Tuesday, January 27, 2009

Housing - Who is to blame?

We might have a Global Financial Crisis today – but we are definitely going to have a serious house price crisis over the next few years. It is quite likely that our children and their children are going to be very *pissed off* at what we did with housing in the first decade of the 21st century.

The 5th Annual Demographia International Housing Affordability Survey: 2009 has become available and it’s a shocker.

Of the 27 Australian housing markets included in the survey, 24 were severely unaffordable (a score of 5.1 and over) and 3 were seriously unaffordable (a score of 4.1 to 5.0).

I won’t reproduce the report - but you can get the details here. (it's a big file).

Here is a quote about Australia.

"The Median Multiple in Australia is 6.0, double the 3.0 historic maximum norm and well above levels of just a decade ago. Among the larger metropolitan markets, Sydney remained the worst, at 8.3 (down from 8.6). Median house prices dropped in Sydney and Perth. Perth’s Median Multiple dropped from 7.6 to 6.4, reflecting not only the price decline, but strong income growth. At the same time, Adelaide’s already serious housing unaffordability worsened, with its Median Multiple rising from 6.5 to 7.1.

The Sunshine Coast (Queensland) replaced Mandurah as the nation’s most unaffordable surveyed market, with a Median Multiple of 9.3. All markets in Australia were rated as “severely unaffordable” except Wagga Wagga (New South Wales), Bendigo and Ballarat (Victoria), which were rated “seriously unaffordable” (Median Multiple between 4.1 and 5.0). Unlike the other national markets in the Survey¸ Australia has thus far been able to avoid material house price declines.

It seems likely that, sooner or later, the inherent instability and unsustainability that characterizes bubbles will lead to house price declines in Australia.

However, were it possible for Australia to retain its highly over-valued house prices, there would still be a significant cost. Future generations would pay far more for housing than in the past, and Australia’s relative standard of living would decline".

So who is to blame? An interesting question – and as usual there are obvious and not so obvious targets.

The obvious targets are the State Governments who have pulled back with their infrastructure investments and who have artificially constrained the supply of land at the fringes of the urban areas. They and Local Government have run a series of misguided land use and urban planning policies for well over a decade now.

All because they didn’t understand how far they could *squeeze* the system. Or maybe they did understand and went ahead anyway.

It is the exact opposite of the planning processes that grew up around the Whitlam Government - that started in 1972. There was a sense at that time that the urban environment had been neglected for many years under successive Liberal Governments and Gough and his Minister Tom Uren set out to change all of that.

And they were largely successful – all of which resulted in a stable urban environment until the mid nineties when the Liberals regained control.

Now here is when we can identify one of the not so obvious targets – the Federal Government.

Howard was elected in 1996 and immediately set out to discredit and constrain the State Governments which were mainly Labor. The way he did that was to try to starve them of funding. He ran a relentless decade long campaign of cost shifting and withdrawal of funding which caused the states to struggle – the problem was that the Feds raised the bulk of the money and could determine how it was spent and who spent it.

At the end of it all, the Howard Government ended up with massive budget surpluses and the states ended up as paupers. So much for Federal / State relations.

So it is clear that the blame game has many facets.

1. The Federal Government – who for political reasons starved the States of funding and tried to make them look like they were incompetent (not altogether hard).

2. The State Governments who cost shifted and blamed everyone else and who eventually found innovative ways to raise new taxes (pokies) and to reduce spending on important infrastructure.

3. The Local Councils who were really the meat in the sandwich and who clearly did not have the intellectual grunt to deal with the problem – they probably didn’t even know it was happening (many still don't).

And so we as a nation will pay a heavy price.

If we look beyond the existing house owners (mostly boomers) who are sitting on billions of extra dollars of *artificial value* – courtesy of Mr Howard’s ideological war against the states then we find a new generation (the X’s and the Y’s) who are struggling – because they are being forced to pay too much (often over 50% more).

That means that their children and their living standards will suffer – with all the associated social and economic consequences.

