What if Labor got in?

Gold!

I do find it incredibly amusing. Could you even imaging if the Labs were in, how frothing at the mouth the Libs would be over the support package?

Cheers,
Inertia.

 

I'm interested in what @DueDiligence thinks about it as he seems to have a different point of view.

The bipartisan comment is spot on.

 

It’s more neoclassical rhetoric. The private sector has shouldered debt since 2010 and not private industry, private households. Go back and look at ABS 5625- new private capital. The economy stopped working properly at the end of 2011 when the idiots at the RBA put the rates back up. Since then it has been a one trick pony (mortgage debt) race from 2012 to 2017 , then the RC happened (which the banks asked for- a fact everyone seems to forget) , houses stalled and fell marginally until 2019 June , then once Scomo got back in the taps opened up again and it was back on.

In that period real wages fell about 0.5 -1.0 % p annum. There has been nothing but household debt since about 2012. The simple solution is now it’s the governments turn, the government spends so households can pay down their share of private debt in a see-saw fashion and then wash rinse repeat ad nauseum. The problem with this now is you’ve got private debt defaults , and the government want to spend now? That’s like handing out jellybeans to diabetics. It fixes the symptom, not the problem.

As far as I can tell, there’s isnt a government lever to stop proper debt deflation, as in a debt deflation spiral. The US Fed is directly buying corporate junk bonds and providing offshore funding to backstop central banks in other countries with US dollar denominated debt. Think about that , the US Fed is providing credit swap lines with other central banks to stop them defaulting on their debt. We are in debt deflation, every dollar today is worth less tomorrow, meaning debt now taken out now is effectively worth more than the current balance because future dollars will devalue.

The only way to prevent this problem of the real value of debt increasing over time is inflation. Inflation right now will cause the entire financial system to default. Inflation is what paid off boomers houses in the 70s/80s , not their wages, very few people have looked into how this works.

I don’t think government spending right now is going to do anything but keep house prices higher than they should be by preventing price discovery. Meanwhile , it destroys the value of future dollars but that’s not a problem if the vested interests can get out before inflation hits (boomers)

 

I dont disagree with your analysis, but what is the path to get through the immediate future if not government spending? Let companies and individuals fail?

Cheers,
Inertia

 

It depends on what you want. Do you want stagflation like Japan, or do you want debt to clear and a real economy to emerge.?

The problem is, almost all of this countries wealth is tied up in their home, then their super is tied up in a 60/40 portfolio. Almost everyone here has exposure to only 2 asset classes. So no one wants anything but stimulus.

 

For what it’s worth, I think a Labour Government would increase inflation risk. If labour were in now and handouts were pumped through MyGov accounts I’d be calling inflation in 18 months.

The irony would be people would be defaulting as they’re being paid (direct) free money.

 

I'd be happy with a little inflation, help clear some debt

Cheers,
Inertia.

 

If you borrowed 500 k in 2012 at 5 % on a 100 k income, that repayment is about 46 % of your income. If you have real wage slippage of 1 % between 2012 and 2020 , that repayment is now 50 % of your income.

They have had to lower rates to give the illusion there is no problem . A 2 % reduction in the interest rate drops the repayment to 37 % of income. Households think it’s great despite taking a 10 % clip in their salary over the same period. Now on top of this, QE keeps asset prices elevated.

Extrapolate this out 20 years and think about the consequences. Keep in mind we’re at a cash rate of 0.25 % right now.

If rates increase by just 2 % and wages are the same, the entire housing market explodes.

 

Interesting analysis, thanks for posting this.

 

Hi, really enjoy reading your posts. A couple of questions regarding price discovery, can we not have government spending but offset this with mechanisms within the home financing industry to limit borrowing capacity?

Also aren't current tax incentives also Hampering price discovery, or as I have argued in the past distorting intrinsic value?

 

It may be possible but the problem is (in my view) the economy is dependent on credit growth for housing. If credit growth falls, then it’s a headwind. Its either volumes or loan values, recently its been loan values going up, and that in my view is serviceability fraud.

How the hell is a home in Sydney pulling 8 -10 LTI with a an average household wage of 120 k.

Look at RBA Table D01, look at all the credit growth indicators then look at the total credit figure. The only thing keeping the credit economy out of trouble is housing, and now investors have tapered back its all up to owner occupiers.

