Could NZ house values drop by 80%?

Past data shows they sure could when priced in gold.

As usual there’s plenty of discussion in the mainstream media about where house prices are going. Given New Zealanders predilection for property it’s no surprise. However the prices used are always and only the nominal NZ dollar prices. And as discussed in this previous article, The Current Stage of the New Zealand Real Estate Market, it’s important to take into account money supply inflation and its impact on the buying power of the dollars you hold, when looking at historical returns.

So we’ve gone to the trouble of plotting NZ house prices against NZ gold prices to hopefully show house prices in a new light….

The below graph depicts the commonly publicised median house price (orange line and right axis). But also the house price to gold price ratio (black line and left axis) since 1962. This is calculated by dividing the median house price by the monthly gold price in NZ dollars. We then arrive at the number of ounces of gold required to purchase the NZ median house.

As it’s difficult to get long range median house prices, the prices were calculated using RBNZ house price index data and extrapolated backwards using the current median house price. Note: the index is for detached houses only. So while not perfect it should give a general indication of the trend in NZ house prices.

We couldn’t find NZ house price data back to the 1930s and earlier like the US and UK graphs care of bullionvault below. (The accompanying articles for the US and UK graphs on bullionvault can be found here and here.)

And while the UK and US data refers to average (not median) house prices, ‎we think we can still use the data to draw some broad comparisons.  So ‎please forgive our mixing apples with oranges!  Hopefully the resulting fruit ‎salad still makes sense!

Comparing the UK (above) and US (below), notice how towards the end of the 2 biggest recessions of the previous century – one, the deflationary depression of the 1930’s and the other the inflationary 1970’s – the ratios both dipped below 100 oz to purchase the average house.

While our NZ data doesn’t go back that far, notice how similar the NZ graph is to the UK data since 1962. Both peaked around 1970 at near to 300 ounces. Both then fell to below 100 in 1980 and climbed steadily with a bit of a stumble in the 90’s, to peak in the mid 2000’s.

So we reckon it’s probably reasonable to assume that the trend was similar during the 1930’s depression era here too.

Now, referring back to the NZ graph (reproduced again below for ease of comparison), note how at the end of the 70’s the housing/gold ratio drops down to almost 50 oz of gold to buy the median house!

If history repeats and the trends in the US and UK are similar to NZ, could we in fact be heading down close to 50 ounces again by the end of the current financial crisis?

Also worth noting is that while house prices in NZD terms peaked in 2007, priced in gold they had already topped out in 2005. So, at first glance it may seem like you’ve “missed the boat” if you didn’t sell housing and buy gold in 2005 when the top was in at 500 oz. With the ratio currently standing at about 250 oz you would have been able to buy back the same house now and still have 250 ounces left over. Or put another way you could now buy 2 houses. That is, twice the buying power in real estate by holding gold for 4 years.

However if we consider that in the 70’s the ratio bottomed at 50, this is a further 80% drop in the ratio from today’s value!

Key point: It’s the proportional drop that is the key factor.

So an average house sold today would net you 250 oz of gold. If the past trends both here and in the US and UK hold true, we may see the ratio drop below 100 and here in NZ maybe even bottoming out as low as 50, by the end of this financial crisis. That would mean you could buy back the same house for 50 ounces of gold and still have 200 ounces left over. Or using the same analogy as above you could now buy 5 houses! Even if the ratio only dropped to 100 ounces you could still buy the same house back twice and have 50 oz of gold left over.

Bear in mind that this drop against gold could happen without house prices actually falling in nominal NZ dollar terms as well but merely just through expanded money supply holding house prices up – i.e. the kiwi dollar being devalued. For example, for the ratio to bottom out at 50 the median house price could remain at the current price of $360,000 and gold could rise to $7200NZ (i.e. $360,000 / 50 = $7200). Notice how in the 70’s housing actually went up for the whole decade in dollar terms (orange line) while falling for the decade in gold terms (black line).

Or you could have gold holding steady and nominal house prices dropping markedly. With NZ gold currently at $1,585, the current median house price would have to drop to $158,500 to return just to 100 ounces! Ouch!

But perhaps the more likely scenario is to have a combination of the nominal dollar price of housing falling and gold rising. For example, gold at $3000NZ and the NZ median house price dropping to $300,000 would result in a 100 oz ratio.

Anyway, if history at least rhymes a little bit, holding gold should result in improved buying power when it comes to real estate in the coming years, whichever of the above scenarios play out.

So to summarise:

1. When priced in gold the NZ median house peaked in 2005 at 500 ounces.
2. Since then it has fallen 50%
3. UK and US data shows the ratio dipped below 100 ounces after the 1930’s depression and 1970’s inflation.
4. Past NZ data shows the ratio reached a low at the end of the inflationary 1970’s of just over 50 ounces. This is a further 80% drop from today’s ratio of 250 ounces.
5. It might be hard to time exactly but when houses priced in gold are below 100 ounces it might be a good time to think about exchanging some gold for property.
6. Hint: To do step 5 you need to have some gold!

Note: We’ll be updating this data every few months and publishing the changes so if you want to stay informed about when NZ housing will again be good vaule, then sign up for our email article updates in the box at the top right of this page.

Gold Kiosks evidence of gold bubble in NZ?‎

From the Sunday Star Times comes this article outlining how Gold Buyers Kiosks are popping up in New Zealand Malls. 

Gold kiosks panned for poor prices

KIOSKS HAVE sprung up in shopping malls all over the country offering to buy your unwanted gold as US dollar prices soar, but they may not always offer the best deal for those tempted to sell.

GoldBuyers New Zealand, a Kiwi company part-owned by Aussie firm GoldBuyers, has opened kiosks in 14 malls throughout the country with a further five about to open, and is seeking to take advantage of a big spike in the gold price which is tempting many people to cash up their old gold.

Gold prices have spiked to $US1112 ($1587) a troy ounce from around $US850 ($1545) a year ago as speculators and investors have sold up shares and other assets to buy gold, which has the reputation as a safe haven in periods of financial crisis.

That has suddenly made it appear a valuable commodity and enabled gold buyers to offer more attractive prices for unwanted family jewellery.

But those selling their gold need to realise the cost of recycling their gold, and the margin the gold-buyer takes, means they are likely to get less than half the value of the gold content of their unwanted bracelets, rings, earrings and necklaces.

And, judging by a mystery shop by the Sunday Star-Times, the mall is one of the worst places to go to sell gold…

The article also mentions that the Goldbuyers company is looking for “reps to hold goldbuying parties in their homes in return for a slice of the profits.”

Some might argue that this is evidence of a gold bubble forming.  However we would counter that to the contrary this shows average Joe or Joanne are more likely sellers of gold than buyers at current prices.

When kiosks selling gold coins to the masses arrive in Westfield Shopping Malls then we’ll take notice and that may be the time to consider gold might be topping.  Until then holders rather than sellers we will be.

 

America—A Country of Serfs Ruled By Oligarchs

This week in our musings, we have some thoughts of our own – and thoughts of others that we have found interesting….

 

Some thoughts on China…

Marc Faber – If the Chinese were to develop a taste for coffee, to the extent that, on average, every adult were to drink one cup of coffee per day,  China would consume the entire world’s coffee crop….

The Chinese government has announced that it has plans to build cities at a rate that will house a population the size of Australia’s every year for the next 15 years…. Hmm, doesn’t that have some implications for ongoing demand for raw materials?

Last year, for the first time ever, Chinese bought more vehicles than Americans… More generally, last year the developing world bought more vehicles than the developed world… Doesn’t that imply a continuing increased thirst for oil?? Perhaps also, it’s part of the reason that, in an economic environment of the greatest downturn (in the Western world at least) since the 1930s, the oil price is once again approaching $80 per barrel… See also the article on peak oil below.

