May05
After Australian house prices rose 20 percent in one year, everyone’s talking a bubble. Channel Ten’s new(ish) avant-garde current affairs program asked for my perspective on the day the RBA yet again increased interest rates.
After leading in with the news and a feature on Neil Roberston, the 26-year-old Australian snooker player who won the World Championship, the story on house prices began 4 minutes and 5 seconds into the video below.
We are all Keynesian now!
Keynesian is only one thing government intervention large central planning to wipe out very slowly those nasty prudent productive people.
Mantra for Keynesian followers is “No pain for anybody except those nasty savers.”
Productive people are the savers,small businessmen and large foreign investors.
Keynesian politics of envy, works very well in election year.
Glenn Stevens verses Steve Keen.
Strong fiat currency verses gold.
Keynesian followers are decent people they think naively if nice people are in power large central planning will work well for humanity, by keeping interest rates below the rate of real inflation.
Unfortunately history is against you it paves the way for large bubbles and power hungry individuals.
Federal Reserve was born in 1913 by Woodrow Wilson the great central planner for government intervention.
FED failure in interest rate policy is very clear to everyone.
Woodrow Wilson had a stroke in 1919.
It was a stroke of luck for the American people, Vice President did nothing in the financial crisis of 1920.
Deflation in 1920 bankrupt the unproductive speculative greedy investors.
Deflation happen for one year then America’s great boom of the 1920s took off.
Good example of 1920 deflation being less painful,quicker and more effective.
Little inflation in economic history always ends with hyperinflation.
Sadly,hyperinflation causes violent bloody revolutions.
Gold bugs be very careful the story of hyperinflation maybe wrong.
Tea parties in USA are a clear sign the “people” are not docile,people will not tolerate money printing and large government cental planning.
Deflations works!
Truth,
Thanks for your feedback.
If I am reading you correctly, your position is
1. The tax system encourages investment which unfairly prices-out owner occupiers / first time buyers. ie “a large proportion who get outcompeted by investors who have certain advantages including policy relating to real estate investment”
2. A system which allows people to borrow 100% for the marginal property (using existing equity as collateral), will permanetly price-out genuine buyers.
My response to both these issues would be
1. No-one really has an unfair advantage via the tax system, since the system is there for everyone. The young will say they need a large deposit before they can buy anything (true), but they also ignore one of their greatest assets – work duration.
2. In my view, prices can not stay above replacement cost for any meaningful period of time. This is because it encourages supply. We are already seeing this in the data.
http://www.abs.gov.au/AUSSTATS/abs@.nsf/ProductsbyReleaseDate/0545FFC6A101264DCA25719F007F6F1F?OpenDocument
Huggy @ 66,
“When the crash comes it will be particularly ugly, and there will be many confusing signals. For example, people will immediately assume deflationary forces take over but, like here in the UK, you might find that when the AUD crashes into the 60c area that the inflationary impact is sever. So the RBA will initially panic on the crash and then have to look through rising CPI prints. Nasty stuff indeed.”
Not sure a lower $A leads to inflation. I know that is what the text book suggests, but In Australia our dollar fell to 47c in 2001. I KNOW BECAUSE I WAS ON MY HONEYMOON IN NEW YORK – OUCH!
However, Aussie inflation in 2002 stayed well within the 2-3% target range.
http://www.ausstats.abs.gov.au/ausstats/meisubs.nsf/0/CC094095E739192ECA2577120019F55B/$File/640101.xls#A2325846C
bb,
I kind of feel like you put that one up there for me to spike.
That’s pretty much exactly what I am saying and you’re responses are right if you ignore one important detail.
The introduction of these laws created opportunities for the people who were in the position to take advantage of them at the time. Since then as measured by the first home buyers perspective prices have been increasing out of reach. This is the period where the investment value of property gets priced in. For the current generation of potential first home buyers, it is like joining a game of monopoly half way through the game.
Your counter argument in regards to supply side reaction would also be correct, if you assume homogeneity between all properties. Because of the geographical and infrastructure constraints, most of the available cheap supply is available in undesirable and unfeasible areas.
