministership will come to an end.

    As a former Prime Minister once said:
    “remember that it is not about you, it is only about the position you hold”.

    Like a boy in a lolly shop with a stack of blank cheques, Kevin Rudd is a man hopelessly out of his depth.

    Easily the worst Prime Minister in living memory.

    Nowadays he hardly ever refers to former Prime Ministers Hawke, Keating or Howard by name, thinking of them as irrelevant to Australia.

    He views them more as reluctant but necessary local administrators of a scorched earth nation in post-Mad Max environment.

    A wasteland where the main role of the three former PMs was to preserve as much petrol as they could and keep the fledgling scrap metal compounds in place until someone could rescue the survivors.

    How else should we account for everything that Rudd does as having to be ‘big’, ‘landmark’, ‘historic’, ‘root and branch’, ‘the first time’ and so on?

    It is as if Hawke, Keating and Howard did absolutely nothing as Prime Ministers.

    Don’t worry about Gough he will just be delighted that after the passing of more then 30 years Australia has produced a Prime Minister worse than him.

    It is Rudd and his fellow blow-in Penny Wong that had to save us from the great moral issue of our time.

    Vital to our nation’s future the CPRS bill had to be passed by 3pm on some Friday back in October or November, not a minute later. What an embarrassment to them this high-pressure hoax became. Surprisingly the world did not end in 2009 after all. Rudd also needed to save the nation from a looming recession by plundering our national savings and putting us into debt for years.

    But, of course, a man with no experience in running a business of any size at all would panic and overreact to the crisis because he failed to take notice of or give credit to John Howard or Peter Costello for having Australia in a position where we entered the GFC in a much better state than any other Western nation.

    This is because in his mind there really was no economic management before Rudd. His election was year 0.

    Charging into the GFC with all of the incompetence and inexperience of a financial markets wood-duck, Rudd spent billions of taxpayer’s money on hair brain schemes that have made Australia a laughing stock internationally.

    Have you noticed how Rudd never now attends all of those international forums you couldn’t keep him away from in his first year as PM?

    The gain for international leaders is the loss to Australia’s hospitalised who have to endure Kevin Rudd exploiting their illness for cheap photo opportunities.

    The second last thing Australians deserve or need is such an incompetent Prime Minister trying to run the hospital system.
    The “Building the Education Revolution” has also been a farce and an embarrassment to both Kevin Rudd and Julia Gillard. With Peter Garrett, these three ministers are lucky they are not company directors otherwise they would be prosecuted by ASIC, cross examined by liquidators and sued by shareholders.

    It is a pity that some years ago our business leaders did not demand of our politicians that any corporate governance rules applying to them would be willingly accepted if the politicians imposing them agreed to be bound by the same rules.

    Some weeks ago, the Prime Minister was passionately in favour of “a big Australia”.

    You know that when a process driven politician like Rudd declares himself passionately in favour of something, it means he has only just discovered the idea, this is especially true in his case given that this passionate belief like most of his ideas, only lasted a few weeks until he realised his passionate belief was not shared by the voters.

    If you add closure of the insulation scheme, the failure of Grocery Choice and Fuel Watch to the debacle over the Green Loans scheme, his border protection policies and the now failed child care centre scheme, you are right to conclude that Kevin Rudd’s hide is much thicker than that of any politician we have ever known in this country.

    Having been responsible for some of the greatest policy failings this country has ever seen, he would be forgiven for being so humiliated that together with Gillard and Garrett, they never showed their faces in public again.
    Agree with him or not on the policies, the only runs Rudd could say he has scored are the two apologies and the signing of Kyoto which only saw him capitalise on the work done over many years by others.

    Just like a footballer whose only game for the year is the winning Grand Final in which he was selected due to other player injuries.

    With such a record of failure and incompetencies, he should not claim credit for any success in relation to his policies pertaining to the GFC which were by good luck rather than good management.

    He inherited the best economy in the Western world, spent too much money and working families now have six interest rate rises as a result of it.
    Kevin Rudd has now announced a disastrous new tax regime which will seriously damage the mining industry.

