7 ms·

In the long term, the bubble is going to pop and then you have dead cities with empty high rises falling apart (but then again, people have been saying for at l

by jussij 10y ago

In the long term, the bubble is going to pop and then you have dead cities with empty high rises falling apart (but then again, people have been saying for at least 10 years that the bubble is going to pop any day now and it's still inflating) The reason that bubble has not yet popped is because over the last 10 years Oz has generally seen below average GDP growth and year on year deflation, not unlike the rest of the world. To fight those conditions the central bank (the R.B.A.) has been forced to cut interest rates (again not unlike the rest of the world). Those record low interest rates makes money cheap and property attractive. But going forward, should Oz see any level of real GDP growth, interest rates will have to rise and when that happens that will be the pin that pops the housing bubble.

cmurf 10y ago
OK and what's the failure mode if broad GDP growth remains stagnant, but the narrow real estate market continue to grow and increasingly unobtainable? Does it fail or does it in effect behave as two economies?
- jussij 10y ago
  If the GDP remains low and inflation remains low then property prices will continue to rise. In fact if this happens the rate of rise may well increase over the short term. To fight low inflation and low GDP central banks around the world have all been singing from the same song sheet by adopting the policy of Quantitative Easing (QE). QE is basically a policy of printing money and it was designed to grow inflation, but all it has done is created a massive oversupply of cash around the world. It is this massive sea of cash that is driving up asset prices around the world. If these central banks continue to use QE then these cash levels will keep going up. Now naturally you just can't keep printing money, but the question is when will the party be over and inflation start to bite? The bigger problem is these low GDP numbers have a direct impact on society as it drives up unemployment and drives down wages, creating unrest. You can see this unrest growing with events like Brexit, the rise ot Trump and the rise of extreme right in Europe, Australia and other countries around the world. Without that GDP growth, political parties around the world will continue to feel the wrath of their voting public and politics and political parties will move further and further to the extremes.
  - cmurf 10y ago
    OK but not all asset prices are going up, it's pretty much just real estate and in particular residential real estate. Commericial real estate is doing well, but it's lagging compared to residential. Bank loans are roughly 1/3 real estate mortgages, 1/3 commercial, and 1/3 consumer. QE affects all of these. So why is QE not resulting in growth elsewhere in the economy, being narrowly focused on real estate mortgages?
    - misja111 10y ago
      QE is not resulting in enough growth in the Western world, because there are just not enough profitable businesses for investors to pour their cheap money into. Supplying cheap money is only one half of the equation to get investors to sponsor businesses: the other half that is needed is businesses with profitable business plans. And there the Western world has a problem: globalisation is moving mainstream business away to cheaper area's in the world. That is not a new thing, and traditionally Western economies have compensated that with new innovative businesses. And although there certainly is some innovation, it is not enough to keep up and keep the GDP growing. The aging populations in most Western countries contribute to that effect because younger generations are much more likely to take risks and start new businesses than the older.
      - rphlx 10y ago
        Another factor is that employee productivity growth has been very low in developed markets since 2008, as the dividends of the computer & internet revolutions have tailed off.
