Those bloody MB guys seem to never learn.
As they stare at decades of obvious and well documented action-consequence situations.
As they ignore everything written in even the most basic beginner-level finance books.
Even as they personally pen the headlines that plainly paint the picture….they can’t quite make out the shape of things!
The shape of things that says “interest rates dictate asset price levels for any given level of supply”.
And again up goes the cry of “lower teh rates/print teh money/fiscal stimulus” , moderated only by the same tired, weak bleating of MPLOL.
Those fucken guys! The only minor saving grace is that they seem to have finally given up the “pushing on a string” stupidity.
So, has anything changed recently, or is anything about to change? Let us canvass the landscape:
- Election is coming up
- borders about to be opened (could outflows be greater than inflows??)
- Iron ore is high, but not as high as it has been recently
- covid is no longer a thing (in the minds of most normal people)
- homebuilder supply lump coming online soon
- astrological omens are poor
For mine, the key thing to watch is the dynamics about border reopening. Whether there is a rush out or a rush in will determine the short-to-medium term trajectory.
I can imagine there being a net outflow out in the short term, to be followed by the resumption of Normal patterns (inflows on a sustained basis).
Assuming you consulted mb’s resident astrologist bc, aren’t they always poor.
We don’t really have restrictions on leaving, just on being allowed back in.
The rest of the world seems to have removed restrictions on entry already.
I presume anyone wanting to leave already can.
they are functionally similar…. Imagine there was a rule that if you left your suburb you wouldn’t be allowed back in… very few would leave 😸
That forecast isn’t from bcnich, it’s from Sylvia. I expect it to be much more reliable!
If you are talking macro long term effects, then people who are going to come back really don’t matter much. IMHO anyway.
I’ve never understood those dot graphs Silvia (bcn) posts on twitter. Can someone explain it to me?
What?! Sylvia is Bcn?! Can’t be!
but apparently, they way to read it is that the x-axis is time in months; each fat dot represents a month. (For some reason I think each year has 13 dots… maybe it’s a lunar thing?)
the y-axis is some kind of measure of good/bad. Up is good. Down is bad.
Who is Sylvia?
You’d like her if you met her 😸
Her orbs of wisdom are definitely worth looking into.
god, they are the most infuriating people in the entire world
So grievously wrong for so long, and no acknowledgement that their calls were absolutely awful
Still I’ll be very interested to see where house prices go
Now that MB have given up on the house price falls theory, I think now is probably the time that it is a real possibility
The reason is that they are not very smart. So everything they think is an incredible insight into the market, is already priced in by everyone else.
For me, the issue is that the yields on housing are so poor relative to nearly everything else
So there must be a capital gain for it to be a worthwhile investment
While interest rates can fall, then this will happen
They are similar to bonds (I was laughed at over at embee for suggesting this) – sure buying 10yr at 1.5% seems stupid, until yields fall to 1.25%
However, if we think we are close to the bottom of interest rates (or even if they stay flat), then there is no more capital gains
And therefore housing is a losing and depreciating asset
yes
yes
I’m not quite with you on this. I’d point to two matters:
Absolutely right – housing is very similar to bonds. That’s just how asset pricing works.
No one getting 3% (after costs) where I am
more like <1%
sure it’s shelter but so is a rental (of which there are many to choose from at cheap prices)
it’s particularly stark at the top end
place near me sold for 10m
now rents for 3700/wk
Land tax 100k plus, council rates 10k, maintenance not cheap heritage
now, we all know that rents/costs don’t scale linearly all along the market.
If they did, we could divide by 10, say, and get:
-$1m sale price
-$370/week ($20k/year: 2% gross)
-$10k land tax (1%)
-$1k rates
in reality, rent would be higher and land tax lower (nil for occupiers). This makes the maths quite different, higher gross yield and taking out 1% cost.
