House prices

flollo wrote:

Here's a bit of data:

- Reo up 43%
- Steel beams up 41%
- Structural timber up 39%
- Plywood up 29%
- Electrical cable up 27%
- Copper pipes up 25%
- Terracotta tiles up 21%
- Metal roofing up 20%
- Insulation up 14%

Overall building materials inflation (March yoy) - 15.4%

Fixed price contract with a 10% margin signed a year ago (there's way less BTW)? Will we see a wave of unfinished projects and defaults?

That’s crazy. Wonder if the billions in government funded infrastructure works will stick to the contracts or be renegotiated to prevent collapses. Subbies will have to be careful.

Don't know what happened but the plumbers and concreters walked off a big job next door to me a few days ago and haven't been back. There was some sort of meeting , I overheard a few expletives. Looks like the Mc Mansion is on hold.

Any house that was fixed priced a year or two ago is going to create massive problems. If the client holds the builder to those prices which is their right, something will need to give ie builders going into liquidation.

oxrox wrote:

Any house that was fixed priced a year or two ago is going to create massive problems. If the client holds the builder to those prices which is their right, something will need to give ie builders going into liquidation.

More likely builders cutting corners in the build....client ending up with a shit product.

Would think there is a lot of that going on right now don. Especially with the cheaper builders.

donweather wrote:

oxrox wrote:

Any house that was fixed priced a year or two ago is going to create massive problems. If the client holds the builder to those prices which is their right, something will need to give ie builders going into liquidation.

More likely builders cutting corners in the build....client ending up with a shit product.

More like sub contractors will get shafted as most tradies won’t do shit work because call backs suck.

monkeyboy wrote:

3 items "caused" inflation in AU:

Building costs, fuel and education.

I am not sure raising interest rates will deal with any of those as 1 and 2 are mostly supply side (I s'pose 1 will be dampened if demand is dropped but prices are set globally not locally). Number 3 was a raise in the tier levels - whatever that means, so thats a once off and effects "only" students.

So, maybe baby there is a transitory element if the supply side can be addressed (but that aint gonna happen quickly).

The US was just a bunch of short covering, and long selling (in the USD). Bull trap.

Raising interest rates will deal with #1. Dont forget people with equity in their home/s also undertake large and costly reno's which drive up demand for materials and tradies. interest rates will dampen people's appetite for full blown reno's as well as new builds, so I think it will help.....but RBA has to lift to somewhere around the 2-2.5% cash rate to make any dent IMO.

Trades go to the builder to ask for more money > builder goes to the investor to ask for more money > investor goes to the bank to ask for more money (if keen) > bank books the valuation on the property > if ok, money approved. If not, no money

Investor can bypass the valuation/bank process if they’ve got cash and are willing to spend that cash.

But in a vast majority of cases, the valuator is the king. And if the valuation numbers stagnate or drop we might be in a shaky situation.

Good point Flollo.

flollo wrote:

Trades go to the builder to ask for more money > builder goes to the investor to ask for more money > investor goes to the bank to ask for more money (if keen) > bank books the valuation on the property > if ok, money approved. If not, no money

Investor can bypass the valuation/bank process if they’ve got cash and are willing to spend that cash.

But in a vast majority of cases, the valuator is the king. And if the valuation numbers stagnate or drop we might be in a shaky situation.

And we all know what will happen to Aus if the housing market gets into a shaky situation!!

honestly i dont know how sticking interest rates up helps the economy, just applies more pressure to the cost of everything which drives up inflation.....

Driving up interest rates reduces demand for things which reduces price of things. In theory.

Keep your eyes on Realestate.com to watch this theorem play out in real time.

yes i know house prices will stabilise or fall but the pressure on the building industry which is the driver of the aust economy these days will hurt a lot of people coupled with everything else going north and i can see a recession looming...so whats the point of putting interest rates up....

I agree Simba, and a lot of others do too.

Raising interest rates when the cost of housing is already such a large component of cost of living is likely to be inflationary.

simba wrote:

yes i know house prices will stabilise or fall but the pressure on the building industry which is the driver of the aust economy these days will hurt a lot of people coupled with everything else going north and i can see a recession looming...so whats the point of putting interest rates up....

It's a really good question, one I've never got my head around fully. The best, most simple explanation I have is: if we dont raise interest rates and our major trading partners do then the AUD goes down and everything becomes super expensive domestically because we import everything and even our local energy is priced on the global markets (unfortunately).

