Friday, June 29, 2012

Does Australia have a housing affordability problem?

There are a few key words that get thrown around time and time again when it comes to property in Australia. 

Take "shortage" for example. Someone bearish on Australian property as a whole might argue that with 10% of Australian homes empty (according to the latest Census statistics) we don't have a shortage of property in Australia (this level of empty homes has been relatively consistent for the last several decades). Another person who invests specifically in some Perth or Sydney suburbs where prices are rising sharply might argue that a shortage of homes in this specific area is driving rents and/or prices higher. Both of these individuals might be right (in the context of their own views), but they will probably squabble with each other for hours if you lock them both in the same room and tell them to discuss whether or not we have a shortage of property in Australia.

Another one of these key words is "affordability". It has been a very hot key word as prices rocketed to their peak on a national scale in early 2010 (using the RP Data/Rismark indices) and have slowly deflated since.

Some would go to the dictionary and grab the first definition of the word and throw that into the face of the property detractors who say Australian property isn't affordable:

"Afford: To have the financial means for; bear the cost of."

The "affordability problem" deniers will say things like "If Gen Y stopped spending all their money on iPods, LCD televisions, laptops, overseas holidays and widgets, then they would be able to afford a property" (and sadly this is almost a direct quote of the sort of rhetoric I see get thrown around). 

The "affordability problem" deniers will argue that younger generations are expecting too much for their first home. They will argue that living 40km out from the CBD is a reasonable expectation for First Home Buyers, when outer suburbs at the time they purchased meant 8km out from the CBD instead of 5km. They will argue that First Home Buyers should just buy whatever they can (even if it's a run down 2 bedroom hovel which the buyers will grow out of in a few years) to use it as a stepping stone in order to build equity and buy a larger home later down the track. 

The "affordability problem" deniers will argue black and blue that if a buyer can live off two minute noodles, take a cash handout from the government, leverage their savings (and handout) 20:1 (95% LVR) in an environment where interest rates are near historical lows, to buy the worst house on the worst street in the worst suburb of the city they live in then property is still affordable.

Personally I would use this definition for affordability of housing:

"Afford: To manage or bear without disadvantage or risk to oneself."

Both of the above definitions were from the same dictionary, yet both put a fairly different spin on what affordability means in the context of buying a home.

The first definition suggests that if it is financially possible then it is affordable, the second if you can manage it without putting yourself at risk then it's affordable.

Affordability of Australian property cannot be calculated on a mathematical equation alone. 

Some historical measures of affordability have attempted to formulate an affordability measurement based on the percentage of your income which is taken by housing costs. Typically 30% has been a level to gauge affordability (e.g. if you're having to spend more than 30% of your income on housing then it's not affordable), but the problem with this is spending 30%+ on housing could have a much larger detrimental effect on someone with a low income.

Another issue I see with this type of measurement is that the calculations today are being made in an environment where interest rates are near historical lows and pose a pretty big risk if/when they start to increase again.

Take a mortgage holder in the mid 1990s for example who may have had a mortgage rate of 12%. A 1% increase in rates for this borrower is an 8.3% increase on interest costs for the loan. With current low rates a 1% move higher where the borrower is on 6% is a 16.6% increase in cost of interest. For a new borrower this will increase the repayment by a significant amount and poses a significant risk, especially where they have borrowed with a high LVR.

One of the arguments made by housing commentators such as Chris Joye is that the low interest rate environment has allowed for appreciation of house prices and that the price rise can be justified almost completely by the fall in interest rates. Take for example this quote from an article he posted on Property Observer yesterday:
There is a sound explanation for this innovation: the long-term cost of mortgage debt in Australia declined by north of 40% between 1980 and 1995, and 1995 and today. This was largely a function of the long-term reduction in realised inflation and measured inflation expectations, which in turn allowed Australia’s central bank, the RBA, to permanently lower its cash rate.
The radical reduction in the day-to-day cost of mortgage debt permitted Australian households to significantly increase the amount of debt they were servicing without a noticeable rise in underlying mortgage default rates.
Although this argument holds water on a serviceability level, if we look at the effects that a doubling price and halving interest rates have on a mortgage holder over the term of their loan it's a real eye opener (use this mortgage calculator to run your own scenario):

$300,000 borrowed @ 6%
Repayments of $2000 per month
23 years, 2 months to payoff loan
Total repayments = $555,903

$150,000 borrowed @ 12%
Repayments of $2000 per month
11 years, 7 months to payoff
Total repayments = $278,643

The initial interest costs on a $300k loan at 6% is the same as a $150k loan at 12%, however the smaller loan is repaid at a much faster rate if the borrower has the capacity to repay either loan at the same rate.