I think the concept of having high home prices at 6-8 LTI isn’t one that can be pursued without causing harm in the long run, and our banks were supposed to transition down to 6 and under 5 LTI but it’s all been rubbished now as far as I can tell.

The tax incentives you mention absolutely distort it. If a property needs negative gearing in order to make it worth holding then its a bad investment. If that property even with negative gearing begins to lose capital gains, you’d have to ask will that investor hold it?

The entire nation is all in on property, only 1/3 rent , and even that one third that don’t own homes in some way have exposure to the property market. No one is prepared to mess with the 7 trillion + white elephant.

 

This is something I have been arguing since my earliest posts on this forum. When I look at an investment I want to see an underpinning yield to support price, without it you are just speculating. And while there is nothing wrong with speculation as long as you understand and manage for risk. There are too many that take risk exposure based on flawed "truisms".

Imo this is exacerbated with those that also hold large exposure to the correlated banks, via cap weighted indexes, managed funds, super or directly.

 

100 % , capital gains is essential to ensure low yielding overpriced properties make sense. Take the growth away to even zero, they don’t make sense. When the value falls, they are an absolute dud. I’m not even sure how many Mum and dad investors understand this.

Agree, almost everything is weighted to growth assets, and , unfortunately they all trend down at the same time at times like this. If all these assets are growth (not defensive) the haircut taken multiplies and it’s the reason bailouts/bail ins are called for.

 

But many of these loans were sourced prior to APRA changes, why we are seeing this??

Either way, personal debt in Australia is second highest in the world, unreal

 

APRA jumped in with the 10 % YOY speed limit about 2015. The books of the big 4 were over 50 % IO. Around end of 2015/ early 16, the big 4 flicked a heap of IO to P&I to get some headspace, then after the RC , lent it back out.

A lot of IO taken out 2015 and 2017 is due for reset mid 2020. Think about that, you’ve got a loan taken out in 2017 (At the peak) on IO, full principal amount still held , down in value due for refi in the middle of a pandemic lol.

Is there any wonder 12 month IO extensions are on the cards? It’s literally to solve this problem , and in that time values will fall further. What does the bag holder do in 12 months from now if they take this position? It’s the same problem.

All of this rubbish prevents price discovery.

 

I hear you

 

@euro73 mentioned 12 month IO extension due to current environment will not get extended after this period

 

I suspect they will. If they don’t, it means credit risk is on the table and it’s really on.

 

I said the current guidance from APRA is 12 months. I suspect that if required , it will be extended - just as mortgage deferments may well be extended as well if required . It’s in no ones interest for Australian lenders to see massive increases in delinquencies . It would blow out cost of funds at best , leading to interest rate increase , fuelling more delinquencies ..... and it could choke off credit completely at worst, leading to our own credit crunch ... so extending current arrangements may well end up being the lesser of two evils , IF it comes to that . It will all depend on how we get through winter

 

you ( and many others) argued against these points when I was making them back in 2016/17 - I called 2020/21 as the danger period for IO to P&I reset way back then.... the big rate cuts kicked the can down the road for a while starting about a year ago after the election and far too many here saw that as vindication of their views that there wasn’t a P&I booby trap at all ... and then APRA had to begrudgingly reduce its fixed assessment rate to a floating one because this dopey Govt has ignored years of RBA pleas for spending .... and again people felt vindicated and that the risks weren’t real..... but all that has happened is that the problem has been pushed down the road a few years , prices have gone up from the sugar hit that a lower rates and lower assessment rates provided , and now the booby trap is even bigger and all the tricks have been exhausted . Now we are seeing emergency levers being pulled everywhere just to keep it from all falling apart .... it’s quite a fragile situation all around.
Cash flow was king then . It is king now , and anyone with a modicum of grey matter should realise it most certainly will be king moving forward. When I said this was the decade to deleverage I meant it was time to migrate to P&I and start paying things off . Besides the fact it improves borrowing capacity , it removes speculation from the equation . My clients and I all have properties that can and are paying for themselves P&I ... I suspect most investors would drown under that requirement so they should really be considering how to add something to their portfolio to balance it .
Maybe we will see 40 year loan terms as the next way banks can create borrowing capacity ... or maybe APRA will have to remove all sensitised assessment rates .... but even if that happens , when all that extra capacity is gone we will just be back where we were but with far worse levels of debt and no more tricks to kick the can down the road ....