Land of the Twee­dles

Flattr this!

Click here for this post in PDF

Aus­tralia is once again prov­ing itself to be the Land of the Twee­dles. Though Labor and Lib­eral loudly pro­claim their dif­fer­ences, on the key eco­nomic issues, they’re (par­don the pun) car­bon-copies. Both agree that the Fed­eral Bud­get should be returned to sur­plus. Both believe that the “Global Finan­cial Cri­sis” (which Amer­i­cans and most of the rest of the OECD call “The Great Reces­sion”) is behind Aus­tralia, and the imper­a­tive now is to stop the growth in gov­ern­ment debt. And both would leave untouched spend­ing pro­grams that make us worse off by pro­mot­ing asset bub­bles rather than seri­ous invest­ment.

On their core eco­nomic beliefs, Twee­dledee and Twee­dle­dum are wrong. The GFC is still with us, and—certainly in Australia—government debt is not the key prob­lem. Gov­ern­ment pol­icy that aims to drive the bud­get back to sur­plus may instead drive the econ­omy back into reces­sion.

Though ‘Dee and ‘Dum rau­cously debate the level of gov­ern­ment debt, both the boom before the GFC and the cri­sis after it were caused by out-of-con­trol pri­vate debt. Ris­ing house­hold debt fuelled bub­bles in asset markets—particularly housing—across the OECD. While Dee and Dum con­cur that Aus­tralia was a respon­si­ble excep­tion to the global rule, the bub­ble in house­hold debt here was in fact big­ger than that in the USA—mortgage debt peaked at 74% of GDP in the USA in late 2007; Aus­tralian mort­gage debt peaked 14% higher, at 88% of GDP, in March 2010.

Fig­ure 1

Against this, the level of gov­ern­ment debt in Aus­tralia about which both Dee and Dum obsess is triv­ial. If gov­ern­ment debt is a seri­ous problem—an issue I return to later—then the USA might have some­thing to debate. Amer­i­can gov­ern­ment debt is 15 times larger than Australia’s—relative to our respec­tive GPDs. And Amer­i­can gov­ern­ment debt is 117% the level of mort­gage debt; while in Aus­tralia the ratio is less than 7%! That Dee and Dum can fill the air­waves with alarm about the level of gov­ern­ment debt in Aus­tralia is truly sur­real.

Fig­ure 2

Dee and Dum con­cur that we avoided the GFC because of our lucky rela­tion­ship with The Red Queen (China). There is some truth to this (they can’t be con­sis­tently wrong), but both avoid dis­cussing the major rea­son we boomed while the rest of the world slumped—which is that Dee encour­aged house­holds to keep on bor­row­ing money while the rest of the world was delever­ag­ing.

Dee and Dum don’t dis­cuss this policy—they call it the First Home Own­ers Scheme, I call it the First Home Ven­dors Scheme—because both wor­ship the sacred cow of ris­ing house prices. The twins both favour expen­sive afford­able housing—yes I know that’s a non­sense phrase, but we’re on the other side of the Look­ing Glass here. So they both main­tain, with­out dis­cus­sion, poli­cies designed to keep house prices high and ever ris­ing, while at the same time pre­tend­ing to make hous­ing afford­able with expen­sive poli­cies that help keep the bud­get in deficit.

That’s why, despite their obses­sion with reduc­ing the deficit, nei­ther Dee nor Dum will even dis­cuss three sim­ple pol­icy ideas:

  1. Limit the First Home Ven­dors Grant to new hous­ing only;
  2. Limit new Neg­a­tive Gear­ing to new hous­ing only; and
  3. Bring the cap­i­tal gains tax rate back into align­ment with the income tax rate.

These pol­icy changes would do won­ders for the Bud­get bot­tom line while improv­ing the economy—which both Dee and Dum claim they’re try­ing to do (“Trust us, we’re Twee­dles…”).

With roughly 100,000 First Home Buy­ers every year, 90% of whom buy an exist­ing prop­erty rather than a new one, the abo­li­tion of this house price sup­port scheme (that’s not what Dee and Dum call it, but that’s what it is) could save $600 mil­lion a year—and the con­tin­ued sup­port for new hous­ing might spur hous­ing con­struc­tion as the Boost did in 2008. That’s a rather more respon­si­ble way to save money than by cut­ting med­ical research fund­ing, which is one of the deficit reduc­tion kites Dee flew a month back.