Chinese citizens, in total, now own more cellphones than US citizens…

James Dines – Rare earths are obscure elements that just happen to be essential materials for modern technology. Large scale modern windmills, for example, require considerable amounts. China controls over 96% of the world’s production of rare earths… Oh dear, Mr Obama – don’t you think that instead of waging expensive foreign wars and killing over 2 million Afghans since the war began, it might be better to spend the dollars you don’t have but insist on spending anyway on securing supplies of these essential materials?  Oh, I forgot, I suppose you do have the option at any time of declaring war on China…

Last but not least, Chinese citizens are being encouraged by their government to buy gold and silver. And, of course, if you are a Chinese citizen, Government “encouragement” has to be taken seriously…

Here are our subjects this week. 

·         Government debt, private sector non-lending – from “The Automatic Earth” blog

·         Defaults, by Marc Faber

·         Peak Oil reaches mainstream media

·         America—A Country of Serfs Ruled By Oligarchs

Government debt, private sector non-lending – from “The Automatic Earth” blog 

February 19 2010: A thousand miles behind

Ilargi: When on any given morning you see consecutive headlines that read

1. “US bank lending falls at the fastest rate in history”,
2. “Lending to British businesses falls at record pace”,
3. “UK mortgage lending falls to 10-year low “,
4. ”Shock as British deficit equals that of Greece” and
5. “Britain posts first deficit for January since records began”

is your first thought that the economic recovery is nicely on pace? If so, perhaps a Tiger Woods press-op is more your thing.

How about we add this one:

“Fed raises interest rate on emergency loans to banks”

Think perhaps that would switch on the light?

See, what those headlines tell us is that the spigots on the private sector are not just closed, they’re still tightening ever more. While at the same time, government debt keeps rising. There can be only one conclusion. The only thing that lets our economies continue to exude a semblance of normality is the dwindling rests of our own remaining wealth, and we are not only not adding any, we are spending what is left, and fast. Our governments, eager to stay in power and remain wealthy, keep us thinking we’re doing just fine, borrow enormous amounts of money in world markets that is not used for any sort of recovery, but instead to pay for the debts of a small group of people who gained access to our full faith and credit by buying the representatives we elect. And once the Federal Reserve starts raising interest rates, while simultaneously drawing down its purchases of Treasuries and mortgage-backed securities, we will come to understand that we have been living in a soapbubble of our own making, built at the expense of many trillions of dollars and that this bubble is about to pop. That is true in the US as it is in the UK, and all the attention presently squandered on Greece and Ireland is but a trick to make us look the other way for a little bit longer, until everything of value has been stripped from around us and we can wake up one day to find all support and stimulus measures vanished into thin air, a bad moon rising, and a cold wind blowing through the cracks of our unheated MacMansions, with no gas stations able to supply us with the fuel to get out and get away. That’s what these headlines say. With all the money thrown at the issues, everything keeps reaching record lows. And all our governments can think of is to spend more. Until they don’t. One year ago, stock markets had almost reached their then low. The amount of public funds spend since to lift those markets are truly mind-boggling, and their effect now, predictably, turns out to be short-lived. The rich have gotten richer, and the poor have gotten an awful lot poorer in that year. They just don’t know it yet, or at least not the full and true extent, but once the numbers are crunched on government and central bank purchases of lenders’ defunct mortgage loans and their own sovereign debt (how’s that for a Ponzi scheme?), you will know just how destitute you’ve become. And it’ll be too late to do anything about it. You’ll have let yourself be fooled for too long. And, to use an ancient metaphor, find yourself one too many mornings and a thousand miles behind. Or is that a thousand debt payments?  

 

Defaults, by Marc Faber 

 I Think In The Next 10 Years, We Will Have A Lot Of Defaults 

What you find in the world is an unusual situation. International reserves have grown from 1 trillion dollars in 1996 to over 8 trillion dollars at the present time. Most of these reserves are held by emerging economies like China, India, Russia, Brazil and so forth. Over 70% of international reserves are in Asia including Japan.

So, what you have is basically in emerging economies, they have relatively low debt to GDP ratios and in most emerging economies their mortgage market has hardly developed. People buy homes for cash. There is no mortgage market. Whereas in the developed world, what we have is an overleveraged consumer and governments that have liabilities that they cannot meet in the long run. So something will break. And I think in the next 10 years, we will have a lot of defaults. Now before the United States, the UK or Eurozone members default on their debt obligations, they will print money. And then we will get very high inflation rates. Marc Faber is an international investor known for his uncanny predictions of the stock market and futures markets around the world. Dr. Doom also trades currencies and commodity futures like Gold and Oil.

  

Peak Oil reaches mainstream media

On our site, we have references to the coming commodity crunch, in particular, we look at the work of Chris Martenson.  To find out in depth about the peak oil crisis, we highly recommend the web site www.theoildrum.com  What is interesting at the present time is that this idea, which has been almost entirely pooh-poohed by the mainstream media, is gradually gaining traction in that same forum. For example, from Ambrose Evans-Pritchard, of the Telegraph, comes this piece. 

 Barclays and Bank of America see looming oil crunch

For oil markets, it as if the Great Recession never happened. Surging demand in China, India and the Middle East is making up for decline in the debt-crippled West, ensuring another global crunch within three or four years.

By Ambrose Evans-Pritchard, International Business Editor Bank of America and Barclays Capital, two leading oil traders, have told clients to brace for crude above $100 (£64) a barrel by next year, before it pushes relentlessly higher over the decade. This is a stark contrast from recessions in the 1980s and 1990s, when it took years to work off excess drilling capacity built in the boom.

“Oil has the potential to flirt with $100 this year. We forecast an average price of $137 by 2015,” said Amrita Sen, an oil expert at BarCap. The price has doubled to $78 in the last year.

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Why would climate change chief defect to business?

“The groundwork for the next sustained step up in oil prices is now almost complete. Global spare capacity is likely to be reduced to low levels within a relatively short time. The global economic crisis has postponed, but not cancelled, a crunch which would otherwise be starting to bite now,” said Barclays.

Francisco Blanch, from Bank of America Merrill Lynch, said crude may touch $105 next year, with $150 in sight by 2014. “Approximately 1.7bn consumers in emerging markets with a per capita income of $5,000 to $20,000 are eagerly waiting to buy cars, air-conditioning units, or white goods,” he said.

China has overtaken the US as the world’s top car market. Mr Blanch expects oil demand to rise by a further 2.8m barrels per day (bpd) in China and 2.5m bpd in India by 2015, when two giants will be absorbing the lion’s share of Gulf output. Consumption in the West has already peaked and will fall each year as populations shrink and we waste less, but the West no longer sets the price. Global use will increase by 8.8m bpd to 95m bpd.

Supply is scarce. Sir Richard Branson warned this month that the world faces ‘peak oil’ within five years. “Don’t let the oil crunch catch us out in the way that the credit crunch did,” he said.

Mr Blanch said output from non-OPEC states is falling by 4.9pc each year, despite Russia’s reserves. Saudi Arabia and the Emirates can plug a quarter of the gap, but global spare capacity must soon drop to wafer-thin levels – leaving us vulnerable to the sort of “super-spike” seen in 2008. The wildcard is whether Iraq can quadruple output to Saudi levels this decade, a target dismissed by most analysts as pie-in-the-sky.

Painfully high prices are needed to unlock fresh supplies as reserves are depleted in the North Sea and the Gulf of Mexico. Deep-water rigs off Brazil are costly and require drilling far below the seabed. Canadian oil sands and US biofuels have break-even costs near $70. While the US, UK, and the Far East are turning to nuclear power, it takes a decade to build reactors. “peak uranium” lurks in any case.

The oil spike brought the global economy to a shuddering halt in 2008. This time the crunch may hit before the West has fully recovered. Whatever happens, the US, Europe and Japan will soon transfer a chunk of their wealth to the petro-powers. It is a new world order.  

