“Terms and Conditions” – what they mean Vs what they say.

Have you ever found yourself looking at personal loan contracts or mortgage loan application forms, flicking through them quickly without much knowledge or regard for the terminology used in them?

Have you seen terms such as LVR, LMI, interest-only loan, leverage, home equity loans, collateral, CPI, HPI, inflation, deflation self-managed super and a raft of others? I thought it would be a good place to start by explaining what these terms mean to everyday people so that they know what they are looking at when they get a loan application form or when brokers and accountants give suggestions about how and where to invest money.

  1. Loan to Value Ratio (LVR): The loan to value ratio is typically stated as the amount of money borrowed based on the deposit taken by the bank as a fraction of the total purchase price. This particular term is commonly used to determine how much the bank wants as a deposit for a particular loan format and is primarily used for mortgages and not other asset purchases. An example would be a person buying a house for $1000000 in Sydney with the maximum LVR allowed being LVR 80 (or 80% of the cost price being borrowed) meaning that the minimum deposit required for the property is $200000.
  2. Lenders Mortgage Insurance (LMI): This is a fee paid by borrowers who decide that they do not want to deposit the minimum to meet the LVR required for a certain loan structure. It is supposedly a way to alleviate credit risks for banks based on the fact that the borrowers haven’t got the amount of money required for a deposit normally. LMI means that banks are willing to lend borrowers more money as the contractual agreement states that the borrower is willing to pay more in the long term.
  3. Interest-only loans: The term “interest only” is intentionally vague as it does not describe the implications it has on future repayments and is almost always a loan given for speculative purposes. The reason I say that interest-only loans are for speculative purposes is primarily the fact that the repayments on the loan do not pay off any of the principal costs of the loan, i.e. you are not paying anything off the initial property price in the hope that it will go up in market value.
  4. Leverage: Leverage is simply the ratio of borrowed money to money used as a deposit (i.e. if a borrower puts down 100k and they buy a 500k house, the leverage is 5:1, or “five to one” leverage).
  5. Home-equity loans:
  6. Low-doc loans:



Why -0.5% GDP won’t be the last of the tumultuous times ahead for Australia

When the results of the last quarter of GDP growth were released by the RBA, are we likely to see growth in the near future to even out the negative figure? That is the question plaguing economists as of late.

Having looked at various economic indicators it immediately becomes evident that there are certain relationships between debt sectors and price indices that cannot be ignored when considering what causes a bubble – in most parts of the western world that bubble occurs in asset markets. To say that America and Australia are not comparable due to the differences in population dynamics is something that needs to be proven either true or false.

Utilising the data viewer and CSV files available for download free of charge on the BIS Statistics Browser, I was able to graph the CPI-deflated housing price indices for both the U.S. (up to 2006 for illustrative purposes prior to the GFC), as well as the current data for Australia up to 2015. To do so I set the first year at 100 and used the difference between CPI and nominal HPI to calculate the CPI-deflated housing price index. While the household debt to GDP as an index is calculated by dividing the first year by itself and multiplying by 100 (all further consecutive years are divided by the base year). The result is shown in the following graphs:

What are you looking at? Notice that the CPI-deflated housing price index (HPI) accelerates in 2001 – especially in 2004 after subsidies utilised to reduce the impact of 9/11 on the economy as well as the dot-com bubble bursting.

Leading up to the GFC we notice that from 1998-2006 (an 8 year period) there is a divergence of the CPI-deflated housing price index (the rate at which the price of housing grows faster than inflation or “the cost of living”) from the household debt to GDP index (which compares the debt of households associated with expenditure on loans such as personal loans, car loans, credit card debt and mortgages). Laws pertaining to prudential lending regulations were changed by the housing and urban development secretary (HUD) in the United States in 2004; the purchase of subprime mortgages by the two largest government-sponsored-enterprise (GSE) companies (Fannie Mae and Freddie Mac) more than doubled from $81 billion in 2013 to $175 billion in 2004. At the time this equated to approximately 44% of the mortgage-backed securities market, in 2005 they paid $169 billion (33%) whilst in 2006 they paid $90 billion (20%) as stated in this HUD Washington Post article.