Australia was once described as a "mine with a farm attached". I think we can add "...and a finacial sector dependant upon home loans and credit" although the banks will be just fine I'm sure.

simba wrote:

yes i know house prices will stabilise or fall but the pressure on the building industry which is the driver of the aust economy these days will hurt a lot of people coupled with everything else going north and i can see a recession looming...so whats the point of putting interest rates up....

It had to happen sooner or later and the later we leave it the worst the worse the outcome. The Housing Ponzi should’ve been popped years ago. We are obviously facing a more tumultuous conclusion by prolonging it to this stage but it’d be much more destructive again if the Ponzi cancer was allowed to metastasise any further throughout our economy.

At the moment the Australian economy is the financial equivalent of a career drunk with liver necrosis who chooses to drink faster to avoid the hangover.

simba wrote:

honestly i dont know how sticking interest rates up helps the economy, just applies more pressure to the cost of everything which drives up inflation.....

It reduces spending which reduces demand which reduces inflation.

simba wrote:

yes i know house prices will stabilise or fall but the pressure on the building industry which is the driver of the aust economy these days will hurt a lot of people coupled with everything else going north and i can see a recession looming...so whats the point of putting interest rates up....

To slow inflation so we don’t end up with hyperinflation like places likeTurkey El Salvador etc which plummets the AUD.

DudeSweetDudeSweet wrote:

At the moment the Australian economy is the financial equivalent of a career drunk with liver necrosis who chooses to drink faster to avoid the hangover.

Gold!!! And yet so true.

Yep, I like that one too.

It's criminal how this has been playing out for over twenty years and
a) no fucker has done anything about it, and
b) the electorate has been too greedy and short sighted (prompted by the media) to deal with it (see 2019 election).

I dropped Economics in second year Uni back in 1980 so anything I learned is well and truly lost in the fog, but can an economist here tell me, I vaguely remember that to control inflation you have to set interest rates above the inflation rate. Is that correct?

That'd make life interesting.

More supply issues on the horizon.

https://www.theurbandeveloper.com/articles/nation-building-approvals-tum...

Zero chance Australia could ever see hyper-inflation.

That would take deliberate Govt policy of wage indexing to price growth, and regularly, to ever get into the tight wage/price upward spiral which is a hallmark of hyper-inflation.

We had sustained high inflation through 70's/80's for eg, with no hyper-inflation.

Interest rate rises can't suppress demand for non-discretionary items - and if that is where most of the price growth is (which it is) then interest rate rises will be useless.

It will take supply side bottlenecks to be fixed, which has nothing to do with RBA monetary policy.

Building materials pricing will not be reduced by interest rate rises for eg.

Nice one @freeride76, I share the same sentiment. I will also add that we need to be careful of lunatic politicians promising to lock rates at a max of 3%. That move could literally destroy the AUD and our standard of living. Not to mention it would bankrupt the state in bad scenarios.

flollo wrote:

I will also add that we need to be careful of lunatic politicians promising to lock rates at a max of 3%. That move could literally destroy the AUD and our standard of living. Not to mention it would bankrupt the state in bad scenarios.

How would that be possible anyway? Doesn't the RBA set the rates, not the government?

Its an interesting change of policy tactic from freedom to 3% capped home loan from UAP isnt it. Different audiences in my opinion. Don't reckon the UAP will get any traction from it.

I assumed it was just Clive Palmer blatantly BS'ing to try and win a Senate Seat?

freeride76 wrote:

I assumed it was just Clive Palmer blatantly BS'ing to try and win a Senate Seat?

Surely not? Would be totally out of character.

yep but he needs people to vote for him to do that, now that the moderate anti vax crowd have their freedom back and are less inclined to vote for UAP. I don't see those most worried about interest rates (FHB's with new mortgages) who clive is targeting being dumb enough to think he can cap 3% mortgage rates. different audience in my opinion and probably not fans of clive. don't think he will do well out of it.

no me neither.

It's just a hail Mary IMO, to try and win back some of the anti-vax vote that he would have lost.

freeride76 wrote:

Interest rate rises can't suppress demand for non-discretionary items - and if that is where most of the price growth is (which it is) then interest rate rises will be useless.

Read the other day that inflation of non-discretionary items was a touch over 5% but inflation of discretionary items was 2.1%.