 

America—A Country of Serfs Ruled By Oligarchs

By Dr Paul Craig Roberts – bio at end.

(We have featured articles by Dr Roberts in these pages before – Ed.) 

The media has headlined good economic news: fourth quarter GDP growth of 5.7 percent (”the recession is over”), Jan. retail sales up, productivity up in 4th quarter, the dollar is gaining strength. Is any of it true? What does it mean?

The 5.7 percent growth figure is a guesstimate made in advance of the release of the U.S. trade deficit statistic. It assumed that the U.S. trade deficit would show an improvement. When the trade deficit was released a few days later, it showed a deterioration, knocking the 5.7 percent growth figure down to 4.6 percent. Much of the remaining GDP growth consists of inventory accumulation.

More than a fourth of the reported gain in Jan. retail sales is due to higher gasoline and food prices. Questionable seasonal adjustments account for the rest.

Productivity was up, because labor costs fell 4.4 percent in the fourth quarter, the fourth successive decline. Initial claims for jobless benefits rose. Productivity increases that do not translate into wage gains cannot drive the consumer economy.

Housing is still under pressure, and commercial real estate is about to become a big problem.

The dollar’s gains are not due to inherent strengths. The dollar is gaining because government deficits in Greece and other EU countries are causing the dollar carry trade to unwind. America’s low interest rates made it profitable for investors and speculators to borrow dollars and use them to buy overseas bonds paying higher interest, such as Greek, Spanish and Portuguese bonds denominated in euros. The deficit troubles in these countries have caused investors and speculators to sell the bonds and convert the euros back into dollars in order to pay off their dollar loans. This unwinding temporarily raises the demand for dollars and boosts the dollar’s exchange value.

The problems of the American economy are too great to be reached by traditional policies. Large numbers of middle class American jobs have been moved offshore: manufacturing, industrial and professional service jobs. When the jobs are moved offshore, consumer incomes and U.S. GDP go with them. So many jobs have been moved abroad that there has been no growth in U.S. real incomes in the 21st century, except for the incomes of the super rich who collect multi-million dollar bonuses for moving U.S. jobs offshore.

Without growth in consumer incomes, the economy can go nowhere. Washington policymakers substituted debt growth for income growth. Instead of growing richer, consumers grew more indebted. Federal Reserve chairman Alan Greenspan accomplished this with his low interest rate policy, which drove up housing prices, producing home equity that consumers could tap and spend by refinancing their homes.

Unable to maintain their accustomed living standards with income alone, Americans spent their equity in their homes and ran up credit card debts, maxing out credit cards in anticipation that rising asset prices would cover the debts. When the bubble burst, the debts strangled consumer demand, and the economy died.

As I write about the economic hardships created for Americans by Wall Street and corporate greed and by indifferent and bribed political representatives, I get many letters from former middle class families who are being driven into penury. Here is one recently arrived:

“Thank you for your continued truthful commentary on the ‘New Economy.’ My husband and I could be its poster children. Nine years ago when we married, we were both working good paying, secure jobs in the semiconductor manufacturing sector. Our combined income topped $100,000 a year. We were living the dream. Then the nightmare began. I lost my job in the great tech bubble of 2003, and decided to leave the labor force to care for our infant son. Fine, we tightened the belt. Then we started getting squeezed. Expenses rose, we downsized, yet my husband’s job stagnated. After several years of no pay raises, he finally lost his job a year and a half ago. But he didn’t just lose a job, he lost a career. The semiconductor industry is virtually gone here in Arizona. Three months later, my husband, with a technical degree and 20-plus years of solid work experience, received one job offer for an entry level corrections officer. He had to take it, at an almost 40 percent reduction in pay. Bankruptcy followed when our savings were depleted. We lost our house, a car, and any assets we had left. His salary last year, less than $40,000, to support a family of four. A year and a half later, we are still struggling to get by. I can’t find a job that would cover the cost of daycare. We are stuck. Every jump in gas and food prices hits us hard. Without help from my family, we wouldn’t have made it. So, I could tell you just how that ‘New Economy’ has worked for us, but I’d really rather not use that kind of language.”

Policymakers who are banking on stimulus programs are thinking in terms of an economy that no longer exists. Post-war U.S. recessions and recoveries followed Federal Reserve policy. When the economy heated up and inflation became a problem, the Federal Reserve would raise interest rates and reduce the growth of money and credit. Sales would fall. Inventories would build up. Companies would lay off workers.

Inflation cooled, and unemployment became the problem. Then the Federal Reserve would reverse course. Interest rates would fall, and money and credit would expand. As the jobs were still there, the work force would be called back, and the process would continue.

It is a different situation today. Layoffs result from the jobs being moved offshore and from corporations replacing their domestic work forces with foreigners brought in on H-1B, L-1 and other work visas. The U.S. labor force is being separated from the incomes associated with the goods and services that it consumes. With the rise of offshoring, layoffs are not only due to restrictive monetary policy and inventory buildup. They are also the result of the substitution of cheaper foreign labor for U.S. labor by American corporations. Americans cannot be called back to work to jobs that have been moved abroad. In the New Economy, layoffs can continue despite low interest rates and government stimulus programs.

To the extent that monetary and fiscal policy can stimulate U.S. consumer demand, much of the demand flows to the goods and services that are produced offshore for U.S. markets. China, for example, benefits from the stimulation of U.S. consumer demand. The rise in China’s GDP is financed by a rise in the U.S. public debt burden.

Another barrier to the success of stimulus programs is the high debt levels of Americans. The banks are being criticized for a failure to lend, but much of the problem is that there are no consumers to whom to lend. Most Americans already have more debt than they can handle.

Hapless Americans, unrepresented and betrayed, are in store for a greater crisis to come. President Bush’s war deficits were financed by America’s trade deficit. China, Japan, and OPEC, with whom the U.S. runs trade deficits, used their trade surpluses to purchase U.S. Treasury debt, thus financing the U.S. government budget deficit.

The problem now is that the U.S. budget deficits have suddenly grown immensely from wars, bankster bailouts, jobs stimulus programs, and lower tax revenues as a result of the serious recession. Budget deficits are now three times the size of the trade deficit. Thus, the surpluses of China, Japan, and OPEC are insufficient to take the newly issued U.S. government debt off the market.

If the Treasury’s bonds can’t be sold to investors, pension funds, banks, and foreign governments, the Federal Reserve will have to purchase them by creating new money. When the rest of the world realizes the inflationary implications, the US dollar will lose its reserve currency role. When that happens Americans will experience a large economic shock as their living standards take another big hit.

America is on its way to becoming a country of serfs ruled by oligarchs.

 

Paul Craig Roberts [email him] was Assistant Secretary of the Treasury during President Reagan’s first term.  He was Associate Editor of the Wall Street Journal.  He has held numerous academic appointments, including the William E. Simon Chair, Center for Strategic and International Studies, Georgetown University, and Senior Research Fellow, Hoover Institution, Stanford University. He was awarded the Legion of Honor by French President Francois Mitterrand. He is the author of Supply-Side Revolution : An Insider’s Account of Policymaking in Washington;  Alienation and the Soviet Economy and Meltdown: Inside the Soviet Economy, and is the co-author with Lawrence M. Stratton of The Tyranny of Good Intentions : How Prosecutors and Bureaucrats Are Trampling the Constitution in the Name of Justice. Click here for Peter Brimelow’s Forbes Magazine interview with Roberts about the epidemic of prosecutorial misconduct. His latest book, How The Economy Was Lost , has just been published by CounterPunch/AK Press.

Jim Sinclair: Greece is merely the first in a chain of sovereign defaults

This week in our musings, we have some thoughts of our own – and thoughts of others that we have found interesting….

So you’re wondering if gold’s in a bubble?