To buy this volume of mortgage-backed securities (MBS), there had to be enough mortgages to fill the market with securities in the first place, causing the lending standards to dive. Loans that required no income, no job or assets (NINJA loans) rose significantly during this period, where lending institutions (especially Countrywide, lead by Angelo Mozilo) gave non-recourse loans (loans where the asset is given back with no extra collateral or money necessary even if the market value of the asset decreases) to low-income earners. These MBS products were then placed in debt derivative products known as collateralized debt obligations (CDOs), which used “tranches” (layers) of mortgages and other loans (credit card debt, car loans, student loans i.e. asset-backed debt) based on the creditworthiness of the borrowers. Most loans at the time were mortgages and as such the CDOs that were comprised of mortgages were priced based on the creditworthiness of the borrowers.

In many instances, the rating agencies who were paid to rate the CDOs did not accurately rate the creditworthiness of the products, and as such, the companies that purchased the CDOs without looking at the mortgages inside them thought that they were highly reliable when, in fact, they weren’t. An example of which is the Abacus 2007 AC-1 synthetic CDO, which was filled with risky subprime loans yet was rated AAA (the highest possible rating of creditworthiness) as in this article about the Goldman Sachs Abacus fiasco.

US Household Debt to GDP Vs CPI Deflated HPI 2016.png
After the peak of the US CPI deflated HPI, we see that after it accelerated away from the household debt, it quickly moved back into line with the household debt to GDP, which in turn dramatically decreased housing prices as a result. The CPI-deflated HPI had historically tracked the household debt to GDP at an almost identical rate, both of which were growing exponentially even after inflation.

The excessive speculation due to financialisation of the American housing market in derivatives of MBS products, in essence, caused mortgage debt to accelerate at a faster rate than the household debt to GDP. These CDOs encouraged a combination of risky lending (in many cases unconscionable conduct) and various forms of fraud (fraudulent ratings acquired by using forged or missing creditworthiness documentation).


Previous low: the low reached in 2004 for interest rates evidently encouraged speculation on assets – primarily property as indicated by the CPI-deflated HPI, which then caused an oversupply of credit, leading the US Fed to raise rates between 2004-2006. Notice that the housing price index was growing faster than the household debt to GDP especially between 2004-2006, although once the interest rate got high enough and the CPI-deflated HPI flattened off and started coming down. 

The problem with the index coming down was that housing financing was primarily provided by using home equity (the difference between what the property was considered to be worth by bank appraisals and the liabilities on the property), which then meant that the liquidity for future purchases had dried up, devaluing the assets further and causing the insurance bonds in the form of MBS products and CDOs to fail. One thing becomes blindingly obvious is that since 2010 where interest rates sat at 0.25%, the US has entered into another bubble.


If we 0bserve the comparative chart for Australia, we can see that the same government stimulus expenditure in the housing market in the form of the first home buyers grant has quickly pushed the CPI-deflated housing price index away from the household debt to GDP ratio which it tracked steadily until the time of the GFC, when the CPI-deflated HPI dropped heavily over a very short period of time, leaving borrowers above their maximum LVR threshold (triggering technical defaults), as well as putting millions of Americans out of work.

With any kind of media-based research, we see that the Australian media portrays the prudential regulation of Australia’s banks as being very sound, as well as the fact that we have vastly different population dynamics, our CPI-deflated HPI and household debt to GDP charts should look vastly different right? Wrong:

Notice anything similar to the US chart circa 2006? The CPI-deflated HPI skyrocketed after 2007, and while the market seemed about to crash in 2010/2011, the Australian government’s introduction of the first home buyers grant, the last oomph of the mining boom and (as will become evident with the US data further on in this article), lowered interest rates have propped up the market.

Notice now how closely the CPI-deflated HPI moves in tune with the cash rate set by the RBA in the following chart. Once the RBA thought they had “thwarted the GFC”, they began raising rates again, which then produced results similar to those in the US, with the household debt to GDP decreasing slightly, and the CPI-deflated HPI looking likely to drop rapidly. The RBA then began to lower interest rates further to ensure that the same drop that happened in the US did not happen here. They have been cutting interest rates ever since, while both wage growth and GDP growth have stalled. To make matters worse, the federal government have started funnelling government debt into the first home buyers grant, further skewing the data.