So are lower interest rates making property more affordable? Not if prices rise to fill the serviceability gap.

By taking on a larger amount of debt, even if the interest rate is half of some historical levels, borrowers are taking on significantly larger amounts of risk and hence by the second definition perhaps can't be considered as affordable as some would make them out to be.

Many bullish housing commentators have been talking about falling interest rates bringing back buyers to the market, but I think that buyers are starting to smarten up on the whole "lower interest rates makes property affordable" lie. Even following two cuts in late 2011 and two more this year (including a 50 point cut in May) we have buyers sitting on the sidelines waiting for lower prices. As Leith points out on MacroBusiness today:

CLICK CHART TO ENLARGE
What is most worrying about this result is that it follows the RBA’s -0.5% cut in official interest rates in early-May. While it is only one-month’s data, these figures imply that this rate cut had absolutely no impact on mortgage demand which, in fact, took another leg down over the month.
Housing credit growth continues to remain at very subdued levels, which ties in with the very low volumes of sale (from RP Data):

CLICK CHART TO ENLARGE
It seems that even if buyers could continue to buy prices at current levels, they are choosing not to afford property (given the risks). A wise choice in my opinion as the short term downside is a much greater risk than missing out on upside.

In my opinion the best thing that Government could do to help any perceived affordability problem is to step back and stop meddling with the markets, let them deflate.


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Thursday, June 28, 2012

Toxic Assets kept on the books by Bank of QLD

While the scope of the problem in Australia may not be at the same level as we've seen in the US/UK/Europe where insolvent banks refuse to mark down the value of toxic assets and rather keep them at full value on their books, it appears we have some banks in a similar situation here.

This from Dow Jones Newswire today:
Bank of Queensland has abandoned plans to sell its $230 million portfolio of non-performing commercial property loans after offers failed to meet its price expectations.
The regional lender said in a stock exchange filing that the final bids submitted by two consortiums this month lacked "sufficient value" for the bank to proceed with the sale, originally seen as a quick way to offload some of its impaired assets.
"Bank of Queensland has alternative strategies in place that will see the individual assets worked through in a timely manner without significant erosion of value to Bank of Queensland and its shareholders," chief executive Stuart Grimshaw said. The lender will look at new ways of "maximising value and minimising the time required to recover non-performing capital". The Australian
So BoQ is keeping these non-performing (read: toxic) assets on their books and are not prepared to take the loss by selling them at market value, rather they are going to look for new ways to "minimise the time required to recover non-performing capital". It looks to me like we might have another "Bank West fiasco" in the making (property margin calls/forcing sale of the properties). 

Let's hope Bank of Queensland handles things more carefully than Bank West did in order to avoid landing themselves in hot water with angry customers:
About 400 angry ex-Bankwest customers say the bank has been colluding with property valuers to force commercial borrowers to default on their loans.
The Perth-based bank is facing two potential class actions over the way it re-valued assets and called in the loans of hundreds of its small to medium-sized business clients after a takeover by the Commonwealth Bank of Australia (CBA) in 2008. News
It's also worth noting that the sub prime issue in Australia is also considerably larger than previously though with details surfacing in this recent article:
Subprime-style lending practices were rampant during the last property boom despite claims by lenders that local practices were superior to global standards.
The Australian has exclusively obtained hundreds of internal emails between lenders and mortgage brokers that lift the lid on the extent of aggressive -- and in many cases predatory -- lending practices in the five years leading up to the global financial crisis.
The emails, many of which are from some of the biggest lenders to chains of hundreds of mortgage brokers, show some spruiked imprudent lending practices to mortgage brokers, highlighting loopholes in their own lending requirements. The practices, which have embroiled the likes of Macquarie Bank, Westpac and GE Money, as well as mortgage brokers in every state, underpin what is emerging as the Australian version of US subprime problems. The Australian
If you've got a commercial loan with Bank of Queensland it might be time to pull out the contract and read over the fine print. As shown previously on this blog (Post on Property Margin Calls) there is the potential that clauses in the contract will allow the lender to call in your loan simply based on the value of the property falling below their LVR requirements...