One current point of interest is investing legend John Paulson’s recent establishment of a gold fund. Several commentators have pointed out that although he has put in $150 million of his own money, he has managed to raise only $90 million so far from other investors. They see this as a negative indicator of the status of gold as an investment.

WE say it’s great news!! It means that the mainstream has a long way to go - how mainstream commentators can argue that gold is in a bubble is beyond me. If Paulson had started a tech fund in 1999, he would have raised $100 billion in a heartbeat, as Fred Hickey of the HighTech Strategist pointed out on Financial Sense Newshour this week. Now, that’s what a bubble looks like, folks!

Diamonds are forever…. This week Eric King interviewed Pierre Lassonde again. We cover the interview in greater depth below, but one of Pierre’s stand-out comments was the following. Eric asked Pierre how he had figured out the growth of the diamond market, and his answer was: “Eric, it’s very simple. So long as there are women on this planet, diamonds are gonna be worth a lot of money”.

And then, there’s that rapidly increasing number of wealthy Chinese ladies….. You think they’re any different?

Here are our subjects this week.

·         Global debt – deflationary collapse or inflationary depression or both?

·         Pierre Lassonde on the Gold Market

·         The legendary Mr Gold, Jim Sinclair, talks to Eric King

 

Global Debt: Two possible paths with the same endpoint

From Earthblog news we have the following essay by Craig Harris. Here is another author who sees the crippling effect of ever increasing debt.

As we move forward into 2010, it is becoming increasingly apparent to many observers that the financial breakdown which started in 2008 is by no means over.  We are seeing increasing investor concerns regarding the solvency of not just individual corporations, but entire countries. In 2009 Iceland went bankrupt and in 2010 concerns are emerging regarding Greece, Spain and spreading across all of Europe. The long term viability of the Euro is even being called into question as I write this essay today.  

What we are seeing is the result of an ever increasing and now unpayable amount of debt which is spreading like a terminal cancer across the entire western world. There have been many fiat currency systems devised throughout history, and they all have one thing in common. They all eventually went bust, because it is human nature to want something for nothing and spend money you don’t have to spend when there is no restraint or restriction against doing so. The total amount of debt has now exceeded the capacity to finance the debt except by creating ever more debt.

The entire western world has been financially controlled and mismanaged by an international syndicate of central bankers for the past several decades. This, along with unrestrained government spending has brought us to a terminal stage of collective bankruptcy as the power and control has shifted from the many, to the few who are now desperately attempting to maintain the status quo with various financial band aids,  shell games,  and smoke and mirrors “solutions”.

The worlds financial markets are now gyrating day by day as market participants move like a flock of sheep or school of fish seeking safety by abandoning one currency after another depending on the day.  The fact is however that in almost if not every Western G7 economy, the government is technically bankrupt, with orders of magnitude more debt than can ever be repaid in constant dollars. Even moreover, there is also massive insolvency among the corporations and the populations of these countries.

Where do we go from here? There are only two possible paths, and they both have the same endpoint which is systemic breakdown and failure.

The worlds central banks can continue printing money (monetizing the debt) in an attempt to keep the western banks solvent and inflate away the unpayable debt, or they can stop monetizing the debt and watch the entire western world collapse into a complete systemic breakdown of insolvency and deflationary collapse. If there was no printing press, if we were not all on a fiat money system, this would be the only choice. With a printing press, which is the only tool they have to attempt to “solve” this problem and save themselves from collapse and insolvency, they are going to keep using it.

The point of this essay however is to argue that whichever path is taken, the end result is going to feel the same for most of the worlds citizens. Whether by deflationary collapse or inflationary depression, the citizens of the western economies are going to experience a rapid decline in their standard of living either because the money they have won’t have the same purchasing power (an inflationary depression) or because they have no money to spend (a deflationary collapse). This will come amid sustained high levels of unemployment, and increasing government authoritarianism to combat increasing social unrest and decay.  It’s not much of a prognostication, because it’s already happening right now in countries like Greece.

I feel strongly that the G7 central banks will continue to take the path they have already embarked on, which is to save themselves by printing money, exacerbating the existing issue which is too much debt. The larger point however is that regardless of the path they take, the Western World is bankrupt from a decades long party of borrowing to spend money they didn’t have to spend. I’m taking cover as the house of cards comes down. 

Pierre Lassonde on the Gold Market

Eric King’s latest interview with Pierre Lassonde.

Once again, we urge you to listen to the complete interview at www.KingWorldNews.com , but if you would like a quick summary, here it is.

Pierre entered the mining business in the early 70’s, and in that period the gold price went from $35 per oz to $180 per oz. As the sentiment on gold became positive, many mining companies raised capital, borrowed money, and then when the gold price subsequently collapsed, many companies went bust.

Two lessons to be learned if you run a mining company, with equivalent lessons for us as investors:

(1) Stay out of debt to the banks – they will bankrupt you in the down cycle.

(2) Have a lot of cash on hand, ready to buy assets on the cheap. 

Gold is once again money – more gold has been sold for investment this year than was sold as jewelry. Also central banks are buying now versus selling previously.

Diamonds

Three large mining companies, Rio Tinto, BHP and Anglo-Gold control the diamond mining business. There are very few high quality diamonds found each year – they command very high prices.  If you can find ‘em, diamonds are a great business to be in.

Global debt overhang

As we also heard last week from Jim Rickards, central banks are far more afraid of deflation than inflation. Hence they are far more inclined to err on the side of inflation. Pierre has an illuminating metaphor for this – his bathtub analogy. Imagine a bathtub with a lot of holes in the bottom with water pouring out of them, and an array of taps at the top fully open and pouring water in. The water pouring out at the bottom represents a deflationary effect – vanishing wealth. The water pouring in represents central banks’ attempts to reflate their economies by printing money. At the moment nothing much seems to be happening. However, if the holes are gradually plugged, eventually the water will overflow the bathtub – leading to massive inflation. On the other hand, if the holes remain, or more holes are created due to, for example, more sovereign debt crises, central banks will have to pump up the money supply even faster to try to keep the reflation going.

Declining gold production.

With gold above $1000 per oz, enough marginal properties have been brought back into production to flatten out production levels from the previous annual declines. On the other hand, quality reserves are being depleted. If the gold price were to come back down to say $700 per oz, the resulting destruction in the gold mining business would be catastrophic. 

Gold stocks have underperformed relative to the gold price over the last seven years because their costs have risen as the quality of ore bodies has gone down. So whereas the gold price has risen pretty dramatically, mining company profits have not.

Gold price going forward

Look at seasonality effects – annual low point is usually May – June. We could see $950 then, but probably not much lower than this. We could possibly be looking at a return to $1200 around September. According to Pierre, we are likely to remain in phase 2 of this gold bull market for 2-3 more years, thus seeing steady gains, punctuated by corrections, and then entering a manic phase lasting several years subsequently. Pierre had a wonderful phrase to describe this latter phase – the gold market could end up “with a Tina Turner pair of legs”!

Investment in gold mining companies

Number one rule: Look at the track record of the CEO.

 

The legendary Mr Gold, Jim Sinclair, talks to Eric King

 

A catatonic Washington taken over by Wall St.

Major international investment houses are the unseen hand moving the markets. They have been enriched by bailouts and no action has been taken against their predatory activities. They are still using derivatives to make their bets and raid the markets.

Paper Market versus Physical Market

The banksters can manipulate the price of paper gold seemingly endlessly to pick your pockets, but they cannot control the price of bullion which remains in a high demand – short supply situation.

Political view will dominate

Whenever there is a conflict between being re-elected and choosing the right course for the economy, politicians can be relied upon to do things that they hope will get them re-elected. So, in the US, if there are signs of a weakening economy around September, another stimulus package is highly likely to be proposed, again increasing the likelihood of hyperinflation down the road.

The upcoming volatility in the gold price will set your hair on fire!