Interest rates reacting to crisis; the GFC resulted in quantitative easing which has arguably created a larger bubble than existed prior to the high-interest rates relative to the current day.

Notice that Australia started raising rates after the GFC? The RBA were the only national reserve bank in the world to raise rates following the GFC, with the results being a tumultuous period of time, as we were uncertain as to whether or not we were going to go into a full-blown recession.



CPI Deflated Aus HPI.png
The figures never lie but liars can figure: the correlation between the CPI-deflated HPI and an exponential growth trend is 94.5%

One of the most interesting figures of note is a comparison between the CPI-deflated HPI and a purely exponential trendline; this means that the housing prices have grown exponentially faster than the rest of the economy and in fact exponentially faster than wage growth. It has since slowed interestingly with quarterly data that I will update this post in the near future once the last quarter worth of data is released on the BIS website.

So what does this all mean for the Australian economy? Return to surplus by 2021? The probability of a return to surplus of Australia by 2021 is almost 0, with further government debt piling up, in fact, becoming increasingly more likely as the banks slowly start to figure out what they should have known in 2009. Relaxing lending standards and decreasing interest rates will almost certainly result in a housing bubble when the rates have to inevitably come back up. The main reason that Treasurer Scott Morrison is pushing for surplus is that the Liberal Party created a mandate for themselves in the 2013 election, however, their policy has, in fact, shifted the debt from the public sector onto private businesses as well as households, as private debt is almost always inversely proportional to public (government) debt. My outlook is quite bearish on the Australian market due to the fact that we now no longer have:

  1. A mining boom.
  2. Government surplus.
  3. Manageable household debt to GDP.
  4. High interest rates.

For this reason, we are not even remotely close to being able to get ourselves out of the rut we are in. Wage growth is stagnant yet housing prices are climbing rapidly. We have the highest household debt to GDP in the world, matched only by Switzerland at 125.2% of GDP, and we are heavily reliant on China for our exports. Hopefully, people such as Saul Eslake who credit the avoidance of a technical recession to a government surplus look more heavily into the contribution of tax subsidised property speculation and the contribution of mortgage debt to the overall outlook of the economy which primarily considers public (government debt). They should also credit sheer dumb luck that created a mining boom into the calculations that applaud the Howard era for its “forward thinking”. Their skewing of public opinion towards thinking that public debt is always bad and that low-interest rates are always good should definitely have a spotlight shone on it, as it flies in the face of rationality and common economic sense.


Letter to my local MP – Tanya Plibersek RE: State of the Economy and the Australian Housing Bubble

Dear Tanya,

I am writing to you as a constituent of your electorate, as a millennial, a voter, but primarily as a concerned citizen of Australia. 

Having seen the most recent GDP figures, I thought it was about time that I put my thoughts down about my misgivings with regards to the cause of our stagnant growth and wealth inequality. As you and I are both aware (since you were the minister for housing in 2008), Australia has what is considered to be some of the most overpriced housing in the world. The reason that it is important is that mortgages account for 60% of all loans given in Australia, and the largest industry in our country at the moment involves property. It is important to note that prior to the GFC, the real seasonally adjusted housing price growth was faster in Australia than it was in the United States (according to data from the Bank for International Settlements), as we did everything in our power to continue to blow up the housing bubble that we both know exists in Australia. There are a myriad of factors that have lead to the housing bubble which include:

Pre GFC:

1. The re-introduction of negative gearing: Paul Keating removed negative gearing in 1986, and as a result, the rents in Sydney went up sharply. First of all, the fact that negative gearing was reinstated and hasn’t been touched since is an absolute travesty for people of my generation as it was one of the first contributing factors that added to housing price speculation. The primary reason that rents went up in Sydney were that people had paid too much for the property in the first place and their on-costs were passed on to renters, to say otherwise is naïve. It has lead to a generation of high-income earners not being taxed or significantly reducing their taxable income by reducing rents (ironically, Scott Morrison is the first to call my generation the “taxed-nots”). If negative gearing were to be only applied to new property it would substantially increase the volume of useful property stock, instead, the majority of properties that are purchased that use negative gearing are existing properties, which in fact reduces the number of houses that owner-occupiers can buy. This, in turn, means that the median price of housing goes up and the net effect of negative gearing on rents is, in fact, a rent rise long term or no change, instead, taxpayers pay for the speculation of property investors and first homebuyers are priced out of the market.