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Thursday, June 14, 2012

Chart Guide To The Melbourne Property Crash

We are likely in the early stages of a price crash in Melbourne property (and continued price falls in most other states as well). Everyone has a different opinion on what constitutes a crash, but my expectation is 30% off nominal median Melbourne prices from the peak (which was around 18 months ago) to the trough (which will likely be around another 18-30 months away). So a 30% decline over 3-4 years is my best guess, below inflation growth following this crash will also see the real decline closer to 40%.

I thought I would pre-answer some questions that may arise from this post:

Is a 30% price drop over 3-4 years a "crash"? As there is no technical definition of "crash" as it pertains to property I am using that term as I feel it fits the size of the drop. If you disagree feel free to substitute "crash" with correction, price drop, buying opportunity, reversion to mean or softening of prices depending on your stance.

Is this price fall guaranteed? Of course not, there are so many different influential factors which could delay further price declines, for example emergency rate drops from the RBA might slow the fall or mix that with further intervention from Government and prices might even stop sliding altogether (delaying the fall short term). However recent actions and words from both these potential crash-breakers has been suggestive that they will not interfere (such as Glenn Stevens speech I posted about where he says rates are not being cut to aid house prices and I would be surprised to see the Vic government do an about turn on recent grants which were removed).

But you are suggesting the price decline anyway? Based on the current state of the Victorian/Melbourne property market via the statistics we have available I would suggest it is very likely that we see a decline of the magnitude I have outlined.

Suburb 'X' has been flat over the past 12 months and you think it will fall 30% by 2013-2014? No, I expect the Melbourne wide median (as measured by an index such as the RP Data/Rismark hedonic index) will show a decline of around 30%, but to hit that point some suburbs may have only dropped by 10% and others by 40%. There may be some suburbs which weren't/aren't as overvalued at the peak so may not drop as drastically as 30%.

What credentials do you have to support your wild claims? Probably about the same number as most property spruikers.

Steve Keen said we would see a 40% crash and he was wrong! Well that's not a question for starters, but Keen hasn't had time for his prediction to play out either (40% decline over 10-15 years). Please judge this post on it's own merits, there is no need to compare it with the predictions of others.

Where is Melbourne on the property investment clock? Half past dead.

Why post about the Melbourne property market when you live in Adelaide? In my opinion it is the most over valued and poses the biggest risk to inexperienced or unprepared buyers such as first home buyers or those buying with a small deposit and in a precarious financial position.

So do you think other states will fall by the same amount? Given global risks, Europe on the brink, US "recovery" stalling and with China slowing I think there is the potential black swan events which could put a squeeze on our banks and in turn the property market sending prices country wide crashing. However assuming things just keep pottering along then prices in most states will probably just continue their slow melt or below inflation growth (with Melbourne falling much more significantly than most). I have indicated in the past that I expect national prices to fall in the vicinity of 15-20% in nominal terms and 30% real.

Gold and Silver are both well down from their 2011 peaks, haha! That's ok as my average buy price is still well below current prices. As I pointed out recently a major bottom has likely just occurred in precious metals and higher prices should be expected over the medium term (even if the recent low is breached in the short term). If the peak for the Gold and Silver bull market was made last year then feel free to rub it in down the track.

What's with the wry sense of humour in this post? Do you think falling house prices are a joke? Not particularly, but after a couple of years trying to convince people that house prices are peaking/have peaked and having the vast majority deny, reject and deride you for having this point of view (even when it is obvious prices are falling), one can't help help but turn a little bitter and cynical! I have friends and family who have already been burned by falling house prices, but I think in the long run house prices which are priced at more reasonable levels compared with rents and wages will be a great benefit to the next generation of home buyers.

Feel free to post any other questions in the comments section...

On with the show!

Christopher Joye recently posted this chart on his blog showing the extraordinary price boom in Melbourne from the lows seen in late 2008 to the peak in late 2010, a 35% jump (below chart courtesy of Christopher Joye's blog):

Click Chart To Enlarge

Since reaching a peak on the above index of around 155 (Melbourne houses) prices have deflated to around 140 and to reach a 30% nominal drop would need to fall to 108.5, a level not seen since mid 2007.

