I'm shocked! Good property journalism!

Its so refreshing to see a well written, thoughtful article on housing, given the general kind of guff that usually passes for property-journalism. Three cheers for crikey.

Penny Wrong on Climate Change

Heard Penny W(r)ong on Radio National this morning. What a disappointment this government has been on climate change. All that money the government is putting into insulating houses with pink batts... what difference will it make to Australia's emissions? The answer, it is becoming clear, is likely to be ... (drum roll).... none. Zilch. Zippo. Why? Because unless the government increases its emissions reduction target, the energy savings from those batts will simply lower the price of emissions permits in the emissions trading scheme. Think about it... the cap remains the same, so if you save energy in your home (by whatever means), this simply means that you will be making it easier/cheaper for companies to buy the necessary permit. Penny did say that a reduction in emissions from households would make it 'possible' for the government to go for a more ambitious target, but does anyone believe the government will do this? No, I didn't think so. What a sorry mess.

Why cant we get to the point where households can get the financial benefit from emissions reductions? If I cut my power use in half, I should get the cost saving from not having to pay for that energy and the value of those saved emissions in the emissions trading scheme. The power company should not take my savings as a windfall gain. Is the government moving towards this? I don't know (perhaps someone can enlighten me), but based on Penny Wong's comments this morning, it seems that they are not thinking this way....

You know its bad in banking, finance and business when....

... the Sydney Morning Herald jobs classifieds lists only a single job under that section of the classifieds. And that job is? A 'Debt Recovery Officer'. At least the federal government has finally said that they will be willing to go into deficit to soften the impact of the slowdown...

So where do people want to live?

Shown below is a picture from some work in progress, where I am looking at the location choice preferences of different household types in Sydney. The picture shows where households with young children (i.e. all less than 15 years) would like to live. The graph shows the spatial variation in preference for detached dwellings only. I do look at the effect of dwelling type, but lets do one thing at a time shall we....

You can pretty safely ignore the scale -- just think warmer colours == 'more desirable'. (If you really want to know, its the log-probability of a couple-with-kids household choosing a dwelling in that region in a discrete choice experiment.... but lets not go there).



And what does it show? Well, couples with kids like the northen harbourside suburbs (i.e. Mosman, and around middle-harbour), and big chunks of the Eastern suburbs (Vaucluse, Centennial Park, etc). No real surprises there.

Other results show that couples with young kids do not like attached dwellings -- they really do want the suburban detached home. Well, most of them anyway.. there is always a distribution of preferences.

And what about couples without kids? The figure (below) shows an estimate for couple households without children where the household reference person is less than 55 years old. They really like the inner-west, dont they?

Back to my knitting

After a couple of forays into economic matters, I'll get back to the sort of stuff I normally do.

Below is a map (click the image for bigger version) showing the proportion of journey to work trips made by either walking or bicycle, at the time of the 2001 census. Not surprising to see the huge walk/bike mode share near the city.


Just FYI, the dark blue patch out in the north-west (near Richmond) is an army barracks, so lots of army dudes live near thhe barrackds and stroll in I guess. Same for in the south (near Holdsworthy). Other than that, its basically the CBD (incl. North Sydney) and the University of New South Wales, with Sydney's second CBD (Parramatta) also having a reasonable amount of walking and cycling.

The insanity of it all

How insane is the latest federal government stimulus package measures which increase the first home buyers grants?

The increased grant will boost demand for housing, so the actual beneficiaries are existing investors/owners and new home buyers. Given that both these groups are better off than the average, this seems like a pretty awful redistribution of income. Much better would be tax relief or payments targetted at lower income households. There is some of this in the package, but there could have been more if they werent squandering money propping up the property market.

There is no reason for the government to step in and support house prices. If the government is worried about the economic damage caused by falling home equity, a straight cash handout to all households achieves the same purpose, as well as being much fairer.

To recap: The winners from this policy will be:
a) existing property owners, who will be able to get a better price for their property if they sell it; and
b) Those in a position to purchase a first home or investment property.

Do either of these groups need a handout? First home buyers would be better served through income tax relief or cash payments. They are not well served by a government throwing money at a property market that is already expensive by world standards -- that's just going to make things worse.....

I'm starting to think: Recession in Australia.......

OK, despite the fact that you almost always come out looking silly when you make economic predictions, I'm going to have a word on this anyway, 'cause I got a feeling that things aint gonna be pretty, and want to put it on the record .....

Despire protestations from our pollies, Australia is headed for a recession. And a bad one at that... . Here is why:

• We arent strong enough to surive a synchronized world recession, despite the relative health of our banks.
• That means higher unemployment
• Given the fact that asset prices (esp. housing) are pretty high, and household gearing is pretty high, this means asset prices are going to ......... drop ......
• This just feeds back on itself for a while, with falling asset prices suddenly turning what were 'reasonable' debt to asset ratios into scary ones.... which causes more defaults or fire-sales, which makes asset prices fall further ... which... you get the picture.

I'm not denying the good things that are often pointed out. Our banks are in relatively good shape, and we will have some buffering from China*. But this is not enough. We have a large current account deficit, and actually financing this is going to get very, very difficult. If foreigners stop lending to us, this means domestic savings have to go up (a lot), or general borrowing and investment must plummet. We cannot boost domestic savings that quickly, so we can either flog off everything we can at fire-sale prices, or else business investment will plummet, leading to a recession.

Note that it is also true that Australia's housing supply/demand situation is pretty tight, so one would not normally expect to see much of a fall in prices. To some extent this is true, but the big boom in house prices up to around 2003 was fueled by easy credit sloshing around the world economy, and now that this is going to be cut off, I think prices can fall regardless of the tight supply situation. How far can they fall? My guess is gross rental yields must reach at least 7% for investors to consider buying (from a purely cash-flow point of view, property starts to stack up at that yield), which means prices could fall by a third.......

Hold on to your hats, and for God's sake, don't borrow any money.


To stick my neck out even further, here is how I think things will pan out afterwards:

• Rising unemployment, falling asset prices (damaging bank and household balance sheets).
• Central banks will lower rates and start pumping out the money. Inflation be damned they'll say !
• In the short term, we could see deflation, inflation, who knows... it'll be a blood-bath, but the end result of the money printing will be high inflation.

So, my investment tip is: For now, be in cash, have no debt. In a year or two's time, when everything is a mess and noone can see a way out, get all out of cash, even borrow a modest amount if you can, 'cause the coming inflation wave is going to wash all that cash (and debt) away. Where to put it? Any income generating asset is OK, but resources or commodity-linked assets will be best. Property probably OK too, as long as the yield stacks up.






*Incidentially, while I am at this prediction thing, I'll say that I think India is much more vulnerable than people think, and is in a totally different position to China. I predict India will go into recession also out of this crisis.