I wouldn’t know if you’re numbers are correct. I don’t concern myself with the lives of the lower class
But one would think that the wealthy people buying 10m homes should be sophisticated and savvy financially
So what are they betting on here
😹
Nah, too many other things at play there. At that price level, houses are in large part luxury/conspicuous consumption/lifestyle goods/capital hordes, rather than mere shelter or investments.
And, I surmise, typically not funded by work wages but by business/asset income streams. Probably different gearing levels, too, compared to lower class housing.
well, no
this house is not being used by the owner
it has been rented out
there is no hedonic benefit or status obtained by the owner
There is no bank guarantee above 250k. You get minimal interest.
Bonds have a significant downside potential if rates go up, some are yielding negatively.
Shares have significant risk, especially if you think they are overvalued.
It is a potential destination to escape your current country should it go pear shaped there. I assume it counts for a significant investor visa…
It is far more convenient and secure than a pile of cash in a safe.
Basically it is somewhere to park money relatively risk free.
I also disagree that owning a 10million house has no status value even if you don’t use it personally.
i would have thought houses have equally significant downside potential if interest rates go up
Possibly. I’m not in the position to buy a $10 million house so take that advice accordingly.
It’s also possible that they are hedging across multiple asset classes.
And finally what doesn’t have downside potential if interest rates rise?
cash
up to a point… thereafter it is called hyperinflation
but where do you store 10 million in cash?
This particular dilemma is what makes negative bond yields a thing that is not completely nonsensical.
what about parties with Reus?
Did I tell you about that 10mil house i bought last year – now it’s worth 12… that is sure to lay some grounds for instant copulation
The bottom end is where yields tend to be better
You will do far better from a cash flow perspective buying 30 300k properties than buying 1 for 10 million.
The 10 mill will probably outperform in capital gains on both the way up and down though.
For sure.
Really you’ve entirely missed my point
which is?
People buying 10 million dollar houses most likely are not investing for profit. They clearly have a well established income stream already.
I was planning on doing a post about current economic happenings and what everyone here was predicting but this post touches on it.
We have Evergrande defaulting, some people saying it will be like Lehman brothers and a Chinese recession. While others saying nothing to worry about if you have no direct exposure to Evergrande and CCP to bail out.
US stock market down and ASX down 2.3% today. Someone here a couple of weeks ago said they moved to cash (interest) with their super, Harry maybe? Might be a smart move?
Then we have all the talk about APRA stepping in to cool a runaway in house prices. Lot’s of excited talk among millennials but given what we’ve seen in the past I don’t expect much more than a wet lettuce leaf. Stagnant house prices at best. Which along with tightened lending standards will still do SFA to help millennials buy a house.
I’ve got maybe 15% in cash, maybe 55% in fixed interest and the rest in international.
Generally, whatever I do is a wrong decision, so I’m just leaving it.
I think not having exposure to Australian shares atm isn’t a bad move. Will it go up from here? Who knows but there’s more downside than up. When your Uber driver is giving stock tips it’s probably not the time to buy…
We’re leading up to an election, so obviously “talking” about housing affordability is going to be happening. I expect nothing to change, and we’ll have more empty platitudes, hand wringing and inquiries which won’t lead anywhere.
even if therre is a ‘crash’, what is that going to do. we’re never going to see the holy grail the macroites have been holding out for, price to income ratios in the capital cities dropping to the levels they were prior to the 2000 olympics. it will never happen, at most a ‘crash’ is gonna drop prices maybe to what they were in like 2015, aka unaffordable to unaffordable, who gives a total rats.
i think a lot of the macroites can afford to buy now, its just that theyre delusional that they’re gonna pick up some sweet little terrace in dulwich hill for the price they’d of paid for it in 1996, they’re just holding out for the crash that’ll make it happen.
It will happen if interest rates increase
…which is why they won’t increase.
Can’t ever say never
the fact that MB has categorically said that they won’t go up is enough for me to consider the possibility is still in play at the very least
Not never, sure.
but to cause a crash, they’d have to go up both relatively significantly and relatively quickly. And relatively soon (before incomes can be back-filled).
say 2% higher 2 years from now…. and not 1% higher -gradually- over the next 7….
