Survey on Australian House Prices
Apr18
on April 18, 2011
at 9:38 am
I have been asked to post a survey to gauge interest in a potential financial product related to Australian house prices. If you are interested in such a product, please click here to take this survey.
Further to my previous comment, I’ve just been informed by BBN that the product will be available to all investors, not merely wholesale ones as defined by ASIC.
The minimum investment will also be substantially smaller than A$250K–this is part of ASIC’s definition of a wholesale investor and not part of BBN’s intended product.
Hi Steve, and Co., first post and a long-term lurker.
Looks like the fireworks are about to start mate … not nice … but too bad, so sad, for all those scammers gouging us into oblivion, and pretending it’s ‘growth’ and good for us.
Yeah, … right … oh well, … bring on the clowns … oh wait …
Keep up the great work Steve, you’re about to be vindicated and ‘recgnised’ etc., … and generally disliked … of course.
Try to avoid bets with boof-heads mate.
Thanks “non”-participant–welcome in from lurking.
jim chanos seems to think shorting china is a good idea,
and i think he is right in the long run,’
but he is going to have to hold his positions for a while yet
and by default that means shorting australia according to him,
but again postions will have to be held for a while
and that can be dangerous, especially if one doesnt have nerves of steel.
“Regulation is a device to hide information from market participants, so that the markets fail due to information asymmetry.”
precisely the opposite lyonwiss
the gfc happened and the financial markets failed, in precisely the area where there was little or no FED supervision or regulation.
in the secondary markets,
we need good regulation to help us poor slobs peer behind the corporate veil
“Purely as an academic exercise I would be curious about the assumptions that go into hedging a property portfolio”
well if they dont take into account that the government will do whatever it takes to maintain incomes and employment,
then they are toast,
lets hope those hedge fund managers dont loose their shirts on this .
OT
“What can’t be paid won’t be paid” ?
http://www.telegraph.co.uk/finance/economics/gilts/8461745/Greece-forced-to-pay-sky-high-rates-to-borrow.html
“Caveat emptor”?
Max Keiser Interviews Tavakoli (!!!)
http://market-ticker.org/akcs-www?post=184538
“lets hope those hedge fund managers dont loose (sic) their shirts on this ”
Although anecdotal I tend to believe that it is the hedge fund managers that makes “loads of money” in proportion to their clients. (John Paulson et al?).
I would think it unlikely that “fund managers” ever lose their shirts in these positions but I am confident that their clients may do so. However one has to wonder where all “their” money came from in the first place?
IWO “The fund managers always come out on top in real terms”.
Don’t forget the “golden handshake”. I have experienced companies that had billions in cash and were bankrupted in very short order and “the (new)management” who did that got very good “golden handshakes”.
I did see that the employees got the “golden shaft”
It’s the nature of the game. “Just sayin”.
Hi Steve, since you are publicising anti-negative gearing campaign on your blog, I would like to make a comment in an attempt to bring some balance to this debate. (This thread is probably not the most appropriate so please feel free to remove/ move this comment elsewhere as you see appropriate).
= = = = = = = = = = = = = = = = = =
Negative gearing – is it really “the root of all evil”?
There is a lot of criticism of “negative gearing” in comments on this blog and in many other commentaries in response to property related news in the media. People are blaming it for increasing property prices, exacerbating housing affordability issues or even for the entire housing bubble. However, I believe that this concept is grossly misunderstood amongst general population. So, at the risk of agitating some readers, I would like to provide an unbiased overview of the concept, for the benefit of the healthy discussion on the issue.
The term “negative gearing” is used primarily to describe a situation relating specifically to investment in real estate in Australia where an investor is loosing money in the first few years of the investment (ie. where costs associated with investment exceed returns and therefore can be claimed as tax deductions). But such a situation is not unique to property investment. For example, it is no different to a situation where investors borrow money to invest in shares (same deal, the loan and transaction costs are initially more than earnings from dividends and there is an expectation of some capital gains in the long term to recoup the losses). It is also no different to any business activity where a combination of capital and loans are used by owners/investors to start up the venture, and after initial loses, make a profit in the long run (some businesses take long time to break even on expenses or to make a decent profit).