2. Capital gains tax concessions: In 2000, John Howard and his Liberal government in all its wisdom decided that it wasn’t enough that investors were able to claim their losses on property against their taxable income, they also needed to be given a tax break once they sold their property too. In essence, this was one of the worst perversions of policy settings in terms of the net effect on the property market. It meant that not only could high-income earners avoid tax by negative gearing, they could also sell the property after a certain period of time, pocket the profit and pay fewer capital gains costs than they would have had to if they had invested elsewhere. This law single-handedly shifted the housing price into orbit in comparison to the CPI, pushing home ownership ever further away from first homebuyers and redistributing wealth from the workers to the property investors.

3. Mortgage fraud in the form of systemic loan application form (LAF) manipulation: In a case study presented to the senate in late 2012, the BFCSA headed up by Denise Brailey provided substantial evidence that there had been systemic mortgage fraud perpetrated by finding discrepancies in a number of loan application forms and bank statements that proved the stated income to be false (I believe that Doug Cameron was present during this senate inquiry, as was Jim Murphy of the Treasury of the government in which you were a cabinet minister, Tanya). In many cases various assets such as stocks were made up and assets were invented or inflated in value. If this were an isolated incident, its effect on the economy would be negligible. The fact of the matter is that not only are cases like these common, they are internal bank policy used to ensure that the banks have cheap flows of credit available to them that they can loan out with higher interest rates so that their profit margins are bolstered. There was, in fact, a class action against Bankwest which seems to have been abandoned, however, there are a vast array of internal bank documents listed on the BFCSA website that show lenders and brokers actively encouraging mortgage fraud and their avoidance of insurance companies that wouldn’t comply with their fraud. Prior to the GFC, we had our own form of sub-prime mortgages known as low-doc loans, which still haven’t fully been exposed for what they are. Having a different name for a product that has the same function does not change the product, it merely obfuscates the truth from unsophisticated buyers and investors. It is the same as the difference between “the great recession” which is what the GFC is known by in the US. The language alone indicates that it was comparable there to the great depression, and the psychological impact that has is much more substantial than the “global financial crisis” since it treats the problem as being external without stating its impact on our own economy.

4. The correlation between household debt to GDP and growth in the Housing Price Index (Part 1): The household debt to GDP in 1988 was between 41% and 42%, whilst during the GFC it was 106%, so it had increased approximately 60% in 30 years, and was among the highest in the world during the GFC. As soon as it looked like we were going to go into the same type of heavy recession as the United States did and various parts of Europe did (especially Portugal, Spain and Ireland), we decided we’d try to keep the bubble blown up by introducing the first homebuyers grant, because what could possibly go wrong by introducing credit into the very same asset market class that caused the GFC in the US in the first place.

During/Post GFC:

5. The first homebuyers grant: The first home buyers grant was introduced as an incentive for people to buy their own homes and a way to reduce the burden on people who were looking for somewhere to live, right? No. The net result of giving people more credit to buy property is that everyone else has the same amount of credit, so the price at auction then goes up by whatever the grant is and it is effectively voided. Again, there are only a select few people that benefit from this grant – real estate agents who pocket a percentage of the taxpayer-funded grant, mortgage brokers and banks who then are paid commission based on the sale price of the property which the grant helped to increase, and the seller who pockets whatever is left of the additional price paid due to existence of the grant. If you want to be realistic about why it was introduced, you must look at the effect that its introduction had on both the household debt to GDP as well as its effect on the housing price index.