Here’s a question I would like you answer for me Ms Peachy
All this money that has been “printed” and is currently in circulation – where is it?
Who is holding it?
Someone has to.
We know that money cannot be destroyed except by government surplus, or paying down private debt
and neither of those is happening
It certainly isn’t me, or any other upper middle class people I know.
We have debts and “investments”
It certainly isnt the proles. They have after pay and credit cards
So who DOES HAVE all the trillions of dollars (USD and AUD)?
Perhaps it is the very savvy people who are holding dollars now
What are the implications
my working assumption is that it’s been diffused, so that there aren’t big lumps of it being held by any single entity.
And the mode of diffusion has been in the course of propping up/bidding up assets, so you’re effectively holding some of it (in the form of the unrealised increase in value of your “investments”.
as a simplified example – assume RBA reduces rates and prints money (call it $10b) for buying government bonds. This does a few things:
So perhaps the sellers had $9b of bonds prior to RBA intervention…. But they have now ended up with $10b in cash.
3.. the sellers go and spend their money (which has been grossed up by the RBA). Mostly they would spend on other financial assets (similarly bidding their prices up/yields down)
that’s the diffusion mechanism as I think of it. That’s how the money “ends up” in higher asset prices.
there are other mechanisms as well – eg TFF gave the banks almost-free money to lend. Borrow at ~0%, lend at 2% – nice margin. This margin flows out as higher share prices/dividends/share buybacks (eg CBA $6b buyback), so it ends up with shareholders.
it shouldn’t be lost on anyone that the money also shields people from what would otherwise be losses (ie filling in holes, not just making mounds). Without the intervention maybe the $9b of bonds would have sold for $8b and CBA shares would be $72 rather than $102….
I don’t think that answers the question
The RBA doesn’t “print money”
It prints reserves
and gives them exclusively to commercial banks in exchange for the banks bonds
This does increase the price of bonds for all holders yes
But there is no cash delivered to the sellers (they receive reserves which can’t be used for anything but interbank transfers)
The amount of “money” (for which I would not include reserves) in the system doesn’t change
However, when a bank creates a loan, then “money” is added to the system.
That is immediately transferred to the seller of the asset
There is no off-setting bond sale to drain the money from the system
(only a proportionately very small amount to maintain capital ratios, maybe a few % I don’t know exactly)
If private debt is increasing, then the amount of money in circulation (not tied up in bonds as would be the case for government deficit) is also increasing
Who is holding it?
It cannot leave the australian banking system (except a very small amount in notes and coins)
We know that most people have absolutely no savings
Is it really all in offset accounts? I find it hard to believe but I don’t know. Most people are leveraged to the maximum, and wouldn’t do something so silly as leaving a large amount in an offset account when interest rates are 2%
There must be big players with very very large amounts of cash in accounts
I think that you’re thinking of the system in the USA.
Australian banks don’t have “reserves” like US banks have reserves.
for sure they do
how do they transact with each other otherwise?
how does the RBA set overnight rates?
how does RBA enact QE?
all these things require a reserve banking system
The banks have accounts at the RBA, but these are not “reserves”.
Not in the sense that this word appears in the phrase “fractional reserve banking”.
how do they differ then
https://www.rba.gov.au/education/resources/explainers/unconventional-monetary-policy.html
they just call them “exchange settlement balances”
but they are functionally the same
the point is that the RBA is not “printing money”
In outline the US system works like this:
in EZFKA:
both systems result in banks being run in a way that protects depositors from wearing all of the bank’s lending risk.