At this stage of the game first home buyers simply cannot compete with investors. Investors are not constrained by deposits and are allowed to leverage 100%. Investors are also not as sensitive to interest rate and price fluctuations. In fact for the established investor, falls in price present buying opportunities.
Hey titint,
I like that one “For the current generation of potential first home buyers, it is like joining a game of monopoly half way through the game.”
Of the total monthly mortgage debt issued, what would be the expected monthly percentage of mortgage debt being taken on by 1st homebuyers 2nd upgraders 3rd upgraders etc as a percentage of the total?
I would have thought roughly 65% of all mortgage debt issued would be for 1st 2nd and 3rd etc (owner occupiers)
Investors roughly 35% (rental)
At present mortgage debt for 1st 2nd 3rd etc (owner occupiers) is only 26.5% of total monthly mortgage debt being issued!
That’s less than 1/2 what I would expect!
Any explanations?
Truth,
Not sure I follow the “half way through Monopoly game”.
If you are talking about negative gearing, this has been in place for over thirty years. Plenty of people have managed to afford a home during this time.
http://www.austlii.edu.au/au/journals/DeakinLRev/2002/17.html#fn21
I agree, homes are not homogenous. But when new houses are being built for $450-500k on the fringe, and people are concerned that $600k for the median is too high…well, that tells me the value still exists in existing suburbs.
In regard to your first point I think the key statistic to look at over the period since the introduction of negative gearing is the price to income ratio and take into account income of first home buyers would be lower than the national average. I’m not sure but there may also be some income concessions if you use the property as part of your retirement portfolio, but for sure once a person retires the tax on the rent income would also decrease. Yes people have and still can afford to buy a home, but decreasingly so, affordability is clearly deteriorating.
On the second point, if there are houses out there which cost less than the construction price that suggest exactly that those properties are in undesirable and unfeasible areas.
bb,
I believe that negative gearing cannot be defended from conservative-liberal positions (this is the greatest distortion of the free market mechanism one can imagine)
http://bilbo.economicoutlook.net/blog/wp-content/uploads/2010/05/Marginal_tax_rates_by_gearing.jpg
and from the left wing positions (because it is unfair and penalises young people or migrants).
It is the popularity of negative gearing what will undo the marked when the prices stop rising for whatever reason. These guys have no reason to hold on to assets when they stop making capital gains. They will have to sell to cut off the loses.
Once the heavily mortgaged first home owners get into negative equity we can expect the second wave.
Think about dead wood making an ordinary bushfire a disaster because small fires have been put off for 30 years. Without dead wood only grass and leaves can burn. But there is a lot of dead wood in our forests…
This will be our own subprime loans crisis. In my opinion it is inevitable sooner or later but I don’t know when and how it is triggered. It doesn’t have to be 40% drop, it may be less if the Government steps in …
Australia is not different and it will not be different this time.
Truth,
No sure we will ever resolve this. I simply do not agree negative gearing affect house prices over the long term. Of course I can’t prove it (i don’t think anyone can), but my main arguments are;
1. Negative gearing has been in place for over thirty years (maybe even longer, but I cant find a relevant link)
2. Certainly since the 1980′s homes were affordable – especially compared to today
3. Serious price growth started the mid 1990′s (start of the so called bubble) and began 15 years AFTER, negative gearing
4. price growth reflects numerous factors. However IMO, the main factors are;
- cost of construction (supply side)
http://www.abs.gov.au/ausstats/abs@.nsf/featurearticlesbytitle/BEF19E4062997FEFCA25759A001A1E49?OpenDocument
- Easier / better credit products (demand side)
5 Theoretically, higher house prices (caused by amongst other things, tax deductability), leads to new supply. This is happening today. Even if this supply increases in fringe locations (undesirable), history proves it has a knock on effect across the entire sub-market (ie: Sydney 2003)
Check out supply growth 2000-2004 Sydney)
2000/01 18.9k
2001/02 27.3k (up 44%)
2002/03 25.0k
2003/04 23.1k
…
2006/07 15.8k
2007/08 15.6k
http://www.ausstats.abs.gov.au/ausstats/meisubs.nsf/0/6669192C668B8285CA2577190019A60A/$File/8731001.xls#A418458A
Then see what the supply boom did to prices.
http://www.businessspectator.com.au/bs.nsf/0bd6ea4d7e0e401eca257300000473fc/3662d0bd0707fdf9ca2576f6006ce24f/bodyhtml/21.3A48!OpenElement&FieldElemFormat=gif
Perhaps we may just have to agree to disagree.