6. The correlation between household debt to GDP and growth in the Housing Price Index (Part 2): Fast-forward to present day and Australia has become number one at something! It’s something we shouldn’t be number one in the world for – household debt to GDP. Since the introduction of the first-home-buyers grant and multiple interest rate cuts, we have now tied first with Switzerland as the country with the highest household debt to GDP at 125.2%, a further 19% in 8 years along the same path as we were going prior to the GFC. If you look at the housing price index from 2008 to now, you’ll see that it has doubled. The correlation between household debt and housing prices increasing is unmistakable because wage growth has been stagnant yet the housing price index has been growing at or above 10% annually! Where must the extra financing come from if it isn’t from wage increases? It is in smaller deposits and the costs are being pushed onto renters, which is not supposed to happen because negative gearing exists. Mossack Fonseca couldn’t dream up a tax avoidance scheme that didn’t involve offshoring like the combination of the first homebuyers grant, negative gearing and capital gains tax concessions. Looking at the most recent government figures released – our number one earner? Construction. What does that mean for the rest of the industries? It means that they aren’t generating as much profit as builders which in turn means that home buyers and investors aren’t earning as much as they are paying the property developers. Why has our household debt to GDP become the highest in the world? It is as a result of a lack of government funding for useful infrastructure. We do not have and will never have a state of the art NBN. We do not have a high-speed rail network or other means of fast public transport. We also have globally low-interest rates. It does not make sense to sit on the fence and not invest in infrastructure to help provide jobs that reduce the strain placed on sub-standard infrastructure that has not been updated and is in many instances well past its use-by date. We need to make realistic changes to the way we allocate our infrastructure spending since we have just approved the Adani mine in Townsville which is reliant on the price of coal, which as we have seen in Western Australia can result in high rates of unemployment because we haven’t been forward thinking and have been too reliant on the price of a commodity remaining stable. 

7. Property investment seminars that make often fraudulent claims: I have on many occasions had to debate people from various property investment seminar pages on Facebook for advertising blatantly false and misleading statements about property financing whilst neglecting relationships between household debt and instability in economies (our household debt is higher than the historic maximums of Portugal, Spain, Greece, America and Iceland). At one stage I had to thoroughly debunk various claims from a conglomerate who call themselves “binvested” – one was that the investment seminar “MAP session” had helped people to invest in lots of “recession-proof property” using home equity. There is no such thing as recession-proof property or for that matter any recession-proof asset class. There is no single asset that is recession proof, regardless of how much you want it to be. It is also the case that these property investment seminars cost substantial amounts of money, and in the case of binvested all services in the investment process are performed by the same conglomerate (buying agents, lawyers, accountants, brokers and property investment advice are all provided by the same company with no second opinion).

8. The myth that Chinese investors will always want to buy: This is one of my particular favourite myths because it has no basis in reality. The Chinese Renminbi has performed particularly well against the AUD since 2012 as we have been progressively cutting our interest rates which further incentivised property speculation, now not just from Australians, but also foreign investors as well! In the case of the US, since the Renminbi has slid substantially in value against the USD, so too has the number of Chinese investors.

I shouldn’t have to write letters pointing out poor economic policies on both sides of parliament that allow banks to commit mortgage fraud and LVR manipulation. I will leverage my voice as a voter to point out the short fallings of all previous and present governments that have been complicit in this cover-up. There has been inadequate action against banks due to political inconvenience and I will not leave the economic future of this country up to chance because leaving it in the previous government’s hands (or for that matter in the hands of the woefully inept current government) would mean we bear the brunt of the consequences of moral hazard. If I sound like I am being critical it is because I am, since there is not one government that has made the right decision about property because it has been too politically inconvenient to do so. I will not suffer the consequences of self-interest quietly.

I would also like to point out quickly the insidious influence that investment banks have had on Australian politics by naming former employees of investment banks (not to mention their influence on global politics):

Ian Macfarlane – Former Governor of the Reserve Bank of Australia (1996-2006) (former Goldman Sachs executive)

Malcolm Turnbull – Prime Minister of Australia: 2015-present (former Chairman of Goldman Sachs Australia)

Mike Baird – Current Premier of NSW: (former executive of Deutsche Bank)

Bob Carr – Premier (1995–2005) of the Australian state of New South Wales current (former Macquarie Bank executive)

Max Moore-Wilton – former Secretary of the Australian Department of the Prime Minister and Cabinet to John Howard (former Macquarie Bank executive)

Graeme Samuel – chairman of the Australian Competition and Consumer Commission (2003–present) (former Macquarie Bank executive)

Warwick Smith – former Australian Federal Cabinet Minister (former Macquarie Bank executive)