There are secret meetings of bankers around the world – protected by the military. The sociopath financiers are out of control. Greece has been under financial attack – if Greece falls, is that the end? No, it’s the beginning of a chain of sovereign defaults. What happens when these guys decide to attack individual states within the US?

So many individual states in the US near bankruptcy.

Why is there almost total media silence on this?  Right now the financial acetylene torch is on Greece – but look out when that torch starts homing in on US states.

 

Jim Rickards: A tidal wave of demand for gold

This article is a summary of comments by Jim Rickards, who was interviewed recently by Eric King, over at King World News. Mr Rickards is a writer, lawyer and economist with a long and very distinguished record in the global capital markets.  He is Senior Managing Director at Omnis, Inc., a consulting firm in McLean, VA and is the leading practitioner at the intersection of global capital markets and national security.  His advice to clients from 2002 to 2006 included early warning of impending financial collapse, the rise of sovereign wealth funds, the decline of the dollar and the sharp rise in gold prices years in advance of these events.  I strongly encourage readers to listen to the whole piece, but for those who can’t spare the time, here is a record of the salient points…

Bernanke

Although Ben Bernanke has been reconfirmed as Chairman of the Fed, his position will be weakened because of the unprecedented number of votes against his re-appointment. Wall street loves Bernanke because he’s giving away free money. Notice that very big investors such as Warren Buffett lobbied hard for Bernanke’s re-election.

Greece

The group of fiscally challenged Europeans known as PIIGS (Portugal, Italy, Ireland, Greece and Spain) vary widely in the amount of gold they own – Italy has over 2000 tons, Greece over 100 tons, while Ireland owns only 5 tons.

Greece’s debt to GDP ratio is only about half that of Japan’s. Its deficit to GDP ratio is comparable to that of the US. If the ECB lets Greece default, where does the rot stop?  The crown jewel of European unification is the monetary system  - symbolised by the Euro. They will do all they can to preserve it.

IMF gold

Much has been made of India’s purchase of 200 tons of gold. India would like to buy 800 more tons. According to Jim’s best information, China would like to buy 3000 tons. Russia would like to buy another 1000 – 1500 tons. We are looking at over 5000 tons of demand from these 3 countries alone! Annual world production is about 2300 tons, but this is all spoken for. These official buyers will have to be satisfied by official sellers. Now the US has over 8000 tons; European countries collectively own over 10,000 tons, but the Europeans, the largest official sellers of gold in the world, are reducing their sales, while the US sells virtually none. There is a huge demand/supply imbalance, which implies support at some level for the price of gold.

The IMF has over 3000 tons in total, but only 200 “discretionary” tons available for sale.

Gold swaps.

 The government  paper securities market works as follows via the repo market – a kind of swap market: I’m a dealer, I can sell some govt bonds without owning them – I’m going short, in other words, or I have what’s called a reverse repo position. I borrow the bonds, sell them to my buyer, and at some later stage I have to buy replacement bonds and return them to the entity that lent them to me – I unwind the repo, as this process is called.

Now let’s consider gold. The market works exactly the same way. As a dealer, I own some gold and I lend or sell it to you, you can sell it or physically deliver it to someone, you now are short some gold, so you go into the marketplace at a later date and buy back the gold, and re-deliver it to me.

But suppose this is done as a secured lending arrangement – i.e. I am not selling you the gold – I’m lending it to you. I’ve got it on my books as a kind of secured loan; the ultimate buyer has it on his books as a physical possession. So the gold is being counted twice. Everything balances as long as the person in the middle’s short position is taken account of. The problem comes because the market is unregulated and opaque – we have no information about the short positions in the middle, or indeed much else.

Now the evidence for actual swaps between central banks is fairly limited (GATA might disagree – Ed.) – but if they do exist in any quantity, and there is any kind of call to cover the short positions, a superspike in the gold price would occur.

Central banks hate deflation.

The consumer won’t spend if he/she thinks prices are going lower. The problem feeds on itself – it’s a positive feedback loop. There is no mechanism in the tax system to handle deflation. Deflating prices, if one’s salary remains constant, mean an increase in the standard of living, but the govt can’t tax it.

At what point does the Fed stop printing money and let deflation prevail? The job of the Fed, in their minds, is to cause inflation (print money in other words. In the words of Marc Faber, Mr Bernanke is a money printer). The current deflationary forces though are very powerful – we have just had the greatest asset bubble collapse in history. It follows that the Fed is likely to be required  to engineer the greatest inflation in history.  However, the job is complicated, because all fiat currencies are fighting to be devalued at the same time.

China is refusing to adopt the mantle of the strong currency, that everyone devalues against.  However, there can be devaluation against gold. Roosevelt did it in the 30’s.

Deflationary forces are too great – they will overwhelm the efforts of the central banks which won’t be able to devalue against each other, so they will bid up the price of gold.

Inflation means transferring wealth from creditors to debtors. In deflation, the flow is in the opposite direction, from debtors to creditors. This is true, so long as the debtor does not default. If the debtor defaults, the loss is transferred – instantaneously -back to the creditor. In fact, for this reason, creditors actually prefer inflation – they’d rather get paid in cheaper dollars than not get paid at all.

The Japanese experience – US better or worse off?

The Japanese had a bad time of it through the 90’s – and they may not be out of the woods yet. The US has a lot more gold, a much bigger base of natural resources and a number of other advantages over Japan. However, the consumer is tapped out.  Prices are likely to drift lower until eventually they get so low that the consumer starts to be interested again. A great P/E compression occurred in the 30’s.

Econophysics

The characteristic behaviour of a bubble is well known across many disciplines. It is very difficult to know when a bubble will break – but the dynamics imply that a bubble will return to where they began, roughly speaking. House prices will probably go all the way back to 1995 levels.

 

Also, check out the link on Jim Rickards’ interview page at King World News to the piece – The Frog, the Scorpion and Goldman Sachs.  This is an interesting summary of the Goldman business model of data mining - gathering data from it’s customers - to determine the likely direction of the markets and making a buck from this - all the while being tax payer supported.  Very profitable!

 

When will the Australian housing bubble burst?

We know we’re not part of Australia - even if the rest of the world doesn’t - but we’ve posted this article under the “New Zealand Articles” heading, as where the Aussie housing market goes generally so does ours.  It also discusses the NZ housing market in terms of affordability or rather it’s unaffordability.  NZ may not have risen to the (even) giddier heights the Australian market has in the last year or so, but house prices here are pretty much back to the highs of 2 years ago.  So we should have plenty of room to fall too.  The author, Mike “Mish” Shedlock writes regularly in his blog ”Mish’s Global Economic Trend Analysis” and is definitely worth keeping an eye on.

Pool of Greater Housing Fools in Australia Finally Runs Out; OZ Dollar, Where to From Here?

Today the Reserve Bank of Australia (RBA) unexpectedly held interest rates at 3.75%. No doubt this was in fear of the Australia’s enormous housing bubble that exceeds the height of the bubble that long ago burst in the US. 20 economists predicted the RBA would hike. Not a single one predicted anything else.

Fear in the board of governors over the pending crash is palpable. Prime Minister Kevin Rudd did not learn a single thing from the US and the disastrous policies of Greenspan. He gave one last goose to the housing market with $14,000 tax credits in a foolish attempt to stem the tide of the global recession that started two years ago.

Prime Minister Rudd brags about Australia’s ability to duck the recession. It did not work. All Rudd did was delay the inevitable, fueling an even bigger housing bubble. The bigger the bubble, the bigger the crash, and rest assured Australia is headed for a housing crash.

Here are a few snips from the Bloomberg article Australia Unexpectedly Keeps Interest Rate at 3.75%.

The Reserve Bank of Australia kept the overnight cash rate target at 3.75 percent after three increases, it said in Sydney today. The decision confounded the forecast of all 20 economists in a Bloomberg News survey for a quarter-point move, and futures contracts that signaled a 74 percent chance of an increase.

