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Friday, October 2, 2015

Defining a Housing Bubble

When the prices of securities or other assets rise so sharply and at such a sustained rate that they exceed valuations justified by fundamentals, making a sudden collapse likely - at which point the bubble "bursts". Financial Times
A spike in asset values within a particular industry, commodity, or asset class. A speculative bubble is usually caused by exaggerated expectations of future growth, price appreciation, or other events that could cause an increase in asset values. This drives trading volumes higher, and as more investors rally around the heightened expectation, buyers outnumber sellers, pushing prices beyond what an objective analysis of intrinsic value would suggest. The bubble is not completed until prices fall back down to normalized levels; this usually involves a period of steep decline in price during which most investors panic and sell out of their investments. - Investopedia
A bubble is an upward price movement over an extended period of fifteen to forty months that then implodes. - Charles Kindleberger

A lot of people have been using the term ‘bubble’ to describe the Australian housing market, others say we don’t have one and Former Treasury secretary Martin Parkinson recently suggested it was the wrong question to be asking (i.e. do we have a bubble?), a comment I recently agreed with.

The problem with debating whether or not we have a bubble is that, like the term affordability, it’s definition is subjective.

I provided a few definitions of an 'asset bubble' above, one thing they all have in common is the need for the eventual ‘pop’. So analysts, economists, bloggers, property commentators and perma-bears can rave on all they like about a housing bubble in Australia, but the proof of having had one will be when and if it bursts.

That leaves us with a question though, what size and speed of decline do we need to see in order to confirm the bubble? The above definitions use terms that indicate a quick outcome, 'sudden collapse', 'steep decline', 'panic' and 'implodes', these all indicate a fast and substantial decline. I think anyone arguing that the 'Australian housing bubble' will burst by a slow paced, long term decline in price (real or nominal) is not really describing the bursting of a bubble at all, but rather a slow revaluation of the asset based on the deteriorating fundamentals.

Here is a chart I posted on Twitter over the weekend (click to enlarge):

I would suggest one of these cities had an obviously bubble (Las Vegas) which was confirmed by the bursting price, but what of the other two cities? In my opinion Boston's price decline was not a bursting housing bubble (it's decline was not steep and sudden as it was in Las Vegas), but rather was impacted by the conditions caused by the GFC and credit conditions resulting form the bursting of housing bubbles elsewhere in the United States and was probably overdue some sort of correction. That might also be the case for Adelaide (included on the above chart) and some other Australian cities which aren't experiencing strong price growth.

At it's peak the United States had a bifurcated housing market just as we have in Australia now with unsustainable rates of annual price growth in Sydney and Melbourne, but only moderate growth (at best, if not negative) in most other locations. Cameron Kusher posted a great chart on Twitter recently which highlights differences in price growth since the GFC.

Capital city home value growth since GFC - Dec-08 to Sep-15

Is 10-15% growth over (almost) 7 years the sort of price increase you'd expect to see in an 'asset bubble'?

Now I'm not arguing that Australian property (anywhere) is cheap or affordable (see the first few charts in this post), there is no doubt in my mind that it's historically and globally expensive, but that doesn't mean that every Australian capital city is in a bubble (and going to pop), nor that the Australian housing market should be considered a bubble as a whole.

There's a good chance it will be years before we can confirm whether any Australian capitals are in a property bubble right now or simply expensive/somewhat overvalued. My best guess is that Sydney and Melbourne could be in bubbles and peak this year experiencing a steep decline in price over the years ahead, but some other Australian cities like Adelaide and Brisbane I expect may only experience modest declines. For example if Adelaide saw a 10% nominal decline into 2017 (which I think is a possibility given weak economic factors), then it would result in growth having been 0% over the previous 9 years.

Whatever lies ahead I wish more commentators would define what they consider a bubble to be, because it's become clear to me that some individuals have a completely different opinion of what the term means.
If you have a view on what differentiates expensive or overvalued property to an actual property bubble and what we will need to see from Australian property prices (or in one of the capitals) to confirm we've had one here then I'd be interested to hear your opinion in the comments below...


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Sunday, August 30, 2015

Australian Houses Priced in Gold / Silver Ounces (2015)

Every 12 months I have been updating the data I keep on Australian house prices measured in ounces of Gold and Silver. Here is the latest update which takes us through to July 2015 (inclusive).