All in all, rental property investment is just a business: provision of long term accommodation services. It is a valid economic activity. And again, as such, it is not much different to other similar business activities like holiday rentals, bed and breakfast, or hotel accommodation services.
And one more thing. According to Australian taxation rules, costs incurred in generating income are tax deductible (with some exceptions). Therefore, costs incurred in the provision of long term accommodation services (ie. rental property investment) are allowable deductions. The same principle applies to home office expenses, professional journals subscriptions, and myriad of other work related expenses that, I am sure, most of taxpayers in this country are diligently claiming on their tax returns. Why then picking on investment property alone as the root of all evil? The only fair thing would be to either lobby to disallow ALL tax deductions by individuals (that includes salary packaging as well)… or agree to leave things as they are.
To finish off, a few words in support of “negative gearing” and rental property investment in general, and the way it all works in Australia. Sure, investors compete for available stock of properties with first home buyers and those who upgrade to better properties but those investors are just another group of participants in the market. And it is the market that sets the prices (at a level where demand matches supply). Would you rather prefer a centrally regulated market? All attempts of regulations of rental property market in western economies led to all sorts of abuse. For example, in the US, renters were trading entitlements for cash and in the UK public housing was commercially exploited by privileged renters. And in Australia past public housing initiatives created ghettos of underprivileged which led to high level of crime and all sorts of anti-social behaviours.
I believe the current model of providing accommodation to residents of Australia is much more socially responsible. That is, those who can afford and/or prefer to own the property can buy one. The bulk of rental accommodation is provided by private investors, who take the risk of owning the property and subsidise to a degree rental accommodation in return for tax privileges and a possibility of some capital gains (by the way, anyone can start long term accommodation service business, it is not restricted to the elite – property investors are ordinary hardworking people, just like you and me, it may be your colleague from work, or your subordinate, it may be a teller in the bank or receptionist in the office, a plumber you called in last week or your dentist… these are not “speculators reaping off poor taxpayers”…). State/Territory governments provide some housing stock for the most underprivileged and Federal government provides assistance for low income earners who don’t qualify for housing trust properties and have to rent privately. It is the right model, it provides the right balance in my opinion.
Although State/Territory governments could have more influence on the property prices by releasing more land for development, any such decision has to be balanced with the availability of the infrastructure. Rail and road network has to be upgraded as a first priority in all capital cities before this can happen on a large scale. And it will take years and a lot of capital. Federal government could attempt to reduce the cost of building new stock by allowing cheaper labour into the country but since this brings all sorts of political issues into play, it is very unlikely to happen. So, the current situation is most likely to continue.
All in all, the question whether “negative gearing”, and property investment in general, is good or bad should be asked from the social perspective and not from the populist, maybe even leftist, point of view. That is, the right question to ask is if the current model gives people decent and affordable accommodation options and NOT whether it allows more people to own their homes. From the social perspective, rental property investment by individuals is a vital part of the entire system of providing decent accommodation for all in this country. Although “negative gearing” may have earned bad name due to activities of some unscrupulous spruikers, the fundamentals of investing in property as a long term accommodation service business are very sound and deserve proper recognition. Please, reconsider your position on “negative gearing” in the light of the above…
I have to agree with mahaish here concerning information asymmetries. It was precisely because government regulators were not doing their jobs, on the grounds that “markets know best” and that they had been captured by the private sector.
Having watched the excellent documentary Inside Job, no one forced the rating agencies (S&P, Moodys, Fitch) to fabricate AAA ratings for financial instruments that were later revealed to be junk. This is an example of an enormous information asymmetry. The rating agencies actually claimed free speech rights to avoid punishment.
As the econophysist Joseph McCauley has pointed out in his work, there has been no economic theory or tool developed to correct information asymmetries. Markets are utterly saturated with information asymmetries, as well as externalities. Even at their best, regulators fight a loosing battle against correcting markets.
The purpose of the advertising, marketing and public relations industries is to promote information asymmetries as much as possible. Conventional economic theory states that markets are efficient because informed consumers and investors make rational choices. What these industries do is make consumers and investors as uninformed as possible so that they make irrational decisions.