Australia’s dollar tumbled to a six-week low and Asian stocks pared gains after the announcement sparked concern at the economy’s ability to withstand higher borrowing costs. Business confidence fell to a six-month low, a report showed today, and Woolworths Ltd., the country’s biggest retailer, warned last week that rate increases would hurt consumers.

Business confidence fell in December to the lowest level in six months, a report by National Australia Bank Ltd. showed today. The bank’s sentiment index dropped 11 points to 8. Lending to companies “has continued to fall as companies have sought to reduce leverage, and lenders have imposed tighter lending standards,” Stevens said today. “Credit conditions remain difficult for many smaller businesses,” he said.

Here is a statement from the article that particularly caught my eye: Prasad Patkar, who helps manage about $1.5 billion at Platypus Asset Management in Sydney said “Today’s decision reduces the serious risk of a policy blunder.”

Serious Policy Blunder

Sorry Prasad, a serious policy error was made long ago, and there is not a damn thing the RBA or anyone else can do to stop the impending housing crash in Australia.

What follows is a post I actually wrote yesterday. I intended to post this before the rate decisions, but it never happened. I too, thought one more hike was coming. That it did not come is a sign of panic at the RBA.

First Time Buyers In Severe Stress

Just as happened in the United states with subprime borrowers, Australia’s first-home buyers struggle as interest rates rise.

Almost half of first-home buyers lured into the market by the Rudd Government’s $14,000 grant are struggling to meet their mortgage repayments and many are already in arrears on their loans.

Thousands of young home buyers are using credit cards or other loans to meet obligations, while those in “severe stress” are missing payments.

Just weeks after the grant was withdrawn, a survey of more than 26,000 borrowers conducted by Fujitsu Consulting has found 45 per cent of first-home owners who entered the market during the past 18 months are experiencing “mortgage stress” or “severe mortgage stress”.

“The dream of home ownership has turned sour for many thousands of first-home buyers now that the reality of rising interest rates is kicking in,” said Fujitsu Consulting managing director Martin North.

“Rising utility costs and school fees are also cited as reasons for hardship, and many first-home owners are living without proper furniture or carpets as they divert all their cash to their monthly repayments.”

During the past 18 months, more than 135,000 first-home buyers have entered the market, encouraged by the generous grants and stamp-duty relief.

As a result, more than 50 per cent of first-home owners are forecast to be in the “mortgage stress” category by the end of this year.

“This was a disaster waiting to happen,” Steve Keen, professor of economics at the University of NSW, said yesterday.

“The grant panicked first-home buyers to rush into the market, which pushed prices up by far more than the grant itself. Now we have buyers falling behind with their repayments as rates increase and thousands of owners exposed to the danger of bankruptcy as the situation deteriorates.”

No Lessons Learned

“LD”, a reader from Australia who sent me the link asked and answered his own question: “What have Australians learned from Americans over the last 2 years? Nothing!”

Credit Squeeze Coming Up

Craig, another reader from Australia writes …

Mish

I’ve been waiting a long time to buy a house in Australia. Looks like I may not have to wait too much longer for the Aussie bubble to burst. As always, love your blog. Cheers, Craig

Craig is referring to Tighter credit rules to halve home loans.

Last week Westpac cut its loan-to-value ratio (LVR) for new customers to just 87 per cent of the property’s value - a new low for a big bank. Although it may appear relatively small, such a cut has a disproportionate effect on how much people can borrow and can halve the value of the property they can afford to buy.

“If you have a $50,000 deposit and you can get a 95 per cent loan, you are able to bid on a property worth $1 million,” said Steve Keen, associate professor of economics at the University of Western Sydney. “But if the LVR is cut to 90 per cent, your $50,000 deposit is only equivalent to 10 per cent deposit on a $500,000 property, so the amount you can spend is halved.”

Westpac’s reduction from a maximum LVR of 92 per cent means that buyers with a $50,000 deposit will see the maximum that they can afford to pay for a property slashed from $625,000 to $384,615. Somebody with a $20,000 deposit would see the amount that they could spend reduced from $250,000 to $153,846, says Professor Keen.

Experts are worried that, if other banks follow suit, credit to the property market will be choked off and property prices could collapse. According to research by broker Mortgage Choice, fewer than half of all new home buyers have a deposit of more than 10 per cent of the property’s value.

“Westpac’s move could affect many thousands of buyers and they will be forced to go to new lenders,” a spokesman said. “It’s a very worrying development because if others follow suit, we could see the majority of first-home buyers priced out of the market.”

Further restrictions now appear to be inevitable. “And banks can’t go on lending forever.”

Lenders have gradually been cutting back the size of loans that they are prepared to offer home buyers. Just over a year ago, 100 per cent - or even 105 per cent - loans were relatively common. But over the past 12 months, the LVR has fallen steadily to 95 per cent, then to 90 per cent, and now to 87 for new borrowers approaching Westpac.

It was this same tightening of credit that led to the collapse of property prices in the UK in 2008, even though the country was still suffering from a massive shortgage of homes at the time.

Deposit Math

Note the above paragraph in red by Steve Keen, one of few economists in the world who actually has a clue. His blog is Steve Keen’s Debtwatch.

Also note the worries of the so-called housing experts in the above article: Experts are worried that, if other banks follow suit, credit to the property market will be choked off and property prices could collapse.

If those “experts” had an ounce of common sense they would be worried the housing bubble would get bigger.

Indeed, housing prices are so stretched in Australia that the bubble will bust soon enough regardless of whether lenders tighten standards or not.

The US housing bubble burst with credit standards still getting looser a year or more later.

When Do Bubbles Burst?

Bubbles burst when the pool of greater fools runs out, and not before.

That is exactly why Economist Steve Keen lost housing bet against Rory Robertson.

AN ECONOMIST known as the “Merchant of Gloom” will have to walk from Canberra to the top of Australia’s highest mountain after losing a bet about the resiliency of Australian house prices.

Last November, University of Western Sydney associate professor of economics and finance Steve Keen made a high-profile bet with Macquarie Group interest rate strategist Rory Robertson.

The two parts of the bet were that house prices would tank by the end of 2009 and that house prices would fall 40 per cent from their all-time high within 15 years.

The loser of the bet would have to make the more than 200km trek from Canberra to the top of Mount Kosciuszko wearing a T-shirt that says “I was hopelessly wrong on house prices! Ask me how.”

Why The Bet Went Wrong

Keen’s mistake (miscalculation is a better word as I am positive he will ultimately be proven correct), was that he misjudged actions the Rudd administration might take to keep the bubble going.

Bear in mind that once the trend changes, it changes for good, but until the trend does change, efforts to keep bubbles alive frequently produce blowoff tops.

In Australia’s case I finally sense a blowoff top in fools. The US suffered the same fate in 2005 when the cover of Time Magazine went “gaga over real estate” and people were camping out overnight and entering lotteries for the right to buy Florida condos.

Inquiring minds might be interested in the following flashbacks, the first showing the funniest Time Magazine cover in history, the second shows approximately where we are today although I do have to move the arrow one notch closer to the bottom.

April 10, 2006: US vs. Japan Land Prices Pictorial Update

July 13, 2009: Housing Update - How Far To The Bottom?

How did Bernanke and other experts fair?
Let’s answer that with a few more flashbacks.

The initial data point on my chart came in the post It’s a Totally New Paradigm on March 26, 2005. Here are some excerpts from that post.

• Ron Shuffield, president of Esslinger-Wooten-Maxwell Realtors says that “South Florida is working off of a totally new economic model than any of us have ever experienced in the past.” He predicts that a limited supply of land coupled with demand from baby boomers and foreigners will prolong the boom indefinitely.
• “I just don’t think we have what it takes to prick the bubble,” said Diane C. Swonk, chief economist at Mesirow Financial in Chicago, who was an optimist during the 90’s. “I don’t think prices are going to fall, and I don’t think they’re even going to be flat.”
• Gregory J. Heym, the chief economist at Brown Harris Stevens, is not sold on the inevitability of a downturn. He bases his confidence in the market on things like continuing low mortgage rates, high Wall Street bonuses and the tax benefits of home ownership. “It is a new paradigm” he said.