      - jussij 10y ago
        QE is not resulting in enough growth in the Western world, because there are just not enough profitable businesses for investors to pour their cheap money into. The central bankers created QE as a way to add liquidity into the markets to allow banks to lend, to allow small businesses to grow, to help economies to generate growth. Unfortunately that money was lent to the big bankers and they realized they could take that money and make much easier profits. The carry trade has been going on for decades and no one has taken any steps to stop it. It is very easy to for institutes with big wallets, to borrow large amounts of money from central banks only to take advantage of countries with an interest rate differentials. Then take a look at how JPMorgan Chase, after loosing billions on hedge positions, they took a US government bale out with the promise not to go back to their bad old ways of gambling with hedge positions. They took the government money and sure enough put it all back on the table betting red, only find it came up black: http://www.abc.net.au/news/2013-09-20/jp-morgan-fined-920-million-usd-in-london-whale-trading-scandal/4970068 http://www.abc.net.au/news/2013-09-20/jp-morgan-fined-920-mi... A broken promise to the US people with lots of money lost and as always no consequences for those who took the money on false pretenses. In reality I can see the sense of the bet. Take someone else's money and if you lose, the billions lost will be covered by someone else.
- stephen_g 10y ago
  The failure mode is one most economists ignore, but was the key for the few who predicted the GFC - private debt. In Australia we have some of the largest private/household debt in the world. There tends to be a point where it becomes unsustainable, and the creation of debt (credit) starts to slow. What was observed elsewhere in the world was that if it slows down and goes negative (that is, the private sector of the economy starts deleveraging), unemployment tends to start to rise. (This is in line with some non-mainstream theories that beleive credit is a major driver of demand in the economy. Mainstream (neoclassical) economic models ignore debt because they assume that it's just a transfer of funds from a more patient person to a less patient person, but that's not actually how modern banks work). If unemployment rises, people start to not be able to pay their debts. The default rate rises, banks sell up properties, and the prices tumble. Recently we were reassured by the Government that the private debt level wasn't a problem because the assets (mostly housing) is very valuable and rising, but I saw a quote from the US in 2005 or 2006 saying exactly the same thing...
rbg246 10y ago
I'm sorry to rain on your parade but Australia has had decent levels of GDP growth for the past decade. It hasn't been the lost decade that some OECD countries has experienced. Australia has experienced a mining boom not unlike Canada.
- adaml_623 10y ago
  I don't think you've actually done your research. I can see lower than average GDP growth which is what the OP said. [0] In addition it's undeniable that the RBA has been cutting the cash rate and that just like the OP said a rise in the cash rate might pop the bubble. [1] I don't know the sources of your opinions/information but you should consider whether they are slightly biased for some reason. [0] - http://www.tradingeconomics.com/australia/gdp-growth-annual http://www.tradingeconomics.com/australia/gdp-growth-annual [1] - http://www.rba.gov.au/statistics/cash-rate/ http://www.rba.gov.au/statistics/cash-rate/
  - rbg246 10y ago
    The comment I was replying to was saying Australia's GDP growth was comparable to the rest of the world, I said it was not. Your first source shows a consistent 2 - 2.5 growth rate except the last two where one was 3 and the other 1.8, majority of OECD countries would be very happy with that sort of growth.