That seems to be a feature of globalised/neoliberal economies.

All the trinkets and bells and whistles get cheaper and cheaper but the stuff you actually can't live without gets more and more expensive.

Constance B Gibson wrote:

And so personal. Commenting from lived experience, no doubt.

(References to economics not applicable)

How’d that big move to Streaky go champ?

freeride76 wrote:

Zero chance Australia could ever see hyper-inflation.

That would take deliberate Govt policy of wage indexing to price growth, and regularly, to ever get into the tight wage/price upward spiral which is a hallmark of hyper-inflation.

We had sustained high inflation through 70's/80's for eg, with no hyper-inflation.

Interest rate rises can't suppress demand for non-discretionary items - and if that is where most of the price growth is (which it is) then interest rate rises will be useless.

It will take supply side bottlenecks to be fixed, which has nothing to do with RBA monetary policy.

Building materials pricing will not be reduced by interest rate rises for eg.

You sure mate?

Houses around here jumped 100% percent in a matter of months. As they have in lot any places . And they weren’t $2 houses to start with.

You don’t think the single largest consumer item in the country increasing in price by about the factor of an average lifetime’s net savings in less than a year is hyperinflation? The inflation may not be evenly spread throughout the economy but it’s certainly already present in places.

Here’s the thing - If you’ve got a house worth $600K then increases in worth to $2M in the span of 12 months , as I’ve seen numerous times , it’s not the value of the house which has increased but the value of the dollar decreasing immensely. Otherwise known as hyperinflation.

freeride76 wrote:

I assumed it was just Clive Palmer blatantly BS'ing to try and win a Senate Seat?

Yep. No lie too big etc

We need to call things for what they are and capping rates at 3% is borderline treasonous as it might destroy the country as we know it. I'll explain why below.

Reserve Bank as we know it was established by Reserve Bank Act 1959 which officially split RBA from CBA. It is an independent body as we know it now. But to cap rates you are effectively saying that you have a difference of an opinion to the RBA. The below 3 paragraphs describe the relationships between the treasurer (government) and the RBA when there is a difference of an opinion

'Section 11 of the Reserve Bank Act 1959 requires the Reserve Bank Board to inform the Australian Government from time to time of the Reserve Bank's monetary and banking policy. This occurs largely through frequent formal and informal contacts between the Governor and the Treasurer.

The Act lays down procedures which are to be followed if there is a difference of opinion between the Australian Government and the Reserve Bank Board as to whether the monetary and banking policy of the Bank is ‘directed to the greatest advantage of the people of Australia’. First, the Treasurer and the Board are to endeavour to reach agreement. If they are unable to do so, the Board is required to provide the Treasurer with a statement on the matter. The Treasurer may then submit a recommendation to the Governor-General who, with the advice of the Federal Executive Council, may determine the policy to be adopted by the Bank. The Treasurer would then inform the Reserve Bank Board of the policy so determined and the Board would be obliged to implement it. The Board would also be informed that the Government accepted responsibility for the adoption by the Bank of that policy. The Treasurer would lay before each House of Parliament a copy of the order determining the policy which was to be implemented by the Bank, together with the statement provided to the Treasurer by the Reserve Bank Board and a statement by the Government on the matter on which opinions had differed. To date this procedure has not been used.

Section 13 of Reserve Bank Act 1959 also directs that ‘the Governor and the Secretary to the Department of the Treasury shall establish a close liaison with each other and shall keep each other fully informed on all matters which jointly concern the Bank and the Department of the Treasury’.'

So, Clive can go ahead and try to cap the rates with 3 basic scenarios (could be more):

1) Claim difference of an opinion with RBA and influence the Governor-General - This would trigger a constitutional crisis and if Governor-General was to adopt their suggestions it could lead to serious civil disobedience (I would be there in the first line)

2) Amend the relationship above so the treasurer is the one calling the shots. He can do it in 2 different ways (again, could be more):

A) Amend the Reserve Bank Act nicely through the parliament and everyone accepts it - Highly
unlikely it can happen OR
B) Take weapons and do it by force (not to be excluded). Civil disobedience again and yes, I would
be there

3) Subsidise the delta between the nominal rate and 3% directly to retail banks. If there is nowhere to get money (globally) to make profits at retail 3% then banks simply won't do it. Don't forget that retail 3% is not far off from where we are now. If banks raise finance in the US for example at 5% and have to sell it for 3% here it would mean that the taxpayer will pay a 2% difference. Higher rates = higher subsidy. This is where 'bankrupt the state' comes in, it's a real risk in this scenario as everyone globally started lifting rates. You could argue that subsidies should go to the mortgage holders but will banks keep issuing new loans? Who knows. But overall, this is like negative gearing x 100 in volume.