The stock on market has been climbing again the last few months and is sitting back around the peak level we saw in late 2011. Current stock on market is roughly double that of the lows seen in early 2010 (below chart courtesy of SQM Research):

Click Chart To Enlarge

Why does the stock on market (number of properties advertised for sale) matter? The more properties that are for sale, the more competition individual sellers have when trying to offload their property. Couple a high level of stock with a low number of buyers (see stats on this below) and if you've got sellers who are motivated then you are going to see them leaping over each other to price cut and driver prices down (almost the opposite effect of buyers leap frogging each other during the boom times). What environment will create motivated sellers? Perhaps one where prices have already fallen over 10% from the recent peak, yields are still way too low to cover rents and further price falls seem likely? It's a self fulfilling prophecy.

As we can see from the below chart, the price decline in Melbourne has continued to accelerate to the downside in 2012 (below chart courtesy of RP Data):

Click Chart To Enlarge

And see below for key Melbourne stats from the same video:

Click Chart To Enlarge

As mentioned above (and also shown in key stats from RP Data), yields in Melbourne are awful. Even following the largest fall in prices over the last 12 months (to April 2012, across Australia) and rents having increased the most over the same period, yields in Melbourne houses are still the lowest in the country (below chart courtesy of Residex):

Click Chart To Enlarge

A yield of under 4% for Melbourne houses is very poor when you consider an investor is paying around 6.5% for any funds borrowed as well as having to cover maintenance costs, council rates and more. This measurement of value alone should be ringing alarm bells and indicates why I think Melbourne has the furthest (of all Australian capitals) to fall.

As I mentioned above, prices in Melbourne have already fallen significantly, around 9% over the past 12 months (houses) and around 11% from the peak:

Click Chart To Enlarge

Not only is there an abundant supply of property in Melbourne, but there is a plethora of new stock about to hit the market over the next 2 years as construction of new homes in Melbourne has boomed, especially so for apartments (below chart courtesy of Property Observer):

Click Chart To Enlarge

Leith from MacroBusiness has also written about the construction boom, using data from the ABS he constructed the below chart which shows house construction was elevated also (below chart courtesy of MacroBusiness):

Click Chart To Enlarge

Along with near record levels of stock on market, which will become increasingly worse as newly constructed homes hit the market, we also have the worst sales volumes seen in over 10 years (below chart courtesy of MacroBusiness):

Click Chart To Enlarge

RP Data recently reported that Melbourne’s transaction volumes are estimated to be 27 per cent below the city’s five year average.

Increase in stock on market along with few buyers and motivated sellers will lead to further and potentially sharper price falls.

Further to the above here are a couple more interesting charts with brief points about the Melbourne property market.

Earthsharing has been releasing an annual report looking at vacancy rates in Melbourne. Where REIV quoted a 1.7% vacancy rate in November 2010, Earthsharing reported a 4.94% vacancy rate based on water usage (below chart courtesy of Earthsharing, their 2012 report should be available in around a week):

Click Chart To Enlarge

This chart shows net mortgages in Victoria, decreasing for the first time since 2003 (when I presume the statistics started, courtesy of MacroBusiness):

Click Chart To Enlarge

Here is a chart showing the performance of a Melbourne property vs cash in the bank over the past 12 months (courtesy of Thomickers at Bubblepedia Forums):

Click Chart To Enlarge

All things considered the Melbourne property market is looking extremely weak and is setup for a potential 30% crash from the peak. I warn urgent caution if you are considering buying in Victoria today. If there are reasons you need to buy that outweigh the potential for further price falls then ensure you take measures to protect yourself, buy within your means, keep a cash buffer and use insurance where appropriate to protect from job loss or income reduction due to injury. The last thing you want happening is the forced sale of your house at the bottom of this potentially devastating crash.