Alan Stockdale – former Treasurer of the Australian state of Victoria (former Macquarie Bank executive)

I am sure there are names that I have missed. The point that I am trying to make is that banks will not self-regulate if the governing bodies that are supposed to regulate them are filled with former investment bank employees. I do not expect anything to change while banks are allowed to infiltrate government by putting up MPs that use the same trade practices in government as they did while working in investment banks – lying cheating and stealing to ensure that they get what they want at the expense of the Australian public. This truly is a matter of extreme urgency, as we have seen first-hand the consequences of inaction in countries such as Iceland, America, Spain, Ireland and Portugal are just to name a few. Whenever we introduce tough lending standards we have seen banks try and succeed in finding ways to circumvent the laws. When they haven’t been able to circumvent the laws they have just broken them outright. This will end in an extremely severe recession, or, more worryingly, a depression if it is not addressed.

I am both willing to listen to suggestions that you may have regarding solutions as well as offering a list of my own. I want to work with whoever I can to ensure that the issues that have been introduced into this economy are dealt with in such a way that we emerge from the necessary downturn as a stronger, more innovative and forward-thinking nation rather than one that pays lip service to it. I expect both a prompt written reply and a face to face meeting to see what it is you can do to represent the constituents of your electorate and to a greater extent the whole nation as they echo my sentiments.



So, what’s the deal with Sydney housing prices?

Cranes in progress – building the apartments of tomorrow at Green Square in Sydney South

For most professionals looking for inner-city living in luxury, look no further than Green Square on the Airport/East Hills line service, at least if you buy the rhetoric of Crown group, Mirvac and a host of others.  These developers seem intent on ensuring that Australia’s property market emulates Icarus and flies too close to the sun in the physical sense, but does that mean joining many others in a long line of failed or failing capitalist economies?

Property developers have been riding high on a wave of Chinese investment in Australian property, in particular, the boom in “luxury” apartments in or near the CBD has seemingly taken off, specifically in the last 3-4 years. People are often perplexed as to what has brought about this sudden impetus of foreign investment, and what correlation it has had to wealth creation in China. It wouldn’t happen to have anything to do with the fact that our currency had dropped 20% against the Chinese Renminbi perchance? At its lowest, the AUD was down over 30% in 4 years –  at the end of 2015.

Drop it like it’s hot – the Australian and Canadian dollar now down 21% and 17% respectively since 2012 even after the resurgence of CNY against both, with the USD appreciating during that period by 8% – Bloomberg

My suspicions as a trader were that the sudden boost in investment in Australian property was due to the appreciation of the onshore Renminbi (CNY) against the AUD. This seemed to be corroborated by the above exchange rate so I then set my sights on finding out the change in the level of Chinese investment after 2013. I was also interested in what this meant for other western economies with similar desirable capital cities to Sydney (Toronto, New York etc.). Funnily enough, the cities among the highest prices in the world also happened to have low exchange rates against the Chinese Renminbi!

Bang – decline of Chinese investors in U.S. real estate in line with the strength of the USD

Since the beginning of 2016, however, the Renminbi has weakened – and it comes as no surprise that investor demand has also weakened from China. If the US does decide to have a trade war with China, it is evident that the section of real estate being propped up by Chinese investors would bear the brunt of the collateral damage, as the only way to have a trade war in this day and age is to debase currencies and impose import tariffs and other barriers to trade.

I believe that Xi has recognised this pitfall of the American economy and welcomes a trade war is it would ultimately cause the next financial crisis for the US – primarily due to the fact that the mortgage derivative products floating around now are the same ones that caused the GFC by another name, and have a very similar if not identical structure, although I’ll focus on that in another post.

Hmm: it is extremely interesting that the capital outflow peaked at the end of 2015, right about the time that the Renminbi was at its highest against most currencies (CAD, AUD, EUR etc.)

So what do we take from this? Chinese investment is directly proportional to the strength of the Renminbi, and not necessarily the prestige or “luxury” of the city. When there is a western country that has a weak exchange rate against the CNY, expect there to be Chinese investment. For Xi Jinping, debasing the currency is the easiest way to ensure that Chinese investors don’t get any smart ideas about trying to make themselves wealthy at the expense of his country.