    The last thing Australians need is Kevin Rudd trying to overhaul the tax system.

    Another fiasco looms.

    What Kevin Rudd needs is less power, less money, less influence and fewer Cabinet Ministers prepared to go along with this circus.

    Anyone with a nodding acquaintance of politics in this country knows that Colin Barnett and John Brumby were right. Why give any more power to a man whose Prime Ministerial record is bad beyond belief and whose period in office will be ridiculed by history?

    Kevin Rudd now leads a Government in crisis.

    His capacity to deliver anything successfully must be severely shattered.

    He is a man without friends in the Labor Party. He is a loner. Not only without friends, but with a huge number of enemies inside his own Party.

    Why would the electorate keep liking a man so intensely disliked by those that know him best.

  • Worried says:

    To quote SnowWhite “What Kevin Rudd needs is less power, less money, less influence and fewer Cabinet Ministers prepared to go along with this circus.”

    It would seem he is working his way to exactly that. By my count, the Capital Investment that is leaving Aus as a result of the RSPT now exceeds the total stimulus spend, and, he has a $40Bn deficit. So I think he has the 1st part covered by his incompetence. We have to wait till the election to deal with the 2nd bit!

  • Patricia says:

    Snow White has overdosed on ‘snow’ and Ann must have drawn the short straw for the lube’s weekly submission, or perhaps Mark and Michael are away so the task became hers…thus the regurgitative discourse.

    Where are Robbie Mac and Gordon? I miss you!

  • Play’s the DVD “What about me” to Patricia 🙁

  • Patricia says:

    Sorry, Robert, great weekly column as usual! Without you, this blog would not exist.

    I appreciate the amount of work and referencing/links that are required to produce your column, week in and week out. Much appreciated by all your readers, I’m sure.

  • Gordon says:

    Patricia, what can I say?

    We seem to have become a bit snowed under this week, and the key point about the massive investment shutdown caused by the Super Emperor and the Super Tax, sorry Treasurer, has been well made already.

  • Patricia says:

    Gordon, all points taken. I marvel at Robert’s ability to write enthusiastically about, and analyse, the same old, week after week. The bumblers in Crumble and Fumble provide ample fodder though it is deja vu all over again. I saw Robert today with a lump on his forehead from his weekly encounter with a wall.

  • Awww – thanks Patricia I was only kidding as it is fantastic to see you back on the blog again.

    Gordon, I wonder where the Aussie dollar and ASX would be without the RSPT? Although, I was simply amazed to see that Julia Gillard declare that in her opinion it was not behind the drop in the A$ – another no brainer.

    I must admit that it is a fantastic time to write a blog with so many active political participants who go out of their way to provide great content here 🙂

  • Patricia, I thought you already knew that our office is fully fitted out with padded walls – so that everyone feels at home.

  • Ann says:

    Interesting points made in BHP’s PR this evening, especially the “four principals of sound tax reform were not present”…..

    http://www.bhpbilliton.com/bb/investorsMedia/news/2010/bhpBillitonMeetsWithResourceTaxConsultationPanel.jsp

    BHP Billiton Meets With Resource Tax Consultation Panel
    21 May 2010

    Today BHP Billiton met with the Resource Tax Consultation Panel advising the Australian Government on its proposed super tax on the Australian resources sector. BHP Billiton conveyed to the panel that the proposed super tax has been designed in a way that has the unintended effect of dramatically slowing investment in Australia and putting the future prosperity and employment prospects of all Australians at risk.

    BHP Billiton conveyed that the four principles of sound tax reform were not present in the proposed super tax. As previously conveyed to the Government, BHP Billiton believes any new tax on the minerals resources industry needs to:

    * be prospective in application, so as to preserve Australia’s position as a stable place for investment.
    * ensure the overall tax burden is competitive with other mineral resources countries, or Australia will lose investment to countries with more attractive tax regimes.
    * vary by commodity, because the investment characteristics and margins of individual minerals are different.
    * be levied on the value of minerals alone – and not unintentionally penalise investments in infrastructure, processing or other enabling activities.