Lim­it­ing neg­a­tive gear­ing to new prop­er­ties only would also do some­thing to increase the sup­ply of new hous­ing for renters. Both Dee and Dum claim that is the real goal of the cur­rent pol­icy, but despite their bleat­ings, every­body knows that, as a scheme to encour­age spec­u­la­tion on ris­ing house prices, neg­a­tive gear­ing is sim­ply another plank in their mutual house price sup­port scheme. So-called investors actu­ally do less real invest­ment than even owner-occu­piers these days—less than 2 per­cent of new dwelling finance goes to investors build­ing or buy­ing new prop­er­ties.

Fig­ure 3

If neg­a­tive gear­ing was restricted only to real investors—people who actu­ally build some­thing new, rather than buy­ing some­thing old and wait­ing for its price to rise—then renters might some­day be able to find some­where to rent.

Lim­it­ing neg­a­tive gear­ing to new prop­er­ties only wouldn’t affect cur­rent prop­erty spec­u­la­tors (I’m sorry, I meant investors)—at least not directly—but it would reduce the growth of this Bud­get-sap­ping Black Hole by 95% or more.

Finally, the deci­sion to halve the rate of cap­i­tal gains tax back in 1999 was one of the stu­pid­est things Dum ever did (when he was in power)—aand there­fore it worked a treat in Look­ing Glass Land. It costs the gov­ern­ment close to $10 bil­lion dol­lars a year—almost the amount of the deficit they’re both claim­ing to know how to reduce. And, like every­thing else Dee and Dum don’t bicker over, it pro­motes spec­u­la­tion over true invest­ment.

Now it’s the main cause of a blowout in the Bud­get deficit this year we’re told, as cap­i­tal gains have evap­o­rated from our anaemic share mar­ket and the now burst­ing house price bub­ble. So why not make the Bud­get hit less extreme by bring­ing the rate back to the same as that for income?

Are either of them likely to even dis­cuss abol­ish­ing this tax dis­tor­tion? Not on your Nel­lie. And the same goes for the other two poli­cies too, because behind their facade of debate, Dee and Dum both know that any­thing that would reduce house prices—and gen­uinely make them affordable—would lose them votes with the Look­ing Glass elec­torate. So even though these pol­icy changes would prob­a­bly elim­i­nate the deficit overnight—which they both claim to want to do—they will instead fight about how hard to hit the soft tar­gets of wel­fare recip­i­ents, uni­ver­si­ties and their own bureau­cracy.

Which brings us to the other issue on which they both agree: the need to reduce the gov­ern­ment deficit. Are they right?

In the inter­ests of pro­mot­ing healthy scep­ti­cism here, let me pro­pose a sim­ple rule of thumb: almost any­thing that Dee and Dum agree upon is likely to be wrong (and this applies in the USA as well to their Dee and Dum).

Firstly, gov­ern­ment debt didn’t blow out on its own accord: it grew because pri­vate debt stopped grow­ing. This is obvi­ous in the US data: gov­ern­ment debt fell after the 1990s reces­sion ended—and only rose since late 2001 because of for­eign wars. Gov­ern­ment spend­ing blew out in 2008, not because the Dumoc­rats took over from the Deep­ub­li­cans, as their polit­i­cal debate would have it, but because pri­vate debt-financed spend­ing col­lapsed when the hous­ing and stock mar­ket Ponzi Schemes ended.

Fig­ure 4

Sec­ondly, it’s a non­sense to argue, on an anal­ogy with house­holds, that gov­ern­ment debt can bank­rupt a gov­ern­ment that has a cap­tive Cen­tral Bank. If a house­hold spend more than it earns, then after it exhausts its sup­ply of credit, it is bank­rupt. But if a gov­ern­ment spends more than it taxes, it accu­mu­lates a debt to its Cen­tral Bank… which it can pay by bor­row­ing from its Cen­tral Bank. Unlike a pri­vate bank, a Cen­tral Bank can’t refuse to lend to its pri­mary bor­rower.