But in truth not many of us care – or at least not enough of us care to make a difference and so we will faff about at the edges and increase the *first home owners grant* – all to be seen to be doing something useful. We might even award *freedom* medals to some of the people who presided over this mess.

When in reality – we should be exposing the stuff ups and vigorously pursuing the perpetrators through the courts.

Wednesday, January 21, 2009

The Satyam effect

We are starting to get some feedback around the Satyam scandal and its impact on local organisations.

There is chit-chat about what NAB are doing to minimise any critical noise after they selected Satyam to manage their core business systems – and sent them offshore. The setup costs of such a venture are huge and if Satyam folds then this will have been a very poor choice indeed. Plus it looks like they don’t have a "Plan B" – because all their experienced staff are long gone.

There are whispers that Telstra is in a similar position – although details are less forthcoming – the *cone of silence* enforced by the amigos seems to be working.

And there are a number of other projects that look as though they won’t proceed. One is a venture between Satyam, Deakin University and the Victorian Government that was going to create yet another "Silicon Village" in Geelong. By my count this is the fourth such attempt of a State Government – all failures.

The amazing thing about all of this is what it says about the "due diligence" processes of these local companies/institutions. Perhaps their negotiators were all asleep in business school on the day when they were supposed to be learning about *risk* and how to ask the important questions.

It just reinforces for me the amazing failures that have resulted from this religious pursuit of *lowest cost* outsourcing. One of the things that would have helped manage the risk would have been to retain some older, experienced, "grey heads" in the selection and evaluation teams. Instead, they were all discarded as being too expensive – it seems that much corporate memory went out the door with them.

When I was working in the outsourcing business we had a saying that goes like this - "All of our assets walk out the door each evening – and some of them choose to come back tomorrow – we should manage that instead of letting it run as a random process".

Tuesday, January 20, 2009

Finally - some debate about truth and facts

There is a long overdue debate going on – at Peter Martins blog site – about what journalists should and shouldn’t say about the information that they come across during their day to day reporting activities.

On the one hand we have politicians, their "spin meisters" and others who want to control the information flow - who argue that it is not wise to provide information to the general public because they can’t handle it.

This is the typical "we know best" argument that has been practiced at length across the world and particularly in Australia over the past decade by "insiders" who think that a full and frank disclosure will "scare the horses" and somehow lead to *chaos*.

Essentially their argument is that the general public are far too unsophisticated to *know the truth*. And that what they don’t know won’t hurt them. It has been practiced with varying degrees of success by our political leaders for decades.

Mike Rann is probably the current world champion practitioner – closely followed by Rupert’s "The Advertiser".

On the other hand we have quality journalists like Peter – who take the view that the public should know the *truth* and the *facts* - because they are smart enough to work out for themselves what is important.

Essentially this argument runs along the lines that the job of the journalist is to tell it like it is and to refrain from inserting his – or anyone else’s – bias into the story. This is about being a *reporter* as opposed to an *opinionater*.

There is another – and just as important consideration – and that is about negating the advantage that the *insider* has with information that has not yet been provided to the general public. We have all seen how these people can "make hay while the sun shines" at the expense of the rest of us – particularly with share values and house prices – and my view is that it’s a much better thing if we can somehow work to *level the playing field* by letting everybody have access to the same information.

Friday, January 16, 2009

Speaking of jobs...

The Possum is at it again and has debunked some of the myths around employment here.

Check out the numeric variation (based on the margin of error) - this is a big part of the story - all totally ignored by the MSM.

Wednesday, January 14, 2009

Lets talk about jobs

There is a lot of handwringing about jobs at the moment. There is a very real expectation that Australian industry will shed jobs during 2009 and that this may lead to a rise in unemployment from 4.2% to around 8% or even more.

This is potentially a big deal but there was a much bigger deal that happened in one particular industry between 2000 and 2005 – in a situation that most Australians are unaware of even today.

That is the IT industry.

Two events caused employment to collapse in Australia – firstly post Y2K there was significantly reduced demand for IT people and secondly the dot-com crash of 2001 finished off a lot of jobs.

