False Prosperity

yes, heard this too??

 

I was talking about the US Federal Reserve, who have raised their benchmark interest rates, after saying they wouldn't increase until 2024, they have also now forecast another two additional hikes this year.

My point basically is take what the RBA says with a grain of salt.

 

I saw it on a 7 News article that quoted a Deloitte Access Economics Business Outlook piece from January.

Deloitte make three assumptions in their forecast, which I've copied below. They were written in late January, before the vaccination programme got messed up.

1. Australia succeeds in keeping virus numbers mostly suppressed, state borders remain mostly open, and that domestic restrictions gradually ease as vaccines roll out.
2. Vaccines begin to be available from February, and achieve the equivalent of herd immunity by late 2021.
3. International borders re-open gradually, starting with New Zealand in coming months, broadening to cover much of the world by end-2021 (though it may not be until 2024 that global and Australian people movements are fully back at 2019 levels).

They also think that migration (and tourists) could return by mid-2022.

My suspicion is that we're not going to see quarantine free travel to the US, Europe, and other Covid hotspots until they get the pandemic under control. Look how long it's taken to get the bubble with New Zealand up and running, and we're both at or around zero cases. It really depends on whether there's a third wave or not up there, and how effective the vaccines prove.

 

'normal' assumes most will have the vaccine , that might be problematic , myself and at least one buddy will be EXTREMELY hesitant due to help issues , now i haven't flown anywhere since 1991 , but the buddy previously flew several times a year , now yes we are both older BUT how many more are in the same boat and will decline the vaccine

( BTW there are current plans for 'boosters ' to the vaccines already , at least one company is planning 3 monthly boosters )

more important to the Oz economy will be international students , let's see how those rules get bent

 

As I’ve posted before, the current growth is non sustainable and makes no sense. As we “normalize” life again so will the prices.

 

This is how I look at the current market.

The underlying economy is extremely weak, and over the last 12 months there has been a lot of lost productivity, and a lot of new debt.

So, given that our V-6 engine is running on 1-2 cylinders (one of which is the real estate market), I doubt that there will be any attempts to kill real estate until there are other growth industries that can pick up the slack. Mining is doing okay, but it is still early.

So in my mind too early to reign in real estate market lest they sink the whole thing. And the central bankers would prefer illusory wealth to a genuine recession.

Another angle is that as debt increases, the banking sector becomes more vulnerable to lower asset prices. The higher the amount of debt in a system, the more important it is that house prices stay high, because the alternative (high debt levels and falling house prices) essentially is a recipe for bank defaults. The RBA won't risk that.

I think the policy makers will take early post-covid GDP numbers with a grain of salt because it is coming off such a low base. the bubble economy has to run a little longer ....

 

How do you think housing affordability comes into play

 

I think housing affordability is based on repayments not total spend, so not quite crisis levels right now.

We will know that housing affordability becomes a problem again when the yield on a median house get's to the same level as the average 30 year interest rate, which is about 2%.

 

i would like a clearer read of the employment market first , before adjusting my mortgage related holdings

signing them up is one thing but keeping them positively geared could be a whole lot tougher , ( but i am sure SOME will have it under control

another factor COULD be a trend towards reverse mortgage and away from down-sizing ( up improving the home so the kids can return and look after granny , save on retirement village costs )

maybe we should keep watch on housing supply closer than interest rates

 

Interesting and good analysis. I’m just wondering whether there may be some political pressure to do something about this?
I have been talking to quite a few young people and working people trying to get into the market and the anger and despair from these people is white hot at the moment.
I am already seeing social media posts blaming the failure of western democracy and capitalism for the crises of not being able to secure a home. I can see this narrative looming as the election nears, and could become an economic talking point. Conversely if the government do step in and dampen the property market then you will upset those who purchased recently and find themselves in a negative equity position.

 

sadly we do not have true capitalism , and that is part of the problem ( nor arguably true democracy )

one might argue the governments intervene excessively , causing extra issues

look at all those FHB grants ( and other incentives ) that ultimately make it harder for future home-buyers

apparently there are plenty of empty units in cities in China , maybe the unhappy can move there ( eventually Japan will have to open it's borders to permanent migrants as well )

Australia without immigration is a shrinking ( aging ) population , do the maths to solve the problem ,

the government has already made it tougher for residential investors

things will probably sort themselves out WITHOUT extra government intervention ( but that might result in smaller government )

 

Yeah its false and denialist prosperity. Covid is still ravaging parts of the world and cutting off major industries here at home. Wages haven't grown almost anywhere and unemployment is pretty high. Seems cheap money is causing all of the paper recovery.

The investment system seems a little broken too as it used to be that you could make a portion of a decent income off smart investing in housing now you are making multiples of an income in housing. Work 7 days a week driving a truck and make $90,000 maybe, or buy an average suburban home and make $90,000 for jam. The imbalance is huge.

Stocks are almost as ridiculous.

 

The savvy make use of opportunities to better their lives and build on their progress. They don't try to change the ingredients they're left with but make the best with what's available. Each and every time.

The contemptuous view the savvy's opportunities as instances of great injustice which needs fixing.

We're all free to choose the path we wish to take. And inevitably, we'll have to live with the consequences of our decisions.

 

stocks are in TINA ( There Is No Alternative ) mode ,
where else are you likely to get returns that keep pace with real inflation ( on new investments )

the banks ? NO

investment grade bonds ? NO

property ?? MAYBE but you really have to know the game well

you could try crazy amounts of leverage , but that often ends VERY badly ( sometimes even for the lender )

stocks are the cleanest shirt in the charity bin

( obviously this relates to NEW investment cash , some seasoned investors are purring along nicely )

to give folks some idea of inflation my first ( official ) job was in early 1972 and paid $25 a week after tax , but in those days the frugal could MORTGAGE a house on ONE adult weekly wage ( just an average blue collar worker ) , sure it wasn't a McMansion but you MIGHT be able to buy the same house today for under $700,000 ( AND it will need renovating )

 

Just because someone gambles and wins doesn't make it a clever strategy. What about those who gambled and lost, they're not talked about so much.

 

Most folks who have built great wealth via real estate, business and other assets have done so strategically. With much effort and sacrifice. No "gambling" involved.

To be blunt, it's the uneducated/no interest to get educated folks who want to justify their own lack of progress/results in life by deluding themselves to believe its mostly gambling/luck etc.

 

There are a few seasoned investors, such as Jeremy Grantham, who believe that we're in the late stages of an epic stock market bubble.

I'm currently thinking that the sensible thing might be to cash out and park money in the bank for a few years.

 

Nassim Nicholas Taleb might disagree with you on that one.

His central thesis in Fooled by Randomness is that investors' returns are largely determined by luck, rather than skill. But cognitive biases convince us that our own genius allows us to make spectacular wins.

 

Buying something that goes up and down by 20% in the short space of a year with 20 times your money as leverage is nothing but gambling. Especially when it costs closer to a million.