I think this is one of the major reasons as to why no information asymmetry index has ever been produced to measure the level or rate of information asymmetries in a state capitalist economy – it simply becomes too revealing. The same with externalities.
Interesting idea …
http://www.economist.com/blogs/freeexchange/2011/04/europes_debt_crisis_7?fsrc=scn/fb/wl/bl/europesproblemsinanutshell
Here I believe Steve Keen, is the definition of your challenge:
“French philosopher Michel Foucault identified a carceral continuum, the system of cruelty, power, supervision, surveillance and enforcement of acceptable behaviour affecting working and domestic lives. Economics and economic systems are part of this system of power. In Lewis Caroll’s Alice in Wonderland, Humpty Dumpty understood the issue: “The question is which is to be master – that’s all.”
“Economics and economist have been always been part of the mechanism of social control and power. The rest is just noise.”
http://www.nakedcapitalism.com/2011/04/satyajit-das-dead-hand-of-economics.html
Piece of cake for you
Let me say this though: the behaviours of socio-economics are consistent with the sciences but inconsistent with that which we believe Man to be, that is to say, a God – as he acts more like a grain of brainless sand.
The grease and oil change man…
More on the global debt crisis:
http://www.economist.com/blogs/buttonwood/2011/04/debt_crisis?fsrc=scn/fb/wl/bl/negativewatch
I recommend that you all “hedge” this probability, as sure as hell freezes over, it cometh here:
http://rwer.wordpress.com/2011/04/20/tyranny-of-the-central-bankers/
“The worst part of this story is that these fundamental decisions about economic policy are made by a small, secretive clique operating largely outside of the public’s purview. Central bank decisions on interest rates are likely to have far more impact on jobs and growth than any of the policies that are debated endlessly be elected parliaments. Yet, these decisions are made largely without democratic input.
In fairness, politicians bear much of the blame for this situation. They established institutional structures that largely place central banks beyond democratic control. There is probably no bank that is as insulated from the democratic process as the ECB, in large part because of its multinational structure, but all the central banks in wealthy countries now enjoy an extraordinary degree of independence from elected governments. In many countries they are even more independent than the judicial system.
Even worse, the politicians have actually mandated many central banks, like the ECB, to pursue an inflation target to the exclusion of other considerations. This gives the central bankers a license to throw millions of people out of work in order to chase their obsession with inflation.”
end quote/
I hope that this sends some signals (evocations) about just how the RBA, in its ignorance, denial and arrogance, believes that it must, a priori, control Australia and Australians through an illicit applied banking consensual age old recursive fraud that is to be imposed upon trusting and gullible souls – just to appease our colonial Masters, past and future. Nothing like a bureaucratic 1M$ salary to hype the arrogance and ego, especially when, in reality, it has no intellectual idea, at all, as to what it is doing!
mahaish April 20, 2011 at 8:07 pm
Nothing is that obvious. We did have plenty of regulation, but it was not being enforced. But it is in the secret nature of regulation that we did not know that regulation was not being enforced. Who regulates the regulator? You are most vulnerable when you think you are being protected.
UK latest.
The banks may have to pay out 4 billion pounds for PPI (Private Protection Insurance) that was mis-sold.
Now let’s just correct that to “You the Taxpayer will have to pay out 4 billion pounds”…
http://uk.news.yahoo.com/5/20110420/tbs-banks-face-huge-bill-after-ppi-court-327c223.html
Of course the banks will likely appeal and this may drag on for years. The news presenter says that “if you think you think you have a problem go talk to you bank”. What a laugh. All this is on mainstream TV today.
“Debt aid” companies are starting up and going out of business quickly.
Want a bit of insight into the sort of stuff that is going on in the UK?
http://www.debtwizard.com/
There is “money” to be made by this financial system on the way up and the way down. A whole plethora have companies have come into existence to “aid” people with their debt problems.
We get unsolicited telephone calls every day about “debt”. Some of the callers can barely speak English. Today we have had 2 such calls so far.