^”whatever it likes” doesn’t actually mean whatever it likes. There are also rules around liquidity etc etc etc
^^15% is crude. Reality is not as high as this because there are also other types of capital that get counted (in addition to real shareholder equity) and also games with risk weighted assets
Ps, at your link, RBA claim (cheekily) that they don’t physically print banknotes for asset purchases (peachy highlighting). As if that fucking matters.
they definitely do create new money in order to pay for the assets (blue highlighting)
they dont create money – they create ES balances
what is the underlying point that you’re trying to make?
that ES balances are different to AUD and so the systems are disconnected (eg ES tokens go between banks and RBA; separately AUD tokens circulate between banks and everyone else)?
would it be different if physical AUD notes and coins were used between RBA and the banks?
Yes ES balances are just tokens that can only be swapped between commercial banks
they can’t be spent in the real economy
they are only used to settle interbank transactions
I’m not completely au fait with the way that ES plumbing works, so have invited pfh here to comment.
my intuition is that even if the ES balances are not fungible with regular AUD balances (nor convertible), there is still enough communication between ES balances and AUD balances.
I will consider this some more & perhaps Pfh will chime in.
they are not convertible
but yes, shifts in AUD balances at commercial banks induce shifts in reserve/ES balances at the RBA
they are a parallel system
We have been over this many many times, but QE is most definitely not money printing
it DOES induce rises in asset prices though (because it pushes down bond rates and interest rates)
I accept that they’re not converted in the ordinary course, but at least theoretically they are convertible, I expect.
afterall, ES account balances are RBA’s liabilities. RBA could print up some pineapples and settle those liabilities that way.
the two systems are linked because the same assets (typically bonds, presumably also fx) can be traded both for AUD tokens and ES tokens.
The convention seems to be that 1ES token is equal to 1AUD token and everyone acts accordingly.
Well, if the RBA decided to go ahead and settle its the ES liabilities in pineapples, then it would be, right?
and if everyone acts like this is what happened, then it’s just as good as having happened.
like, if everyone treated you like the owner of that $10m house down the street for all purposes (you collected the rent, the land tax and rates notices came to you, you could sell it and collect the proceeds or bequeath it), it wouldn’t really matter that you never bought that house, right?
The reserves that the rba gives the banks in exchange for their bonds are not money and cannot leave the reserve system
just because bonds can ALSO be purchased with real money does not mean that the rba is printing money
but yes by removing bonds from the market, the rba causes the price of bonds (in real dollars) to increase (all other things, ie demand, being equal)
The reserves are RBA liabilities. Banknotes are also RBA liabilities. I think that are effectively the same thing, notwithstanding that one is not routinely converted into the other.
but even this is not pivotal. as I say – as long as everyone carries as if they’re convertible it should be enough, because it can move normal-AUD transactions.
It kind of does. Let’s assume ES-tokens can’t be converted to normal-AUD.
Now, Say RBA declares it will buy bond X (face value $1,000) from banks for $2,000 (ES-tokens) under its Cash-for-crap facility.
banks will obviously buy up every available bond X for prices approaching $2,000 in normal-AUD and on-sell to RBA for ES account tokens, for risk-free profit.
assume rba then holds to maturity.
for every bond thus bought by RBA, $1,000 normal-AUD has been created.
If RBA paid with freshly printed pineapples (ie normal-AUD) instead of ES-tokens the only difference would be that perhaps for each bond $2,000 would have been created, rather than $1,000. but even if that’s right, it’s immaterial.
Why would banks want to accumulate reserves ?
what does it get them ?
it isn’t a profit
reserves can’t be distributed to share holders
but if you want to front run the rba there’s nothing to stop any private individual from buying bonds too
let’s continue with our assumption that reserves aren’t convertible, for the sake of argument.
its a distinction without difference.
for all accounting purposes they are exactly the same as AUDs.
as for distributions – well banks are in the business of always growing balance sheets, not shrinking. But even if they do want to distribute, that’s fine as well:
Take CBA for example & assume that they wanted to distribute that $6b buyback but jsut didn’t have the AUD (😂)and only had ES tokens
no problem, they’d just borrow $6b AUD from other banks for the day, to make the payment. And they’d settle the loan up by transferring to those banks $6b of ES tokens in the RBA’s settlement system overnight. 👍🏿
I’m not really sure what you are suggesting here
CBA will “borrow” $6bn of ES/reserves from NAB
and then convert that into $100 bills via the RBA
Then mail those $100 bills out to its shareholders?