Neither were related but the effect of both was to decimate an industry that was once seen as the entry point into the smart jobs that were needed by a clever country.

Believe it or not - in Australia in 2005 the actual number of IT jobs was around 28% of the number of people employed in the industry in 2000.

Think about that for a moment – employment in this industry had shrunk by over two thirds in less than 5 years.

So in terms of the IT unemployment rate – if we assume that in 2000 that we had full IT employment - that is a 0% unemployment rate, then in 2005 assuming no growth in jobs, the IT unemployment rate was 72%. This is a record that is unlikely to be beaten by any other industry – ever.

This was clearly a big deal and yet neither the industry association, nor the government of the day were able to deal with the resulting crisis – and so they did what any self respecting politician or political organization would do - they ignored it.

Large numbers of smart, well educated and senior people lost their jobs over this period – many of whom have never recovered and who today are wondering what went wrong and why they were ignored by their association and their government.

In the wreckage of all of this we saw the opportunistic rise of the Indian outsourcing companies – they promised to do all the things that the in-house staff had been doing but at significantly lower cost – one of these companies that I evaluated at the time said they could provide equivalent services for just 33% of the in-house cost!

Of course now we know that it was all BS – but at the time it was attractive to the many lightweight CEO’s and CFO’s who were only concerned with costs and the bottom line. No-one cared too much about "risk" or their "people".

That is why the current Satyam situation is so interesting.

I can imagine that there are hundreds, perhaps even thousands of displaced senior, experienced, smart, capable and pissed off – ex IT executives who are all hoping that the whole "house of cards" will go belly up – just so they can experience some "revenge".

Monday, January 12, 2009

Satyam – it’s hilarious

Not only is it hilarious – it’s absolutely deserved. Any Australian company (think Qantas, Telstra, NAB etc.) that finds itself caught up in this scandal deserves all they get.

For almost a decade now, they have been rushing headlong into the "lowest cost" outsourcing model – without appreciating the "risks". In the same way that some banks have been caught lending money without regard to "risk", some large Australian companies have been signing up "outsourcing vendors" with little regard to "risk".

Or more significantly, without appropriate "due diligence". Blind Freddy could have told them about the "risk" and the issues associated with screwing their suppliers until only a few desperados were left in the game.

So now these companies are totally stuffed – they have shed all their smart, capable and experienced people (because they cost too much) and have handed over their business systems to a company that is likely to go down the tube – because it’s executives have falsified the books. And they think that we ought to let them keep "playing the game"?

Does anyone in these large companies actually understand the words "risk" and "dumb"?

No I thought not – as I said earlier it’s hilarious.

Talk about Desperate

I don’t often read "The Adelaide Advertiser" (what is there to read?) but today I made an exception. Found myself in a cafĂ© for lunch without any reading material and the only thing nearby was Rupert’s "little joke on the people of Adelaide".

And as surprising as it may seem, only one included item was worthy of commentary.

Apparently some young local lady (and her dog) were so impressed by the Adelaide real estate investment market that she just had to have her say. Her success with real estate investments was down to her *mum* who provided brilliant advice and her *sister* who was a real estate expert – not to mention her *employer* - who happens to build houses.

Anyway, she has made a small fortune on her initial foray into real estate and was just like so impressed by the opportunities available locally. She thought that it was an ideal time to take the plunge. Blah, blah, rhubarb, rhubarb and other complete rubbish.

Does Rupert’s editor - Melvin Mansell think that South Australian’s are so thick?

Perhaps he does – and perhaps they are ;-)

Anyway, this is the trend with the Advertiser – find some local airhead and get them to prattle on about something that they know nothing about and then use that as an example of how great the local economy is doing – all to justify the outrageous fees that "The Advertiser" gathers from their classifieds.

Because that is what it is all about – milking the local community for advertising revenue while they can. Eventually South Australian’s will stumble into the 21st century and work out that there are better, easier and cheaper ways to sell things.

And what then for "The Advertiser" – perhaps it will change it’s name to "The News" - no probably not - been there done that.