The video link that was posted here is very well worth watching…
http://jessescrossroadscafe.blogspot.com/2011/04/how-far-can-fed-go-in-manipulating.html
I have been “bitten” hard personally with this financial/legal system. I know what it is like to be a small fish in a game ruled by “big fish” and the rules are never made clear up front. They *always* have the upper hand.
Hedge funds ? Who are the counterparties ? I guess most here have heard of AIG who were counterparties to those derivates (credit default swaps) but *didn’t actually have the cash to pay out*. Whoops another 100 billion dollars that was given from the taxpayer to pay out.
So when it really comes down to is to beware any “complex financial instrument” and know who your real counterparties. Genuine insurance is useful and valid. What I have seen these last 2 years is not useful.
Hedge funds ok ?
http://www.wdm.org.uk/food-speculation
Ultimately this *is* a (the biggest) gambling casino. If you want to participate at least go in with your eyes open.
I hope some of my posts here are useful to a few here.
Philip April 20, 2011 at 9:58 pm
Regulation creates information asymmetry. The regulator is a basically lawyer. Lawyers are most reluctant to divulge information, which is a weapon for their prosecution. Just open your eyes! How often have our financial regulators warn you of dangers? They are supposed to collect and analyze a lot of information and market intelligence.
Nothing is what it seems from the outside. The regulators often appear to be the last to know about fraud. Information disappears into the black holes bureaucracy. Look at the Madoff case. Harry Markopoulos delivered significant evidence on Madoff fraud to the SEC, relying on the regulator to do its job. It have been better if he simply ignored the regulator and published the information himself.
Regulation as is currently conceived is quite useless and the GFC proved it. Regulation relies on law, which by definition is yesterday’s problem. You can provide some protection for yesterday’s problem, but it will be inadequate for tomorrow’s problem, when the market is encouraged to be innovative.
One of the difficulties in regulating derivatives comes from the inability of the lawyers to come up with a functional definition of derivatives. The weapons of mass destruction have yet to destroy the masses… but they will.
Normally I like Bill Black’s understanding of things…
However I find the following interview the most confused emmission from him.
Professor Keen I think he would benefit from some clarification from you.
http://neweconomicperspectives.blogspot.com/2011/04/william-black-interviewed-on-real-news.html
@Lyonwiss
“Regulation creates information asymmetry.”
I think we need a total rethink of “regulation”. I do not even know what “regulation” really means in the context of the financial system. More importantly I was trully ****** off when 2 years ago I found out how this “money system” really operated. I simply could not believe that it had been hidden from me all these years.
So let’s consider “education” being a number 1 priority. Of course if you educated people then maybe the game would not work ?
Secondly I love the term “information asymmetry”.
I appreciate the phrase “Regulation creates information asymmetry.” but since I simply don’t understand what regulation really means. I am not alone in this matter, any people in the street whom I care to broach this subject to do not know either.
My polls tell me that the average person is so ignorant about any of this stuff (and generally prefers to keep it that way) that asymmetry is too technical a term.
More like financial class knows 100% and general public knows -60 %. (Yes I did use a minus sign – how is that possible? – simply because what they even think they know is wrong as well).
I still recommend that people who have not viewed “The Crash Course” do so…
http://www.silverbearcafe.com/private/08.09/crashcourse.html
A mortgage (mort == French for death and gage == old english for bond) is a long term arrangement. That can cause many problems due to things that were not considered at the outset.
So as professor Keen has pointed out considering one thing in isolation without considering that changes in other things due to changes in the thing under scrutiny along with the passing of “time” is even more of a problem for long term contracts.
Let’s be quite clear. From what I have seen these contracts are really nothing of the sort. Why people sign them I don’t know. They are so variable (the bankers can change things as they so wish) as not really to be worthy of the term “contract”.
As someone quite famous once said…
“The only reason for time is so that everything doesn’t happen at once.” -Albert Einstein
I prefer to think that time does not exist and that all we have is the relative speeds of things.
As for people “who could not see this coming”. One of the local shopkeepers told me that it was obvious it could not continue. He is a “down-to-earth” sort of chap (maybe that helps as to understand why he could see and end whereas others could not.