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Tuesday, June 12, 2012

NSW Budget: Gambling on FHBs & Lottery Revenue

I ended an earlier post today on the following note:
I suspect we are yet to see the full effects of the recent interest cuts (with potentially more to come) on the Australian housing market, but fingers crossed those most vulnerable don't succumb to over leveraging in a housing market which is still well inflated and in my opinion has some way yet to fall. 
It must have been only 10 minutes after posting it that I spotted NSW was changing their First Home Owners Grant in their new budget...
From 1 October 2012, the First Home Owner Grant will more than double to $15,000 and then continue at $10,000 from 2014 for first time homebuyers of new properties. Existing first homebuyer stamp duty concessions will apply to new properties up to $650,000.

Additionally, a new measure, the New Home Grant, will provide $5,000 to all non-first homebuyers of new properties.
The interesting part is that they are doing this at the expense of existing homes (FHOG will be exclusive to buying new homes) as pointed out by Jonathan Chancellor on Property Observer:
But it comes at the expense of buyers of existing homes, who will lose thousands of dollars in incentives from October 1 this year.

From October, a first-home buyer who purchases a $550,000 new home will get $35,240 in assistance. But if it is not new, the first-home buyers will secure nothing.

First-home buyers of existing properties, about 90% of the market segment, will receive no government assistance with major ramifications for estate agents who sell existing properties in this market.

Property investors can also expect land tax bill increases in the next year. Land tax revenue is forecast to grow by 8.1%.

First-home buyers will receive up to $35,240 in government handouts when purchasing a new home from October 1, for a 15 month period before its drops back.

But the longstanding $7,000 first-home owners' grant, negotiated with the federal government when the GST was introduced in 2000, will no longer be given to buyers of existing homes, replaced by a scheme that gives $5000 for only new homes.
Now given that construction of new homes in New South Wales was running at 50 year lows six months ago it's not surprising that they want to boost those levels to meet demand, but I'm not sure they are going the right way about it.

With interest rates falling, a stamp duty concession and increase in deposit (via the grant for new homes) First Home Buyers will potentially be able to leverage themselves into properties they wouldn't have otherwise been able to afford. Sound familiar? It's a good thing this grant is for new homes only, so existing stock shouldn't see prices pushed higher as we saw during the 2008/2009 "boost period", but that won't stop unsophisticated First Home Buyers from paying through the nose for over priced property.

Using a $550k purchase price (used as lowest price example in budget document), the borrower will need to have as little as $12.5k + fees saved on their own for a 95% lend (capped LMI) once you consider they will receive $15k assistance from the grant and won't have to pay stamp duty.  Of course they have to be able to service the loan, but with rates back at historically low levels it's easier to service a large loan today than just about any other time in history except for the last time rates were dropped this low 3.5 years ago.

No doubt developers will be rubbing their hands in glee at the prospect of another round of suckers ready to leap frog each other for an overpriced, poorly constructed home in a mortgage belt suburb 40km out from the Sydney CBD. Is this the right way to solve the "housing shortage" in Sydney or are we simply setting up another bunch of home buyers to fail?

Another sound bite from the budget:
I can also confirm we are investigating the potential to securitise part of the future lottery revenue duties – a move to bring forward future revenues for today's infrastructure.
Or CBOs (collateralized bet obligations) as Mav cleverly named them on Twitter.

What sort of ponzi budget are they dreaming up in NSW where they plan to draw forward future gambling revenue to pay for today's infrastructure projects? Unbelievable!


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Glenn Stevens Warns Property Speculators (Again!)

"The decade or more up to about 2007 was unusual. It would be quite surprising, really, if the same trends – persistent strong increases in asset values, very strong growth in per capita consumption, increasing leverage, little or no saving from current income – were to re-emerge any time soon." - Glenn Stevens, RBA Governor
A common meme perpetrated by (some) property investors is that should property prices fall too far then the RBA will be standing ready to drop interest rates in order to save their skins. However contrary to this expectation Glenn Stevens (RBA Governor) has in fact warned against speculation in leveraged property over the last couple of years.