Several problems with this
-absolutely the RBA will not allow that. The banks are heavily regulated believe it or not, and there are very strict rules about what they can do with their ES/reserves
-How will CBA get the reserves to pay NAB back? Where will the interest come from? Why would they do this?
-Why would NAB “lend” CBA ES/reserves that it knows it is going to throw away to shareholders? This makes CBA a counterparty risk in any future interbank transactions because it has dubious levels of reserves
-why would NAB wait for QE to do this? Why not just sell its bonds (before they get swapped for reserves) and then distribute the money to shareholders? QE is an asset swap – reserves for bonds. The banks overall position does not change as a result of this manouevre
nah… I’m responding to what I interpreted to be your objection that banks wouldn’t want to accumulate reserves, because reserves aren’t real dollars.
and I was explaining how the bank -having accumulated the reserves- can treat the reserves as real dollars. For all purposes – capital, balance sheet, profit, liquidity, making distributions to shareholders.
the last bit was just about the mechanics of making distributions if somehow the bank found itself only with reserves and no real dollars (which is ludicrous in the first place)
ok, but whats stopping them from treating their already held bonds the same way?
My point is that it was only ever an asset swap
The bank gave up bonds, and received reserves in return
If you are suggesting all the ways in which the banks can get reserves out into the real economy, then why couldn’t they do the same thing with their erstwhile bonds
It just proves that QE isn’t money printing, but it is an asset price pump and it spurs borrowing
this, by the way, reads to me like you’re reframing the bond purchasing in the terms of Zeno’s paradox about Achilles (how he can never get to the finish line).
in reality, we know it’s not a neutral “asset swap”. The price of the bond purchased goes up, yielding someone a profit and the seller of the bond also then ploughs that money into something else, creating profits for someone else.
this happens. And it’s caused by the RBA action. And the RBA doesn’t expend any resources in making this happen. So money is created, whether you want to label it an asset swap or whatever doesn’t really matter.
no, that’s not correct. you are ignoring the subtleties and nuances which matter
Wealth is created (by asset price rises)
That doesn’t correspond to money. And if everyone tries to cash out their newly found “wealth” they will find that there isn’t enough money available to do so
money is not directly created
BUT, money MAY be created by spurring lending (but that also comes with a corresponding debt/liability)
anyway, this really gets at what I was driving at before
QE means the reserve bank is gathering real assets,
while the private sector is largely gathering reserves or cash
What has gone up in value? The real assets
What has gone down in value? The cash/reserves
Who is benefiting?
Once the reserve bank has gathered as many real assets as it can, wouldn’t the best way to enrich the private sector be to reduce the value of the real assets (and the central bank takes the nominal loss on its limitless balance sheet), while cash suddenly becomes valuable again?
Who is holding all this cash/deposits ?
this is not correct
there is no longer a reserve requirement in the US, as of march 2020
https://www.federalreserve.gov/monetarypolicy/reservereq.htm
In any case it made no difference, because the banks were never reserve constrained
They could always get more from the fed or from other banks (hence interest rates)
holy fucken shit, is that true? How did I miss that?!
you missed it because its irrelevant
banks have never been functionally constrained by lack of reserves
it was an irrelevant rule, thats why they scrapped it
The people selling bonds? The banks in the Reserve bank as capital?