Data for house prices is via Residex (median house price indices).

Data for Gold and Silver prices is via Perth Mint (bid average AUD).

I have added Perth and Adelaide house price charts to the mix this year, but note the time frame is different to Brisbane, Sydney and Melbourne (due to limitations on available Residex data).

Key Figures:

Adelaide (Ounces to buy a house) 
Housing Peak Against Gold (February 2005): 501oz Gold
Latest Figures (July 2015): 282oz Gold, 21,439oz Silver
Based on Current Spot Price: 271oz Gold, 21,375oz Silver

Brisbane (Ounces to buy a house)
Precious Metals Peak (January 1980): 62oz Gold, 1091oz Silver
Housing Peak Against Gold (February 2004): 600oz Gold
Latest Figures (July 2015): 321oz Gold, 24,448oz Silver
Based on Current Spot Price: 309oz Gold, 24,375oz Silver

Melbourne (Ounces to buy a house)
Precious Metals Peak (January 1980): 67oz Gold, 1181oz Silver
Housing Peak Against Gold (February 2004): 661oz Gold
Latest Figures (July 2015): 450oz Gold, 34,253oz Silver
Based on Current Spot Price: 432oz Gold, 34,150oz Silver

Perth (Ounces to buy a house)
Housing Peak Against Gold (July 2007): 642oz Gold
Latest Figures (July 2015): 342oz Gold, 26,078oz Silver
Based on Current Spot Price: 329oz Gold, 26,000oz Silver

Sydney (Ounces to buy a house)
Precious Metals Peak (January 1980): 103oz Gold, 1811oz Silver
Housing Peak Against Gold (February 2004): 1100oz Gold

Latest Figures (July 2015): 670oz Gold, 51,028oz Silver
Based on Current Spot Price: 644oz Gold, 50,875oz Silver
(Spot Price ratio calculated on A$20oz for Silver, A$1580oz for Gold and July house prices)

A point of interest, Gold has outperformed most capitals since the last update, rising from $1360 in June 2014 to $1518 in July 2015. This has resulted in most cities seeing the ratio fall. That is with the exception of Sydney where house prices have outperformed Gold and rose a blistering 21% YoY to July 2015.

It's also interesting how much later the peak for Perth property (to Gold) came as house prices boomed there into 2006/2007.

My view going forward has not really changed from my update last year: "Over the same period (next 3-5 years) I expect rising precious metal prices and a lower Australian Dollar, so do think investors stacking ounces for the eventual purchase of a house will be rewarded (even those in Sydney). Only time will tell if I'm right."

Here are the charts (click any to enlarge).


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Wednesday, August 26, 2015

The Religion of Gold Hating

A lot of finance commentators have poked fun at those who own Gold (aka 'Gold Bugs') over the years, likening them to members of a cult or religious group.

Articles such as '5 more reasons why investors shouldn’t worship gold right now' and 'Let’s Be Honest About Gold: It’s a Pet Rock' where the author concludes that owning Gold is "an act of faith", are recent examples of authors trying to portray Gold owners as devotees of the metal. This is nothing new though, one well known Gold hater, Joe Weisenthal, even wrote a post half a decade ago titled '9 Ways That Gold Is A Religion Masquerading As An Asset Class'.

One amusing aspect of all this Gold hating is that (when aggregated) much of it ironically resembles the same culture they are criticising. It has the same comradery, the same obsessiveness and the same unwavering faith (just in the opposite of what Gold stands for: fiat currencies, sensible government or other financial assets, with no allocation to those which are tangible).

Many Gold haters spend a great deal of time trying to convince anyone who will listen not to own Gold. They ridicule those who do own it and usually make no differentiation between those who allocate a small or large portion of their portfolio to Gold. They try and mold any argument for or against Gold to their own nonobjective viewpoint while claiming to be "asset agnostic" as if their view doesn't suffer from the same subjectivity as the rest of us.

Here are some recent examples of Gold hating from one of their favourite pulpits (Twitter).