From this speech in mid 2009 Stevens spoke of the importance that low rates translates into more dwellings, not just higher prices:
July 2009:
Quote from speech: A very real challenge in the near term is the following: how to ensure that the ready availability and low cost of housing finance is translated into more dwellings, not just higher prices. Given the circumstances – the economy moving to a position of less than full employment, with labour shortages lessening and reduced pressure on prices for raw material inputs – this ought to be the time when we can add to the dwelling stock without a major run-up in prices. If we fail to do that – if all we end up with is higher prices and not many more dwellings – then it will be very disappointing, indeed quite disturbing. Not only would it confirm that there are serious supply-side impediments to producing one of the things that previous generations of Australians have taken for granted, namely affordable shelter, it would also pose elevated risks of problems of over-leverage and asset price deflation down the track.
Unfortunately irrational exuberance gripped first home buyers, upgraders and investors and they bid prices up to even higher ridiculous levels than we saw at the initial peak in 2007. The following boom was the result of historically low interest rates as well as the government lining first home buyers pockets with a record amount of handouts and other contributing factors such as relaxed foreign buyer (FIRB) laws.

It was clear to some that this trend was not sustainable. Seeing the record numbers of unsophisticated buyers flooding the market in 2009 (see one of my first posts on this blog for some of the statistics) was in part the reason I sold my property at the end of that year and returned to renting.

By March 2010 the unsustainable price boom must have been obvious to Glenn Stevens who made an unusual appearance on mainstream morning television in Australia to warn against leveraged property speculation:
March 2010:
Quote from appearance on Sunrise: I think it is a mistake to assume that a riskless, easy, guaranteed way to prosperity is just to be leveraged up into property. You know it isn't going to be that easy.
These (house) prices are getting quite high,” Mr Stevens said. “I’ve got kids that within not too many years are going to want somewhere of their own to live and you wonder how is that going to be afforded.
The above warning was probably too little too late as it almost marked the exact top of Australia's property market bubble (on a national level, some states are in different cycles e.g. Perth prices haven't really gone anywhere in around 6 years) with prices having deflated considerably since.

To try and avoid a repeat of the rampant speculation and over extension of first home buyers in 2009 Stevens is again warning property speculators that interest rates are not being lowered to aid house price growth:
June 2012:
Quote from speech: One thing we should not do, in my judgement, is to try to engineer a return to the boom. Many people say that we need more ‘confidence’ in the economy among both households and businesses. We do, but it has to be the right sort of confidence. The kind of confidence based on nothing more than expectations of ever-increasing housing prices, with the associated willingness to continue increasing leverage, on the assumption that this is a sure way to wealth, would not be the right kind. Unfortunately, we have been rather too prone to that misplaced optimism on occasion. You don’t have to be a believer in bubbles to think that a return to sizeable price increases and higher household gearing from still reasonably high current levels would be a risky approach. It would surely be a false basis for confidence. The intended effect of recent policy actions is certainly not to pump up speculative demand for assets. As it happens, our judgement is that the risk of re-igniting a boom in borrowing and prices is not very high, and this was a key consideration in decisions to lower interest rates over the past eight months.
Hence, I do not think we should set monetary policy to foster a renewed gearing up by households. We can help, at the margin, the process of borrowers getting their balance sheets into better shape. To the extent that softer demand conditions have resulted from households or some businesses restraining spending in an effort to get debt down, and this leads to lower inflation, our inflation targeting framework tells us to ease monetary policy. That is what we have been doing. The reduction in interest rates over the past eight months or so – 125 basis points on the cash rate and something less than that, but still quite a significant fall, in the structure of intermediaries' lending rates – will speed up, at the margin, the process of deleveraging for those who need or want to undertake it.
In saying that, of course, we cannot neglect the interests of those who live off the return from their savings and who rightly expect us to preserve the real value of those savings. Popular discussion of interest rates routinely ignores this element, focusing almost exclusively on the minority of the population – just over one-third – who occupy a dwelling they have mortgaged. The central bank has to adopt a broader focus. And to repeat, it is not our intention either to engineer a return to a housing price boom, or to overturn the current prudent habits of households. All that said, returns available to savers in deposits (with a little shopping around) remain well ahead of inflation, and have very low risk.
I suspect we are yet to see the full effects of the recent interest cuts (with potentially more to come) on the Australian housing market, but fingers crossed those most vulnerable don't succumb to over leveraging in a housing market which is still well inflated and in my opinion has some way yet to fall.