Flashback October 27, 2005

Inquiring minds may wish to review Bernanke: There’s No Housing Bubble to Go Bust.

Ben S. Bernanke does not think the national housing boom is a bubble that is about to burst, he indicated to Congress last week, just a few days before President Bush nominated him to become the next chairman of the Federal Reserve.

U.S. house prices have risen by nearly 25 percent over the past two years, noted Bernanke, currently chairman of the president’s Council of Economic Advisers, in testimony to Congress’s Joint Economic Committee. But these increases, he said, “largely reflect strong economic fundamentals,” such as strong growth in jobs, incomes and the number of new households.

Flashback February 12, 2008

Bernanke Expects Housing Recovery by Year End

Federal Reserve Chairman Ben Bernanke told lawmakers Tuesday he expects the downtrodden U.S. housing sector to improve by the end of the year, a senator who participated in the closed-door meeting said.

“He let us believe that the housing situation should begin to ameliorate by the end of the year,” said Sen. Pete Domenici, a New Mexico Republican, told reporters.

“He gave a very good, succinct, short overview of where he thought the economy was right now and how it might move forward,” said Sen. Jon Kyl of Arizona.

Bubbles and Humpty Dumpty

Bernanke has proven all the king’s horses and all the king’s men cannot put bubbles together again.

For further proof please see Bernanke’s Deflation Preventing Scorecard.

After bubbles burst, nothing matters including loose lending standards in the US that lasted long after the housing peak in summer of 2005.

Supply of Fools Exhausted

I am willing to bet that at long last, Australia’s pool of greater fools just ran out. Rudd’s ridiculous $14,000 grant and stamp-duty relief programs were likely enough to exhaust that pool.

The ultimate irony of Keen’s bet is that by the time he starts his hike in April he will likely be right.

Bear in mind however, that prices tend to fall slowly at first as inventory builds up. Then the losses accelerate quickly.

A Long Wait

By the way, Australia buyers might need to wait 5-7 years or more for reasonable valuations. Look how long it took for the US housing bubble to implode. We have not hit bottom yet after 5 years, and the Australia bubble has a bigger starting point.

 

Please see Housing Bubble Comparison: US, UK, Canada, Spain, Australia, Japan for a county by country comparison of housing bubbles from the Ecomomist.

Demographia International Housing Survey

Inquiring minds are reviewing the results of the 6th Annual Demographia International Housing Affordability Survey. Countries in the survey include Australia, Canada, Ireland, New Zealand, the United Kingdom, and the United States.

Least Affordable Cities

The article shows the top 58, I captured the top 20 above.

Congratulations To Canada And Australia

Congratulations go to Vancouver, Canada for being the least affordable city in the survey. Vancouver thus wins the gold medal in the individual competition.

 

Sydney Australia proudly wins the Silver medal and the Sunshine Coast Australia wins the bronze. It was close but no cigar for Australia’s Gold Coast. Honolulu Hawaii came in a respectable fifth place.

Most Affordable Cities

Detroit, South Bend, Youngstown, Flint, Toledo, Akron, Peoria, Cleveland, and many other “affordable” cities are not places where anyone would particularly want to live. Indeed many cities at the top of the affordability list are places that most would hope to escape from.

The high school graduation rate in Detroit is a mere 25%!

I am willing to bet that Detroit’s graduation rate is far and away the worst of any city in the survey. See Michigan Forces Business Owners Into Public Sector Unions; Detroit’s Aura of Hopelessness for more details.

Moreover, there are houses in Detroit, Cleveland, Flint, etc, that one could buy for $500 that have no takers. Unlivable houses no one wants at any price skew the results.

Demographia Summary by Nation

All of the affordable markets were located in Canada and the United States, while most markets in Australia, New Zealand and the United Kingdom were severely unaffordable.

Australia: House prices have continued to rise in Australia (Figure 2), which registered the worst housing affordability (the highest Median Multiple) in the
history of the Survey. Overall, housing in Australia is severely unaffordable, with a Median Multiple of 6.8, more than double the 3.0 historic maximum norm. Housing had been affordable in Australia in the late 1980s, with a Median Multiple of under
3.0. The Median Multiple remained at or under 3.5 until the late 1990s.

All of Australia‟s major markets were severely unaffordable (Median Multiple above 5.0). Moreover, all markets, including smaller markets were severely unaffordable except Ballarat (Victoria), which was seriously unaffordable (Median Multiple between 4.1 and 5.0).

Canada: Housing is moderately unaffordable, as in previous Surveys. Canada‟s Median Multiple is 3.7. Housing had been affordable in Canada in the late 1990s, with a Median Multiple of 3.0. Canada had 5 affordable markets, 13 moderately unaffordable markets, 5 seriously unaffordable markets and 5 severely unaffordable markets.

Vancouver remained the least affordable market of any size in the surveyed nations, at 9.3, worsening from 8.4 last year. Toronto joined Vancouver as severely unaffordable, with a Median Multiple of 5.2. However, Barrie, within the Toronto region was moderately unaffordable, at 3.4. Victoria, Abbotsford and Kelowna (all in British Columbia) were also severely unaffordable.

Ireland: Housing in Ireland has become moderately unaffordable with a Median Multiple of 3.7, showing a trend toward historic norm of 3.0.20 Housing had been affordable as late as the middle 1990s, with a Median Multiple below 3.0. The extent of Ireland‟s recent housing affordability improvement is illustrated by the EBS/DKB Affordability Index, which indicates that mortgage payments have been halved in Ireland since the peak of the bubble in relation to first home buyer incomes.

New Zealand: Housing in New Zealand was severely unaffordable, with a Median Multiple of 5.7, nearly double the historic maximum norm of 3.0. Housing had been affordable in the early 1990s, with a Median Multiple of under 3.0. Auckland is the least affordable larger market, with a Median Multiple of 6.7, while Christchurch (6.1) and Wellington (5.7) were also severely unaffordable.

Tauranga-Bay of Plenty was again the least affordable market, with a Median Multiple of 6.8. Five of the 8 New Zealand markets were severely unaffordable, while Palmerston North, Napier-Hastings and Hamilton were seriously unaffordable New Zealand had no affordable markets and no moderately unaffordable markets

United Kingdom: Housing in the United Kingdom remains severely unaffordable, with a Median Multiple of 5.1, well above the historic maximum norm of 3.0. Housing had been affordable in the late 1990s, with a Median Multiple of under 3.0. Less than one-half of the United Kingdom markets were severely unaffordable (14 of 33), while the other 19 markets were seriously unaffordable. The United Kingdom had no affordable markets and no moderately unaffordable markets.

United States: Housing in the United States is rated as affordable, with the Median Multiple of 2.9.The recent house price declines have restored U.S. housing affordability to the below 3.0 historic norm (last achieved in the early 2000s), as the price bubble burst in many plan-driven markets. The United States had 98 affordable markets, 58 moderately unaffordable markets, 8 seriously unaffordable markets and 11 severely unaffordable markets.

The most affordable major market (population over 1,000,000) was Detroit. Other affordable major markets were Atlanta, Buffalo, Cincinnati, Cleveland, Columbus (Ohio), Dallas-Fort Worth, Houston, Indianapolis, Kansas City, Las Vegas, Louisville, Memphis, Minneapolis-St. Paul, Oklahoma City, Phoenix, Riverside-San Bernardino, Rochester, Sacramento, St. Louis and Tampa-St. Petersburg.