by jussij 10y ago

cmurf 10y ago

OK and what's the failure mode if broad GDP growth remains stagnant, but the narrow real estate market continue to grow and increasingly unobtainable? Does it fail or does it in effect behave as two economies?

jussij 10y ago
If the GDP remains low and inflation remains low then property prices will continue to rise. In fact if this happens the rate of rise may well increase over the short term. To fight low inflation and low GDP central banks around the world have all been singing from the same song sheet by adopting the policy of Quantitative Easing (QE). QE is basically a policy of printing money and it was designed to grow inflation, but all it has done is created a massive oversupply of cash around the world. It is this massive sea of cash that is driving up asset prices around the world. If these central banks continue to use QE then these cash levels will keep going up. Now naturally you just can't keep printing money, but the question is when will the party be over and inflation start to bite? The bigger problem is these low GDP numbers have a direct impact on society as it drives up unemployment and drives down wages, creating unrest. You can see this unrest growing with events like Brexit, the rise ot Trump and the rise of extreme right in Europe, Australia and other countries around the world. Without that GDP growth, political parties around the world will continue to feel the wrath of their voting public and politics and political parties will move further and further to the extremes.
- cmurf 10y ago
  OK but not all asset prices are going up, it's pretty much just real estate and in particular residential real estate. Commericial real estate is doing well, but it's lagging compared to residential. Bank loans are roughly 1/3 real estate mortgages, 1/3 commercial, and 1/3 consumer. QE affects all of these. So why is QE not resulting in growth elsewhere in the economy, being narrowly focused on real estate mortgages?
  - misja111 10y ago
    QE is not resulting in enough growth in the Western world, because there are just not enough profitable businesses for investors to pour their cheap money into. Supplying cheap money is only one half of the equation to get investors to sponsor businesses: the other half that is needed is businesses with profitable business plans. And there the Western world has a problem: globalisation is moving mainstream business away to cheaper area's in the world. That is not a new thing, and traditionally Western economies have compensated that with new innovative businesses. And although there certainly is some innovation, it is not enough to keep up and keep the GDP growing. The aging populations in most Western countries contribute to that effect because younger generations are much more likely to take risks and start new businesses than the older.
    - rphlx 10y ago
      Another factor is that employee productivity growth has been very low in developed markets since 2008, as the dividends of the computer & internet revolutions have tailed off.
    - jussij 10y ago
      QE is not resulting in enough growth in the Western world, because there are just not enough profitable businesses for investors to pour their cheap money into. The central bankers created QE as a way to add liquidity into the markets to allow banks to lend, to allow small businesses to grow, to help economies to generate growth. Unfortunately that money was lent to the big bankers and they realized they could take that money and make much easier profits. The carry trade has been going on for decades and no one has taken any steps to stop it. It is very easy to for institutes with big wallets, to borrow large amounts of money from central banks only to take advantage of countries with an interest rate differentials. Then take a look at how JPMorgan Chase, after loosing billions on hedge positions, they took a US government bale out with the promise not to go back to their bad old ways of gambling with hedge positions. They took the government money and sure enough put it all back on the table betting red, only find it came up black: http://www.abc.net.au/news/2013-09-20/jp-morgan-fined-920-million-usd-in-london-whale-trading-scandal/4970068 http://www.abc.net.au/news/2013-09-20/jp-morgan-fined-920-mi... A broken promise to the US people with lots of money lost and as always no consequences for those who took the money on false pretenses. In reality I can see the sense of the bet. Take someone else's money and if you lose, the billions lost will be covered by someone else.
stephen_g 10y ago
The failure mode is one most economists ignore, but was the key for the few who predicted the GFC - private debt. In Australia we have some of the largest private/household debt in the world. There tends to be a point where it becomes unsustainable, and the creation of debt (credit) starts to slow. What was observed elsewhere in the world was that if it slows down and goes negative (that is, the private sector of the economy starts deleveraging), unemployment tends to start to rise. (This is in line with some non-mainstream theories that beleive credit is a major driver of demand in the economy. Mainstream (neoclassical) economic models ignore debt because they assume that it's just a transfer of funds from a more patient person to a less patient person, but that's not actually how modern banks work). If unemployment rises, people start to not be able to pay their debts. The default rate rises, banks sell up properties, and the prices tumble. Recently we were reassured by the Government that the private debt level wasn't a problem because the assets (mostly housing) is very valuable and rising, but I saw a quote from the US in 2005 or 2006 saying exactly the same thing...

rbg246 10y ago

I'm sorry to rain on your parade but Australia has had decent levels of GDP growth for the past decade. It hasn't been the lost decade that some OECD countries has experienced. Australia has experienced a mining boom not unlike Canada.

adaml_623 10y ago
I don't think you've actually done your research. I can see lower than average GDP growth which is what the OP said. [0] In addition it's undeniable that the RBA has been cutting the cash rate and that just like the OP said a rise in the cash rate might pop the bubble. [1] I don't know the sources of your opinions/information but you should consider whether they are slightly biased for some reason. [0] - http://www.tradingeconomics.com/australia/gdp-growth-annual http://www.tradingeconomics.com/australia/gdp-growth-annual [1] - http://www.rba.gov.au/statistics/cash-rate/ http://www.rba.gov.au/statistics/cash-rate/
- rbg246 10y ago
  The comment I was replying to was saying Australia's GDP growth was comparable to the rest of the world, I said it was not. Your first source shows a consistent 2 - 2.5 growth rate except the last two where one was 3 and the other 1.8, majority of OECD countries would be very happy with that sort of growth.