Cullen Roche (speaks for itself):

Joe Weisenthal (retweeted this link to an August 6th article on the Gold crash costing Russia and China $5.4 Billion, when the price had already rebounded to around the pre-crash level.):

John Aziz (suggesting a price drop in Gold should result in investors who own the metal "rethinking the world", does that mean those who don't own Gold should have been rethinking the world when it was at US$1900?):

Stephen Koukoulas (whose Gold commentary over the years has lacked sense, see here and here):

Barry Ritholtz, is another prolific Gold hater who I've written about recently (here and here).

A lot of the Gold hating is less obvious than this (i.e. snarky tweets on Gold, that most would brush off as attempted humour, but a pattern can be identified when watching over time), but evidence of it exists across the feeds of many Twitter finance 'elites'. It also flooded the mainstream media over July and early August (marking a significant bottom?) until the price started to rise again.

I agree Gold is like a religion to some owners (but not all of them as the Gold haters would have you believe), but even though that's the case, wouldn't it be rational for investors (who recognise this fanatical group of Gold owners and buyers) to hold a position in the metal knowing of this devout participation in the market? Wouldn't it also be rational to own Gold knowing there are billions of people living in a society with deep cultural ties (many based around religion) to the metal and who are likely to be the same people whose wealth is set to increase the most over coming decades?

For me owning Gold is more of an atheistic position (for the most part, among other reasons). Disbelief (or lack of faith) in governments being capable of navigating the excessive debt that's built up in the financial system today to a growth model moving forward without a significant reset, mass default, global crash to restore some resemblance of sustainability. I think Gold will be one of few assets to benefit from such an event or environment so a healthy allocation is warranted.

Gold Bless,
Bullion Baron.


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Thursday, August 6, 2015

Is Property More Affordable Today Than 30 Years Ago?

This is a continuation (that I have written) of a conversation written by fellow Adelaidean Peter Koulizos, see here for the prologue.
[Son enters room]
Son: Hey dad, I just heard you spinning a whole lot of nonsense to sis about housing affordability.
Dad: What do you mean son? I was just telling her how it was back in my day.
Son: Well you know finance and history aren’t her strong points…
Dad: Speak nicely of your sister please.
Son: Ok, as I was saying, you claimed that it took mum and you longer to save a deposit, because a 25 per cent deposit was required to buy, but isn’t it true that some building societies loaned up to 95 per cent, meaning similar loan to value ratios were available even 30 years ago?
Dad: Well, yes, but the interest rates were often higher than the major banks...
Son: But isn’t it also typical today for the lenders offering the easiest credit conditions to have higher interest rates?
Dad: You have me there son.
Son: And isn’t it true that in the early to mid-1980s that the First Home Owners Scheme was far more generous paying up to $7000 in benefits, equalling more than 10% of the purchase price you mentioned?
Dad: That is true. Your mum and I took full advantage of that and the First Home Owners Grant isn’t nearly as generous today.
Son: You did pay 17% interest rates for a short period of time, but isn’t it true that the higher level of inflation at the time reduced the real value of the loan rather quickly with wages rising faster than they are today?
Dad: Yes, but it was tough for the first few years…
Son: Didn’t you brag to me one time that you paid off your first home in less than 10 years because interest rates fell in the years after you purchased allowing you to pay off the mortgage much faster? Do you think that it will be made so easy for sis who would be borrowing at historically low interest rates with rate rises more likely in the future?
Dad: I hadn’t considered that.
Son: You mentioned her trip to Bali, but you know she got those tickets for only $300 return and the accommodation, food and entertainment over there is far cheaper than in Australia. In real terms wouldn’t her week in Bali be cheaper than the long weekend holiday you told us you took to the Gold Coast in the early 1980s while saving for your first home?
Dad: You are probably right.
Son: It’s also the case that a median house in Adelaide today will be on a far smaller block than you got in 1985. In fact if I recall correctly you said your first home was on a subdivisible block once the council changed the zoning, do you think sis will be able to do that with the typical 375sqm blocks of today?
Dad: No, I suppose not.
Son: Look, I know you think you had it tough with the mortgage and for the first couple of years that may have been the case, but if sis takes a larger mortgage today, to buy a smaller block, in a lower wage growth environment, with the possibility that interest rates may rise making it difficult to make the repayments in the future, isn’t she taking a greater amount of risk?
Dad: If you look at it that way...
Son: And shouldn't being able to afford something take into account the level of risk associated with doing so?
Dad: I’ve had enough of this, I am going to watch some TV in the lounge.
Son: Weren’t you going to have some dessert?
Dad: I’m going to put it aside until your sister returns from her friends place so we can sit down and eat it together while I explain that I wasn’t as right as I thought.
Son: You don’t say.