I do recommend reading some of the comments on the “market Ticker”. Might help you consider things…
http://market-ticker.org/akcs-www?post=184584#discuss
Finally for those who think that what happens in the USA does not affect other countries I would hope that you see that there are indeed great effects. Since we have a shared monetary system, things of a given nature that happen in the USA will “leak” to all places around the globe. (;-)).
The problem as I see it is that too much “money” has been “manufactured”
A good day to all.
Bill Black on form !!!
http://market-ticker.org/akcs-www?post=184605
Well worth watching – he talks about “regulation”. Touches very much on the recent (sub-)thread of discussion.
Apologies for swamping this thread but…
If you take a look at the dollar index and see the trend…well it looks like things are right back where they started before all this “money printing”.
Questions for Professor Keen.
Is this significant ?
Has Bernanke’s “largesse” to the financial sector failed and is he now out of moves ? (Does this constitute a “disorderly decline” of the dollar?).
current value 74.382 (down 0.647)
http://quotes.ino.com/chart/index.html?s=NYBOT_DX&t=&a=&w=&v=dmax
For those who haven’t looked at the trade deficits since 1992 of the USA one can download them as an excel spreadsheet here…
http://www.bea.gov/international/#trade
Calculate the total accumulated imbalance since 1992 and compare to GDP.
Interesting ?
aus_ed,
Let me disagree.
You have presented arguments to support negative gearing because investment in rental properties should be treated in the same way as any other form of leveraged (productive) investment. Your explanation of the influence of negative gearing on house prices is related to generating extra demand, possibly slightly shifting the equilibrium price. The cure to the malaise of low housing affordability would be to release more land.
But the fundamental issue of setting off an accelerating growth of the prices – the housing bubble has been overlooked in your analysis. This is the real economic and social cost of this “invention” (which is unique to some Anglo-Saxon countries and cannot even be imagined in continental Europe). If we compare average dwelling price/average family income ratio – it has risen dramatically since 1991 in Australia. We are not in a long term equilibrium and therefore this type of analysis where an increased demand slightly moves the equilibrium along the supply curve is inappropriate. The market doesn’t work as described in the neoclassical economic handbooks. It works exactly as described by George Soros in his theory of refexivity – there is a positive feedback driving demand and prices up because people see prices going up – they invest mainly because of the capital gains (otherwise what negative gearing would be for?). Of course when house prices are rising almost everyone is interested in increasing long position on the market. We have oversized houses inhabited by heavily indebted families with low income because everyone wants to realise long-term capital gains.
I am not sure whether borrowing to invest by individuals should be encouraged in general. We ended up with the system where leveraged speculation on land prices has been disguised as productive investment. The neoclassical economic models ignore the process of credit money creation. It is not true that over a period of time prudent savers have to save X dollars so that investors may find the most profitable and optimal way to invest that amount. In fact if the investors want to borrow 10*X dollars over that period and they have enough equity, well-capitalised banks will happily create that amount of money out of thin air (their assets and liabilities increase by 10*X dollars due to double-entry accounting rules) and later worry about the composition of their asset portfolio, possibly encouraging some cash deposits.
Here is a link to a paper explaining the process:
http://www.bis.org/publ/work297.pdf
It is exactly the negative gearing combined with halved capital gains tax rates what enabled the process of “wealth generation” that is redistributing money from the younger generations of Australians and fresh migrants towards the so-called “baby-boomers” and other similar creatures. There is no chance that the same level of capital gains would be sustained by our children because the continuation of the exponential growth of the prices/income ratio would lead to diminishing housing affordability throttling the demand. So this is a one-off intergenerational rip-off and I am the person being ripped off by being a taxpayer and not being an investor (because I arrived in Australia too late). These who are renting are ripped off twice. I know that there is a lot of not-so-well educated and rather lazy people with $50k income owning several investment properties worth over a million and a lot of young professionals on almost $100k salaries who will never afford to buy a house in a decent spot. Is this capitalism or rather feudalism? It doesn’t matter what you do and how hard you work as long as you have been born at the right time and at the right place.