Certain things seem to be inevitable.
“(Reuters) – The European Central Bank will buy euro zone government bonds to help support fractured markets, abandoning firm resistance to full-scale asset purchases in light of Greece’s debt crisis.”
http://www.reuters.com/article/idUSTRE6490DG20100510
marvenger1 @ 70,
I agree with what you say; there is only partial evidence at best that unsubsidized markets actually exist. Since the 1970s, there has been a massive state-capitalist propaganda campaign carried out to convince the public that we have a free(r) market economy. It takes only a bit of research to find out this is just a load of crap.
There are sections of the economy where markets are inefficient/unworkable: education, health, R&D, transport, defense, law, etc. and it makes sense not to have markets. Otherwise, the rest of the supposedly private economy is saturated with state support: corporate charters, intellectual property rights, central banking, restricted trade for highly-paid professionals, preferential tax treatment, FTAs, criminalized drugs, subsidies, bailouts, etc. The economist Dean Baker covers some of this in his excellent book The Conservative Nanny State: How the Wealthy Use the Government to Stay Rich and Get Richer.
I think the reason for the propaganda campaign over the years is that it is a difficult task for the rich to strip away benefits for the middle & working class while they (millionaires, billionaires, executives, directors, shareholders, speculators, fund managers, etc.) are been lavishly subsidized by the welfare state. So the pretense is made that the rich live by the rules of the free market and thus everyone else should be made to live by them as well.
The ideology is interesting in that it equates privatization to the free market. A great deal of the private sector has its markets rigged to ensure that wealth flows to the rich. In fact, the only private aspect of the private economy is that profits are privatized. The phrase ‘public subsidy, private profit’ seems apt.
If one examines our institutions, it will be found that the state has a grievous flaw: it is potentially democratic, meaning that the public at least has a chance to influence policy in certain directions. I think that people will be better off once they realize our wonderful democratic free market economy has very little to do with democracy and markets.
bb,
The essence of what I was saying wasn’t that the main factor in rising prices is negative gearing. I presented a mechanism which seems to explains a few things, including rising debt.
I think Philip’s post fits nicely into what I am saying, in the sense that the idea of a free market is really just an idea which is used to present this kind of mechanism, which in essence make the rich richer and the poor poorer under the banner of free market. Free market is what you can call it, but you could create any number mechanisms and call it free market. The mechanism in Australian Real Estate effectively perpetuates the gap between rich and poor. In pure hypothetical capitalism it’s necessary to have rich and poor but by principle the free market should reward productivity with wealth, where productivity may include good allocation of resources. However this is not what is happening here. I can’t understand how buying existing homes for investment is productive on the part of the individual investor.
My point in terms of negative gearing is that the government favours investors at the expense of potential first home buyers. It doesn’t mean that negative gearing is the only factor for determining price.
Negative gearing real estate is for the financially illiterate capital allocators who wish to subsidise the banking industry and renters with their wage. Usually their entire net worth is pledged and they earn a return free risk with a highly asymetric chance of total bankrupcy.
A fool and his money are soon invited everywhere
Philip
I probably don’t know enough about democracy to say too much about its operation but I’m convinced there’s no such thing as a free market and you bring up many pertinent examples to show this. The half truths expounded by government and business about free markets has certainly served a small portion of the population extremely well in a material and power sense. I’m not sure how you do it but I believe there needs to be a far more participatory environment where the incentives are far different, more broadly and long term focused, from the current carrots and sticks of corporate life. In this environment I believe quality ideas will be given a chance to thrive rather than people being forced into Darwinian competition for money and power. How do people change in spite of themselves?
All ponzi finance schemes require increasing quantities of dumb money to flow into the scheme to support the pyramid.
At present the entire parasitic financial sector is on the precipice and desperate for new players…
Presently only 26.5% of all new mortgage debt is borrowed by owner occupiers… This ponzi scheme is running out of new dumb money!