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Thursday, July 30, 2015

Martin Armstrong: New Supply Could "Crush Gold"

I read Martin Armstrong's blog on a near daily basis (I have his site bookmarked in my Feedly reading list). Sometimes he has interesting predictions and theories to share, sometimes he adds some historical perspective, other times he pumps out some absolute garbage. Here is one example of the latter:
"Well, when it rains it pours. A new discovery of gold has been made and the quantity expected is up to 46,000 tons of gold, whose market value is estimated to 298 billion US dollars if the market stays the same. The entire USA gold reserve is 8,000 tons. So we are talking about a sizable discovery in the Sudan. From a supply-demand perspective, this could crush gold." - Martin Armstrong
Armstrong's source? Sputnik News, the BuzzFeed of Russian propaganda. Here are some key points from the Sputnik article and a couple more sites I found carrying the news (none of which I would have any confidence in).

- Feb 2014 Sudan grants 9 Russian companies permission to explore for minerals.
- Sudan's total Gold production during first half of this year reached 43 tons.
- Russian company Siberian for Mining discovers Gold reserves of 46,000 tonnes.
- The market value of this gold is U.S. $298 billion.
- Zhukov (CEO), plant will be €240M and have production capacity of 50t/pa.

A few things I see wrong with this picture.

It would not be possible to firm up 46,000 tonnes of (proven) Gold reserves in 18 months. The mobilisation of drill rigs, geological expertise and utilisation of laboratories for testing would have been breathtaking, like no other mining and exploration venture you had seen before. After all, 46,000 tonnes of Gold is roughly 25% of estimated above ground Gold that we've mined through all history and would almost double the proven Gold reserves we already have waiting to be extracted. Exploration for Gold reserves is an expensive and time consuming process, Gold mining and exploration companies often take years to firm up a 1-2 million ounce (30-60 tonnes) deposit, let alone something of this scale.

Furthermore 46,000 tonnes of Gold (in above ground form) is worth far more than US$298 billion at market value. Try $1.6 Trillion.

My initial though was that perhaps the 46,000 tonnes was a reference to the total volume of dirt containing the $298B in Gold, but that still doesn't make sense as Gold content of the earth would be way too high... maybe the figure was supposed to be $298M (not billion) worth of Gold, but even that by my calculation would have required Gold content of around 200g/t (not a chance, most miners these days operate on mining ore around 1-2g/t).

If anyone else can make sense of the figures or find another source with better information about the find, I'd welcome your input in the comments below.

But just for a moment lets imagine that Martin Armstrong wasn't spreading nonsense that has no basis in reality and that this company had proven up 46,000 of actual reserves ready to mine and "crush Gold" as Armstrong so eloquently puts it... I have had other commentators say "what if" about a massive Gold find in the past.

This company is spending €240M (US$263M) on a Gold plant with production capacity of 50t/pa. How fast are they going to bring that 46,000 tonnes of Gold to the surface and what would the cost be to do so? Even if they spent billions of dollars building new massive plants with the intention of bringing 1,000 tonnes of Gold to the surface each year from this one find (increasing current annual mine supply by around 35%) and assuming global Gold infrastructure expanded to process this additional capacity, it would only add a little over 0.5% to total above ground supply each year.

Meanwhile, global debt has increased by an astounding 40% since 2007, despite having a Global Financial Crisis during the same period.

Somehow I don't think Gold has much to worry about from the discovery of a massive new deposit. Of more concern is the supply / demand of and for existing above ground Gold.


Martin Armstrong has since edited his article. Google cache had most of that I quoted above so took a screenshot comparing old with new (though the old version I found was still missing some paragraphs from the end, so presumably has been edited a couple of times over the last day or two).

So it appears that Sudan will be mining only an additional 20 tonnes of Gold in 2016 (100 tonnes, versus 80 tonnes in 2015). Will that be enough to crush Gold (or "crush gold psychologically" as Armstrong rewrote)? Probably not if sold as mined, although Bron notes in a recent article that it only took 22 tonnes on the Futures market to knock $48 off spot price in the recent price smash.


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