Gold, Silver, Bronze Medals

In terms of national unaffordability (the team competition) Australia wins the gold medal, New Zealand, the silver medal, and the UK wins the bronze medal.

Because of a preponderance of “affordable” cities in the US and the way the national rankings are made, I question the results of the national survey although it likely did not affect the top three medal-winning rankings.

Email Exchange With Survey Developer

I had this exchange with Hugh Pavletich of Performance Urban Planning who helped develop the survey.

Mish: When you come up with “national affordability” are all the cities given equal weight? Does Detroit count as much as San Francisco?

Hugh: Yes.

Mish: In my opinion, a weighted average is what matters most (at least for the purpose of figuring out how big the bubble still is).

Hugh: We are NOT attempting to explain how big the bubble is on a country wide basis. We are simply illustrating what the Median Multiple is at the 3rd Qtr of each of the urban markets listed.

Other researchers are most welcome of course to take the next step and do a population weighting, if they wish to do so.

Our goal is simply to illustrate the degrees of housing stress of the urban markets listed.

Bear in mind my goal is quite different than Hugh Pavletich’s. He wants to show the role local planning rules have in affordability. Hugh makes a case that local zoning rules play a huge factor on a city by city affordability basis while I am concerned with “How Big Is The Bubble?”

From my perspective, the US and Canadian bubble problems are very understated, and the national affordability rankings of the US and Canada are thus overstated. To be certain, one would have to take a weighted average of populations and rankings. One would also need to take into consideration unlivable houses offered at $500 that no one would take. If one did that, we would see the bubbles are where the most people live.

There is much more in the survey. Please give it a look.

Mortgage Stress in Australia

If this chart does not scream “nationwide bubble”, nothing ever will.

Australian Interest Rate Hikes

On December 2, the Reserve Bank of Australia hiked rates to 3.75%.

At its meeting today, the Board decided to raise the cash rate by 25 basis points to 3.75 per cent, effective 2 December 2009.

With the risk of serious economic contraction in Australia having passed, the Board has moved at recent meetings to lessen gradually the degree of monetary stimulus that was put in place when the outlook appeared to be much weaker. These material adjustments to the stance of monetary policy will, in the Board’s view, work to increase the sustainability of growth in economic activity and keep inflation consistent with the target over the years ahead.

Let’s come back to that last paragraph a year from now. Two years from now it is likely to look downright silly.

One more hike is in the cards, too, on February 2. Some will lay the blame on what is about to happen on these last couple hikes. The reality is the blame for the coming bust lay in the ridiculous expansion of credit that preceded it.

Australia’s problems have not yet started. Remember too, that commercial real estate follows residential with a lag. Australia can look forward to a bust in commercial real estate down the road as well.

Email From “Down Under”

Here is another email from Australia that readers may appreciate.

“Down Under” Writes …

Mish,

I actively watch this chart and a colleague of mine updated it today. RBA balance sheet collapsed in early part of 08 ahead of the debacle.

Add this to the recent report of Sydney being second most expensive city in the world. And add in likely tightening of bank prudential standards by our regulator APRA (extend liquidity requirements out to 21 days) and not looking so pretty. Deja vu all over again.

You can get the data straight from the RBA on the web: RBA Liabilities and Assets - Weekly

Kind regards,
“Down Under”

Australian Dollar Outlook

Two of the biggest factors affecting currency fluctuations are interest rate differentials between countries along with trends in interest rate differentials. The latter is more important. The Fed clearly is not going to cut rates (at zero bound it can’t).

The Australian dollar has strengthened vs. the US dollar on the back of rate hikes. If the RBA hikes once more and the Australian dollar sinks anyway, the top is likely in.

$XAD Australian Dollar vs. US Dollar Monthly

click on chart for sharper image

Déjà vu all over again?

At some point the RBA will stop hiking and start cutting. In turn, speculators in Australian dollars will start taking profits. At a bare minimum, at least a fair sized pullback in the Australian dollar vs. the US dollar is likely.

$USD - US Dollar Index Monthly Chart

click on chart for sharper image

Most underestimate how far the US dollar can strengthen. Another run at 90 is certainly not out of the question.

Mike “Mish” Shedlock
http://globaleconomicanalysis.blogspot.com

Precious metals paper market correction continues

 

This week in our musings, we have some thoughts of our own – and thoughts of others that we have found interesting….

 

Last week and earlier saw the precious metals paper market correction continue.  Please note that this is the supposed paper market tail wagging the physical market dog. The physical market remains in high demand and short supply.

The banksters kept forcing the paper price of gold and silver lower, started covering their shorts, and rebuying longs as the technical funds coughed up their leveraged positions. Eventually, the price will rise, the banksters will sell into strength, and this round of the dance will end, only for another round to begin. We have seen this particular dance so many times that one might think all gold pundits would report accurately on it – but no. One would be better advised to listen to Jim Sinclair, who has stated many times that this game will continue, with a marked increase in volatility, as the gold price see-saws higher, as it assuredly will, whether we are in for a period of heavy deflation, or massive inflation.

The financial system is now inherently unstable, and one of the other of these outcomes is inevitable. The debt will either collapse, meaning massive defaults at individual, municipal, state and sovereign level, or it will be inflated away.  The powers that be know this – that’s why central banks have become net buyers of gold, and the Chinese government is encouraging its citizens to buy gold and silver.

Meanwhile, western governments are encouraging their citizens to spend any money they have and indeed to go further into debt, to buy widgets to “get the economy moving again”.  It’s also why the SEC has quietly arranged to allow money market funds to suspend redemptions. A brighter flashing pointer to continued expected financial instability, I have yet to see.  Here’s Zero Hedge’s take on the new rule…

 

Zero Hedge discussed a month ago the disastrous prospects of what would happen if the new proposal contemplated by the SEC, which would allow the suspension of redemptions from Money Market Funds, were to pass. Well, in a nearly unanimous vote, Money Market Funds now have the ability to suspend redemptions, courtesy of the SEC’s just passed 4-1 vote. This explains the negative rate on bills: at this point, should there be another meltdown, money market investors will not, repeat not, be able to withdraw their money purely on the whim of Mary Schapiro. As the SEC noted: “We understand that suspending redemptions may impose hardships on investors who rely on their ability to redeem shares.” Too bad investors’ hardships considerations ended up being completely irrelevant.

Here’s an interesting question. Is it immoral, or “un-American”,  to walk away from your mortgage debt? Of course if you’re a too big to fail bank, it is apparently quite OK. But corporations have legally become people – they can spend as much as they like endorsing their preferred candidates for Congress or Senate. It’s all very confusing. I would hazard a wager though, that as more and more folks take the “jingle mail” route, we will hear increasing calls from the banks about the dubious nature of the practice….

 

Speaking of debt, Australian economist Steve Keen, who was one of the few to presciently call the upcoming crisis in 2007, has carried out some very interesting work concerning the rate of growth of debt in an economy. What he has found, if I understand him correctly, is that for both the US and Australia, there is a very high correlation between the rate of growth of debt and the rate of growth of the economy.

Now we know that, in the US, it is taking increasingly large increases in debt to produce growth – now the figure is upwards of $5 of debt to produce a $1 increase in GDP. This means that if we go for growth, we have to accept an increasing debt burden – just at a time when the existing debt burden is becoming unconscionably large.

It is also interesting to see President Obama try to harness the groundswell of calls for fiscal responsibility by proposing certain spending freezes. Of course the fact that this is a small drop in a very large ocean seems to escape many folks attention…

 

Lastly, I just want to draw people’s attention to Eric King’s site King World News where each week, Eric posts great interviews with noted figures in both the precious metals and general business communities. The current interview with Jim Rickards is long, but one that I found particularly good for understanding the nature of the gold market.  You can download the full interview here.

UPDATE:  If you’re pushed for time to listen to this interview, we’ve now published this summary article of the main content… Jim Rickards: A tidal wave of demand for gold