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Friday, June 8, 2012

The Perth Mint Regional Lockout (Guest Post)

Perth Mint locked out US customers from purchasing (directly) some of their most highly anticipated coins
The below is a guest post from 'Doomberg', a blog which has had some great coverage of new coin releases recently and would recommend those interested in such content to add the site to your favourites (or add the RSS feed to your reader). Today he talks about the recent decision by Perth Mint to lock US customers out from purchasing (directly from the Perth Mint) some of their most highly anticipated new release coins:

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One of the most recent products Perth released was its five ounce proof silver dragon. I was particularly interested in the product, even in the face of potential high premiums, because I do not yet have a "plain" proof silver dragon. I missed the regular one ounce proof variety as well as the three coin proof set. I was also unable to get the typeset, my only other real chance at a regular proof variety, due to problems with Perth's website. I was expecting very high premiums of $500 or higher on the five ounce proof silver dragon, so when I logged into Perth's site early in the afternoon on June 4, I was quite excited to see the relatively low price of $436... until I noticed another problem. US customers were barred from purchasing the five ounce silver dragon!

A growing problem that I've noticed is occurring with the Perth Mint recently is that they are starting to use regional lockouts to prevent US customers from buying any of their popular products. The US has been noted in this post and elsewhere as the world's largest coin market, and it is also the largest consumer of the Perth Mint's products. This had to led to some legitimate complaints from Australians that they are being shut out in favor of customers from the USA.

Perth has been experimenting with a variety of approaches to controlling the outflow of their coins. In March, for example, they introduced a queue system for the high relief silver dragon. I had some initial problems with using it but in the end, it turned out that it worked fairly well and prevented a massive rush like the one that knocked out Perth's website when the typeset went on sale. Perth has likewise experimented with selling its products at carefully spaced intervals to ensure that both Australian, US, and international customers would all get chances to order the coins. Starting last month, however, Perth began implementing regional lockouts to prevent US buyers from obtaining their coins at all, instead choosing to sell limited quantities of the coins to third party distributors for their US customers. In May, they sold the one ounce high relief kookaburra to Paradise Mint, and they sold the five ounce proof silver koala to Asset Marketing Services Inc. (AMS), which is distributing those coins through New York Mint. AMS' businesses are well-known for charging very high premiums on coins sold through their websites. New York Mint, for example, is selling the US Mint 2012 silver proof set for about $100. The same set can be purchased from the US Mint directly for about $68!

This month, Perth sold the US allocation of the five ounce proof silver dragons to AMS.

There are two potential reasons for the growing trend of regional lockouts. The first is that it's just a typical business decision by Perth; in other words, US dealers have been offering Perth big bucks to be exclusive distributors for Perth for a given coin series. In this case I don't have much more to say except I don't agree with Perth's business approach and hope they change their minds in the future and stop blocking US customers from purchasing their products. The other possibility, which I see as more likely, is that this is the latest in a series of experiments intended to control the outflow of Perth's coins to ensure Australian and other international customers aren't continually "shut out" by a tidal wave of US buyers. However, I feel like the region lockouts have gone a step too far in this direction.

It has been three days since the release of the five ounce proof silver dragons, and AMS so far has not put the coins up for sale at New York Mint, and has refused to provide any information about the coins to customers who called by phone, based on comments made on World Mint News Blog. There is a reasonable concern among US fans of Perth products that they will not be able to acquire the five ounce proof silver dragons except by paying excessively high premiums to New York Mint, which may take weeks to put the products up for sale, or by purchasing it from flippers on eBay. While Perth is not responsible for what AMS decides to do with the coins it bought, should AMS fail to distribute the coins in a timely manner or charge extremely high premiums for them, Perth will at least be partially blamed, whether it is fair or not.

UPDATE: Perth now says on its website that the five ounce proof silver dragon will go on sale on July 16th. This delay is most likely to give AMS time to get the coins graded, as graded coins can be sold for even higher premiums than "raw" coins. By way of comparison, Paradise Mint put the kookaburras up for sale almost immediately.

In my opinion, the Perth Mint has created a problem for itself similar to the problem the US Mint created for itself during the initial distribution of the 2010 America the Beautiful five ounce silver bullion coins. Readers may recall that the US Mint sold the 2010 AtB bullion coins to a select number of dealers, who promptly hiked the premiums and sold all the coins as a set. This caused a major PR problem for the Mint, and the aftereffects are still being felt today as this led to overproduction of five ounce AtB coins followed by very low demand for them.

