Sunday, October 26, 2008

Sell your house?

I noticed in today's press that a large number of fairly expensive houses being put up for auction in my suburb yesterday and that all were passed in.  The story was much the same across Melbourne. A plausible guess is that either those with big mortgages are trying to 'sell up' in anticipation of a possible housing price collapse or that 'smarties' are just trying to lock in tax free capital gains with thoughts of buying back more cheaply in a year or so time.

Several people have asked me what to do about the imminent recession and I have hedged the issue.  I am not a qualified financial advisor and like most economists I do not know how the current crisis will pan out medium term.  I do think that a recession in Australia is inevitable but the severity of this is unclear. Moreover, I agree with Gregory Mankiw that we cannot rule out a really severe recession - the D word is not redundant yet, although it seems unlikely given enhanced macroeconomic management prowess.  The escape clause that it 'might' happen reflects ignorance of the current situation.  Policy makers are guessing.

Most of the standard advice that I hear dispensed is that those with a lot of debt should lighten up a bit lest asset prices take a sharp further plunge leaving borrowers with hefty debts assets of diminished value. That sounds very plausible but, to be clear, this advice is:

(a) Possibly incorrect - with lower interest rates residential real estate may be more resiliant than we expect.
But this seems unlikely. There was pressure on house prices prior to the current financial crisis.  There will be quite a few fixed interest mortgages held during a period where prices seem likely to slide a lot.
(b) Probably too late given that, as observed, the wealthy are already trying to 'sell up' without success. It will become increasing difficult to abandon the sinking ship.
(c) Socially disfunctional though individually rational given that it worsens the downwards pressure on prices of such things as real estate.

Meanwhile here is a cheery, optimistic very American guide to riding out the slowdown.  Opportunities abound according to Business Week even though on balance you might lose your shirt. As a people Americans as a people are too optimistic - they need to understand that intent and resolve are not everything. Optimism is a bias.


observa said...

"the D word is not redundant yet, although it seems unlikely given enhanced macroeconomic management prowess."
Like guaranteeing bank deposits Harry and watching the rest of the finance markets freeze up? The worry is Turnbull, Rudd, Stevens and Henry were all as one on this brilliant bit of economic prowess. I'd be laughing at your statement if the initial evidence to the contrary wasn't so serious.

With the malinvestments of years now locked in by the stupidity of manipulating the price of capital for consumptive purposes, the Depression die is now cast(well apart from a brief experiment with rampant stagflation if central bankers can manage to pull it off)

observa said...

And as fiat money collapses everywhere-
We now have Rudd 'fine tuning' that initial, unequivocal deposit guarantee over a 'long period of time' according to him. I'm certain even Austrian economists can trust you on that now Kev.

conrad said...

Given current demographics, I imagine an additional group are people wanting to retire to somewhere smaller that have left it a bit too late or are simply unlucky enough to want to retire at the wrong time (especially in suburbs like Ivanhoe, which I imagine have a relatively old population).

observa said...

Here's the Austrian view, Oz style in a nutshell Conrad-
The damning point is that 163% M1 growth in 11 years. Basically that means that for every dollar of readies(purchasing power) in Mar96, there was $2.63 sloshing around in Dec last year.(this with a maxm popn growth of around 1.5% pa) If you flung that sort of dough at a youth generation in the late 60s, early70s, their reaction and outcomes were swift and obvious. This time round that aging cohort began to 'invest' it for their retirement, driving house prices to unaffordable levels for their offspring note and mostly on tick to Asian savers. They were happy to join the ponzi scheme, because they couldn't trust lending it to their compatriots in their own backyard, given the regulatory and judicial regime there. So in the 'West' they trusted, or more precisely our central bankers, more fool them.

The problenm with ponzi schemes is when everyone wakes up to the rules of the game that there aren't enough new suckers in the world to keep up the payouts. Welcome to deleveraging and the crash we have to have. The problem is the length and depth of these malinvestments which is why the recession will be so long and deep to unwind them. That's called a Depression at some stage by all and sundry. It's just that Austrian economics can call it a lot sooner by reading the signs.

Sir henry casingbroke said...

You'd have to wonder, Harry whether anything you now say in your blog is not superseded (no pun intended) by news a few hours later.

Colonial First State is freezing, i.e. suspending applications, daily withdrawals and switches relating to funds with significant investments in mortgages. Now the last bit is a vote of confidence in the property market, eh?

Colonial First State is no irrelevant minnow or a reckless junk bond investor. It is owned by the Commonwealth Bank. It is the 14th biggest super fund in Australia.

Swannie says he is unable to do anything about funds freezing redemptions. But Property Investment Research boffin Dugald Higgins, says huge numbers of people will be pushed over the brink unless action is taken.

So, in less than a month, things have gone from slightly worrying to full-on catastrophic.

If 1929 was the Great Depression, this is the Ginormous, Gargantuan, Brobdingnagian Depression.

In 1929 everything wasn't linked. There was no globalisation, as such. The derivatives market with its 40 times money in the kitty exposure did not exist prior to 1979.

Here is a prediction: as we do not produce anything except agricultural goods and things mined out of the ground that nobody will need to buy for a while, and because companies that do make money in Australia are mostly overseas owned (Holden, McDonalds, Optus, the water in Sydney and Melbourne, etc.) and thus repatriate the profits back home, the Aussie dollat will be worth about 25 cents by Xmas. And this is an optimistic assessment.

jc said...

Holden doesn't make any money Henry.

sir henry casingbroke said...

It normally does, JC, but after sacking 600 workers at its Elizabeth plant there were costs associated with retrenchments of $77.5 million this fin year, JC, otherwise it would have made a pre-tax profit of about $30 million.

Holden has been very profitable over the years for its parent.

Interestingly, although the company was bankrolled by the Australian government, and up until 1962 (I think) was 49% in Australian hands, it is now wholly owned by GM.

I reckon the Australian government will be buying it back again real soon now.

Bit like a shells and pea game.

I note Harry is trailing a fresh carcass as his head thread so I better go there. To quote S. Clay Wilson, The head always tastes best.

observa said...

As the chief econ of the OECD says, depression is an 'ambiguous concept',22606,24558153-5006368,00.html
and getting more ambiguous by the day by the sounds of Klauspeak

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