    BHP Billiton conveyed to the Resource Tax Consultation Panel that the proposed tax does not recognise how investment decisions are made in the industry and would place Australia in an uncompetitive position globally.

    In particular, BHP Billiton urged the Resource Tax Consultation Panel to recommend to the Government that the time be taken to properly engage with the industry on all aspects of the tax rather than pursue selective adjustments in order to achieve the objectives of tax reform that benefits Australia.

  • Ann says:

    Should have disclosed that I hold BHP shares, like just about every other Aussie directly or indirectly.

  • Robbie Mac says:

    To paraphrase the Chinese – we live in interesting times!

    What has become abundantly clear in these recent, interesting times, is that at both state and federal level, even if government policies are good ones (and recent history would suggest that these are rare), the execution risk is high. This in turn has a trickle down (flood?) effect on confidence, in turn leading to investment decisions being adjusted accordingly. Real estate, being a largely state based governance, meant investors simply looked across borders, which would explain recent woes in NSW, but better times elsewhere in the nation, Victoria especially. However, at a national level, the alternatives are more dramatic, and on a much more macro level – dealing with larger, often multi-national corporates, who DO have the choice to invest elsewhere.

    The past few weeks, as evidenced by opinion polls, stockmarket behaviour and currency fluctuations, all suggest that confidence in Australia is rapidly decreasing, which poses some troubling questions for investors – how and where to invest? All major asset classes – cash, shares, property and businesses face increasingly unknown risks at present. At times like this, what happens? Under the mattress, into “safe” currencies (Euro anyone?), or keep it local? Could we see a flight to Australian property? No currency risk. Some interest rate risk, but that can be mitigated with some smart loan structuring. Probably stay away from NSW, but look to the states with more stable governments but with less exposure to resources – so forget WA, QLD and SA. Tassie and the Vics remain standing. Tassie is a shallow market, which may or may not suit. Vic is probably the best governed of a motley lot, and has an economy driven by other factors. Therefore, theory would suggest Victorian property may be the safe haven during this period of uncertainty, at least until the next NSW state election, and the Federal election. Shares still too fickle given the tax risk and the amount of the index filled by the resources companies, as well as the lack of confidence of foreign investors. Cash under pressure due to increasing inflation and businesses caught in the middle of the uncertainty.

    Does R&W have a Toorak office…..??? 🙂

    BTW – hello to Patricia. Also, disclosures – shares in the usual suspects, real property and business ownership, which when all combined, should see a fairly impartial view of the world!

  • Robbie – a most articulate post and so true. I have been researching this detail for this week’s edition. An interesting note is when the government (I use that term lightly) abandoned FIRB approvals NSW still came in as third choice over the other states.

    Sorry no Toorak office – no Mexicans in our network 🙂

  • Ann says:

    Well said Robbie,

    This is a flawed retrospective tax on our best industry and the ramifications will ripple through the economy, right to tradespeople and coffee shops.

    The word around town is that drop off in small / medium and huge retail business since the Mining Tax announcement has been breathtaking. Six interested rate increases in 7 months has also had an impact. The Euro fallout is there as well.

    The future 2 cents reduction in company tax is nothing compared to the negative sentiment on the street, the falling Australian Dollar and the damage this is doing to investment in Australia. Not to mention the fall in our super funds.

    Now we are seen as a country where the Government can introduce retrospective wildcat taxes and this will destroy our reputation.

    They wont back track now in an election year, and they can’t, they need the revenue to fill budget black holes. What a mess.

    We all laughed when the UK bought in a Poll Tax in 1990, but is that the next low hanging fruit for our spendthrift / wasteful governments?

  • Just read an interesting yet somewhat extreme article “The Rudd Regime This is an absolutely outrageous destruction of the Australian economy by Rudd and his gang of fools, who can be compared to the Mugabe regime as they dismantle the assets that Australians have worked to build over many generations.

    OUCH !!

  • Gordon says:

    Yes, Rob, it seems that the major problem is not that our Dear Leaders have mostly been doing the wrong thing.

    The problem is that it appears that they have no idea at all about what is the right thing.

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