My suggestion is this. Rather than "locking out" all US customers from purchasing their products, if Perth is worried about not enough Australian and other non-US customers being able to get the coins, they ought to allocate a specific number of coins for US customers and a specific number for their Australian and international customers. They could then sell this allocation on their website and when the US allocation runs out, that would be it. Should the "international" allocation fail to sell within several months, Perth could then perhaps consider allowing their US customers to purchase from that allocation as well to help get the coins to sell out. When combined with Perth's other approaches of the queue system and making the coins available at different times of day, I think this method would ensure the most customers who are "on the ball" will be able to get access to the coins they want.

The current approach of preventing US customers from buying their products and relying on third party distributors to handle their release seems to me to be a counterproductive approach which just unnecessarily antagonizes US buyers and forces them to pay higher premiums which customers in all other countries do not have to pay. As it currently stands, until AMS decides to sell its allocation, most US customers have no reasonable means of buying the five ounce proof silver dragons.

Above guest post courtesy of Doomberg.

Tuesday, June 5, 2012

AUD Gold Price Exceeds Weekly Aussie Wage

The case is often made that Gold is an inflation hedge. However the volatile and cyclical nature of the metal shows that it doesn't practically work as such unless measuring over a long time frame.

For example suppose an individual had purchased some Gold in January 1980 right at the peak for US$850... did Gold keep up with inflation if this individual needed to sell some in 2001 at Gold's low point (US$250)? Of course not, in fact Gold hasn't even yet reached the inflation adjusted high after rising more than 600% from the lows (inflation adjusted high from 1980 is over US$2000). Gold is not practical as an inflation hedge over short time frames. However over long periods of time Gold does hold value in comparison to fiat currencies which continuously deflate in value as the supply is increased at unhealthily high rates.

There are examples from other commentators and authors showing that Gold has retained similar value over very long time frames (hundreds and even thousands of years) against livestock and against objects such as a fine suit. However the problem with this is you are taking two specific points in time to reach a conclusion that may differ if you varied the time frame selected by as little as a decade.

The reality is that Gold cycles in value against assets from overvalued to undervalued and back again (some would argue that it's other assets which cycle against Gold). Some of these cycles might be short term (such as the Gold/Oil ratio which I covered here) or medium term (such as the Australian property priced in Gold ounces, covered here). There are other (non-tangible) things that Gold cycles in value against as well. One of the most interesting I have covered on the blog before was an average Australian wage (see previous post here).

You can see the previous post for the data sources I have used (have spliced RBA/ABS data for wages). For wages I have taken the printed number from the last quarter in each year (as it's not volatile and generally is consistently rising), for Gold I have averaged monthly prices (AUD price) across the year due to price volatility.

Here is the average weekly wage of an adult Australian plotted against the annual (average) price of Gold in Australian Dollars since 1972:
Click Chart To Enlarge
As you can see on the above chart, the spot price of Gold in Australian Dollars has surpassed the weekly Australian wage for the first time since 1989.

Chart in log form (requested by obakesan):
Click Chart To Enlarge
And if we divide the price of Gold into the weekly wage we are presented with this ratio which shows Gold cycling in value against Australian wages (Gold undervalued as the ratio peaks and overvalued in the troughs):
Click Chart To Enlarge
As I pointed out the last time I calculated this ratio, the weekly wage has cycled between around 1/2 and 2 ounces of Gold for the best part of the last 100 years.

1901:
Based on the above figures from the ABS the Wage/Ounce ratio was around .51 ($4.35 wage / $8.50 oz) in 1901. Source
1920:
In 1920 the Pound was valued at USD$3.66, so in USD an Australian weekly wage was around $38.43 and bought 1.86 ounces of Gold. Source
If we took the peak monthly price (instead of averaging over the year) the ratio actually dropped to around .37 in January 1980 rather than the .42 by averaging the Gold price over the year. To get back to these ratio levels we would need to see Gold climb to AUD$3750 or AUD$3300 respectively, assuming the average weekly wage remained at $1391 where it is today. In my opinion either of these ratios is possible (I would suggest likely) within the next few years as Gold shoots to overvalued status against Australian wages.

Despite that I blog on a site which might suggest I am a permabull on precious metals, that is certainly not the case and when I believe that the metals have reached a cyclical high against other assets (and other indicators such over valuation against wages) I will be looking to move a majority of my positions from Gold and Silver related assets into income producing/productive assets.


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