What is “leftist” in the critique of the negative gearing? I thought that stimuli and tax distortions are against the principles of the free market system.
Yes we have a kind-of “real socialism” here implemented by the baby-boomers (Paul Keating/John Howard with a little help of Bob Carr in NSW) for the baby-boomers that is a welfare state for the middle-class. I think that we should either get rid of it or extend socialism to everyone (but this may not work much better in Australia than in Cuba). If the government does not throw good money after the bad money (to “kick the can down the road”) the bubble will burst soon and the market mechanism will do its job – at a very high price paid by everyone. We will eventually reach an equilibrium when a significant number of the negatively geared investors are bankrupt and the house prices/income ratio reverts back to the long-term average because the demand will be based on satisfying real needs of people not on speculation. I think that we should come back to this point in maybe a 5 years time when the long-term price paid by the economy is fully known. Also – not all the baby-boomers who have been so strongly in favour of the current system will be happy to live on a state pension when their “wealth” evaporates suddenly. They will also pay the price for the system they voted for.
You wrote “the fundamentals of investing in property as a long term accommodation service business are very sound and deserve proper recognition, please, reconsider your position on “negative gearing” in the light of the above…”
I would say that maybe greedy real estate speculators sorry investors should reconsider the path they have chosen for this country – the path to ruin, exactly the same as in the US, Spain, Ireland or Portugal.
I would just build more social housing and stop fiddling with the market by introducing first home owners grants and more tax loopholes. Land and property taxes should dampen the appetite for speculation (like in Germany). People who want to invest their own money in rental properties should be allowed and encouraged to do so but leveraging should be discouraged. This German model of the property market is proven to work like a German car. We don’t need to reinvent anything.
#Aus_ed Isn’t negative gearing itself a ‘leftist’ idea?
Why don’t we limit tax deduction to property related costs only?
sirius April 21, 2011 at 4:12 am, April 21, 2011 at 3:46 am
William Black is great when it comes to microeconomics of bank fraud. But on macroeconomics, he is no better than anyone else (in providing innovative solutions). Sure, Obama’s focus on deficit reduction may be bad timing and inadequate. Most economists do not seem to be aware of the structural changes in the US economy. More government stimulus (or less deficits) may not bring back 25 million unemployed and restore the economy to its former health.
The recent rally to protest cuts in research funding provides an opportunity to raise an important point. Suppose you half research funding for a few years (for temporary budget reasons) and then double research funding afterward, you will not recover your research capabilities, as there will have been a permanent loss of intellectual capital. (It happened to me in 1980s.) Economists and politicians seem to think that you could simply pull the fiscal and monetary levers one way or the other to adjust the economy like a thermostat.
We have not even begun to understand the true implications of the GFC. The Keynesians (neo and post) point out market failure of neoclassical economics. But the neoclassical and Austrian economists point out government interference and failure of regulation. Failures in government bureaucracies, regulation, financial engineering, the economic paradigm etc. have yet to be properly recognized and analyzed. The so-called reforms and the now common “business as usual” attitudes show the shallowness of the understanding. The film “Inside Job” has just scratched the surface of a much deeper rottenness.
@ Lyonwiss April 21, 2011 at 12:40 pm | #
“Failures in government bureaucracies, regulation, financial engineering, the economic paradigm etc. have yet to be properly recognized and analyzed. The so-called reforms and the now common “business as usual” attitudes show the shallowness of the understanding.”
Your statements clarify my position as to “leadership” being of “incompetence” and hence the need for the public to bailout the economy due these incompetences or, IOW these failures – have been properly recognised and analysed – **but not by those of elected and unelected office” or “leadership inclusive of bureaucracy / economic elites.
War, is the unnecessary effect of these incompetences – as are the taxation beyond death policy while self agenda expressed in recursivity, are the “as nobody-could-have-envisioned… ” ‘we then just fed ourselves and our team’ – default of collective human nature at its worst. The worst is that strata of our society from which we chose our leaders.
Technically and scientifically we have absolutely not one single problem in developing a socio-economic governance system that works and functions efficiently except – the opposition to such a schema by those that see themselves as “leadership” material – aka “us”.