The emm bee story is that savings are at an all time high, and debt has been paid down significantly, so a large chunk of it has probably gone there. I have certainly paid down a heap of debt and have a big chunk of cash reserve compared to a few years ago.
of course – savings is at an all time high, because private debt is at an all time high
that is how it works
one person’s debt is another person’s deposit
the question is: who is holding the debt, and who is holding the deposit
It MAY happen. Do you want to be living here if it does is the relevant question. It will make the 91 recession look like boomtimes if it gets that bad.
yes, i’d take it over the current clusterfuck
maybe you would want to be living here. It’s all relative, remember.
say you are on Centrelink anyway, why would you give a shit if another 10% of people become unemployed?
or if you’re in secure but not highly-paid employment (schoolteacher, say)… you’d be much better off.
or if this were a global phenomenon – where else would you go?
Well, if the government cut centrelink by 50% because recipients tripled you might care.
If 80% of all businesses fail and you can’t buy anything with your schoolteacher salary you might care.
If the AUD collapses in value and all imports end up 10-50 times more expensive without any wage inflation you might care.
It all depends on how you get to that point, but none of the realistic ones I can think of seem like a great place to be.
Even if it is not a global phenomenon I suspect once it gets going it will likely have removed the average persons ability to go somewhere else anyway as a side effect of trashing the entire Australian economy.
Yeh, I agree with all that.
In other news Glady B has resigned because corruption investigation. Wonder if it had anything to do with Jordy lol
Slut
…
it should have been dan
The Turkish slut is gone. Suicide by cop much like Porter.
They’ll get someone in there who can open the borders quicker!!!
Who the fuck cares tbh? They’ll just replace her with the next Davos appointment and it will be back to business as usual, after all the labor supporters have had their circle jerk on Twitter.
That is the very very strong likelihood.
Everyone just forgot the Christian Porter scandal lol…
Delete.
It is not just housing, it is most assets. Take CBA for example, DLS says it is overvalued whilst ignoring strong credit growth, TFF funding share buybacks, etc. There is a reason why DLS is a former gold trader.
Come on now. Their investment skills are so good they are running a blog begging people to pay them a few hundred a year instead of living off the enormous profits from their previous investment decisions.
On DLS. It amazes me that he correctly predicted bond prices rising but couldn’t join the dots on property being another asset linked to interest rates.
On rising interest rates. All central banks have indicated they will let inflation run before raising rates. It essentially means wait for wages to rise adequately to cope with increased debt repayments before raising interest rates. Of course that only works if you simultaneously tighten lending criteria. Is it coincidence that MPlol discussions are centre stage now?… maybe…
If/when we do get wages rising, and interest rates rising soon after, then asset prices will fall in real terms (relative to wages) but not necessarily nominally. The subtle difference is people in debt will not go into negative equity so it will be tolerated.
The end of the housing affordability crisis will lead us into a retirement crisis as all assets (family home, shares in superannuation) fall relative to the cost of living. Which is why is still have my doubts it will ever happen.
It’s not as clear cut as you are saying. Falling real values make a huge difference for someone who owns the asset outright.
For someone who bought with a loan a nominal increase is still a gain even if it decreases in real terms as when you sell the asset you end up where you started + nominal increase in value as a profit, or your payments to hold the asset fall as a percentage of your income.
What matters is how the financing costs compare to the nominal increases.
The lenders are the ones likely to fair worst in this scenario as their loans get paid back in money worth less in real terms.
I didn’t want to go into too much detail and cover every scenario. But yes, pretty much if you can keep up with repayments then much like the baby boomers in the 80s you end up with a partial debt jubilee by way of paying the mortgage off in a fraction of the time… which will ironically turn all the people who hate baby boomers into the same greedy fuckers that will use the opportunity to buy multiple houses and screw over the next generations in the same way.
I don’t agree that lenders (as in banks) will get screwed over. I had this discussion with Peachy a few weeks ago. The balance sheet will expand as wages rises, and as rates rise they also take a bigger clip of the ticket. . i.e. larger difference between mortgage rate and funding cost
Depositors on the other hand will cop a reaming on their savings offset by cheaper housing relative to wages.
to be fair to DLS, he called it for all the wrong reasons (ie iron ore $30)
even when he’s right its by accident
be long real estate….still