Clive spurts out dung like the back end of an overfed elephant. He’s the legit Barnum and Bailey candidate. It’s heavy to believe that he’d garner a single vote. What can you do - democracy.

DudeSweetDudeSweet wrote:

freeride76 wrote:

Zero chance Australia could ever see hyper-inflation.

That would take deliberate Govt policy of wage indexing to price growth, and regularly, to ever get into the tight wage/price upward spiral which is a hallmark of hyper-inflation.

We had sustained high inflation through 70's/80's for eg, with no hyper-inflation.

Interest rate rises can't suppress demand for non-discretionary items - and if that is where most of the price growth is (which it is) then interest rate rises will be useless.

It will take supply side bottlenecks to be fixed, which has nothing to do with RBA monetary policy.

Building materials pricing will not be reduced by interest rate rises for eg.

You sure mate?

Houses around here jumped 100% percent in a matter of months. As they have in lot any places . And they weren’t $2 houses to start with.

You don’t think the single largest consumer item in the country increasing in price by about the factor of an average lifetime’s net savings in less than a year is hyperinflation? The inflation may not be evenly spread throughout the economy but it’s certainly already present in places.

Here’s the thing - If you’ve got a house worth $600K then increases in worth to $2M in the span of 12 months , it’s not the value of the house which has increased but the value of the dollar decreasing immensely. Otherwise known as hyperinflation.

True, but existing homes are excluded from the official inflation numbers. Only newly developed + rent are included, bundled together with other things into the housing component. Below from ABS:

'It includes new dwellings purchased by owner occupiers (houses, townhouses and apartments), rents and major renovations. Including new dwelling prices captures the cost of adding to the housing stock.'

freeride76 wrote:

That seems to be a feature of globalised/neoliberal economies.

All the trinkets and bells and whistles get cheaper and cheaper but the stuff you actually can't live without gets more and more expensive.

In a nutshell.
Helps with the misapprehension that we've never had it so good.

"There is no means of avoiding the final collapse of a boom brought about by credit expansion. The alternative is only whether the crisis should come sooner as the result of voluntary abandonment of further credit expansion, or later as a final and total catastrophe of the currency system involved."

Ludwig von Mises, in "Human Action".

I say sooner, will be nicer outcome.

I think that the currency expansion discussion has been thrown out of the window in the last 48 hours.

We're looking at the other side of it, from the top

donweather wrote:

It reduces spending which reduces demand which reduces inflation.

freeride76 wrote:

Interest rate rises can't suppress demand for non-discretionary items - and if that is where most of the price growth is (which it is) then interest rate rises will be useless.

.

I can easily see the mechanism where IR increases would suppress demand. If housing is non-discretionary, as soon as the IR rises shift the sentiment of buyers and sellers, the sentiment can dramatically alter a market very fast - one recent example being the vignette of Victoria BC in this thread. Pricing/number of listings may follow. Every single chart any of us ever reads, is ultimately a chart of human sentiment toward a particular thing.

I note in your favour BOE minutes suggest supply side bottleneck as well, and they forecast their inflation to reduce from 10% (!) later this year, to much lower in 2025.

Oh yeah, in addition to the mullets I am seeing more flannel out there. You all know what that means.

"Housing demand dwindles as buyers take a step back due to rising mortgage rates. Compared with the month before, the number of houses sold in Toronto tumbled 26% in April. Vancouver home sales also slipped. "

https://www.zerohedge.com/markets/toronto-housing-bubble-deflating-home-...

Decent article

"Help to Buy v Home Guarantee: Will either party’s plans help aspiring homebuyers?

Economist Peter Tulip is blunt when asked if either major party’s home buyer incentives will make a difference. “Yes,” he says. “I think they will both do harm.”

https://www.domain.com.au/news/help-to-buy-v-home-guarantee-will-either-...

Thanks for your detailed explanations flollo.
Can I ask what’s you do? Academic?