So Fed­eral Gov­ern­ment in the USA or Aus­tralia won’t go bankrupt—though their States could, as could the Euro­zone coun­tries of Europe. Hence, what should be dis­cussed are the eco­nomic con­se­quences of run­ning a deficit: assum­ing instead that a gov­ern­ment can run out of money is Twee­dle­Dum­ming down the prob­lem.

I apol­o­gise for com­pli­cat­ing the debate here—Tweedle-dumming a prob­lem is much more cathartic—but the indi­ca­tions are that this is not the time to be reduc­ing gov­ern­ment spend­ing in either the USA or Aus­tralia. The cri­sis was caused by accel­er­at­ing debt—which gives the econ­omy a boost—giving way to decel­er­at­ing debt—which dri­ves aggre­gate demand down. This is eas­ily shown by graph­ing the accel­er­a­tion of debt—the Credit Impulse—against changes in unem­ploy­ment (the cor­re­la­tion coef­fi­cients in the next two charts are –0.77 and –0.75—extremely high cor­re­la­tions over such a long period with such vari­able eco­nomic con­di­tions).

 

Fig­ure 5

Though Aus­tralia cer­tainly was assisted dur­ing the GFC by its sales of coal and iron ore to the Red Queen, the real rea­son that it “avoided” the GFC was that it restarted the pri­vate debt engine more rapidly than Amer­ica did. The Credit Impulse stopped its plunge at –12 per­cent of GDP here, ver­sus a peak neg­a­tive of –26 per­cent in the USA. Aus­tralia also spent less time in the red on the Credit Impulse than the USA: 26 months ver­sus 30.

Fig­ure 6

Now both economies are recov­er­ing, not because the phys­i­cal economies are in good shape—they’re both very sick, except for Australia’s min­er­als sector—but because the Credit Impulse has turned pos­i­tive in both coun­tries.

Fig­ure 7

This, how­ever, is not a sus­tain­able path to recov­ery.

Firstly, bor­row­ing money and gam­bling on ris­ing asset prices is what got us into this cri­sis in the first place: rely­ing on a recov­ery in pri­vate debt to get us out of this slump is like pre­scrib­ing more can­cer as a cure for can­cer.

Sec­ondly, it’s highly unlikely that either coun­try can sus­tain the accel­er­a­tion in debt that is needed to keep the Credit Impulse pos­i­tive, because if they did, then at some point falling debt would have to give way to ris­ing debt once more. Call me crazy, but I just can’t see that hap­pen­ing.

Fig­ure 8

So what is likely to hap­pen soon—and sooner for Aus­tralia than for America—is that the pos­i­tive boost from the Credit Impulse will run out, and turn neg­a­tive again. If, at the same time, the government’s input turns neg­a­tive cour­tesy of deficit reduc­tion, then the reces­sion will return.

Ulti­mately, the only way out of this cri­sis is to abol­ish the debt that caused it: debt that financed spec­u­la­tion on ris­ing share and house prices rather than to finance gen­uine invest­ment. As Michael Hud­son puts it so sim­ply, debts that can’t be repaid, won’t be repaid. At some stage—maybe ten years after the Great Reces­sion began, we’ll finally learn the truth of that elo­quent apho­rism, and tackle the real cause of this cri­sis.

But until then, we’ll dis­tract our­selves by watch­ing the point­less debate between Twee­dle­dum and Twee­dledee.

About Steve Keen

I am Professor of Economics and Head of Economics, History and Politics at Kingston University London, and a long time critic of conventional economic thought. As well as attacking mainstream thought in Debunking Economics, I am also developing an alternative dynamic approach to economic modelling. The key issue I am tackling here is the prospect for a debt-deflation on the back of the enormous private debts accumulated globally, and our very low rate of inflation.
Bookmark the permalink.
  • Aus_ed May 14, 2011 at 10:40 am | #

    How long will it take you to realise prof Keen’s model is sim­ply incom­plete and there­fore it can­not be used as a pre­dic­tor of what is hap­pen­ing in real world?”

    Is sci­en­tific terms pre­dictabil­ity is a proof of the­ory but not nec­es­sar­ily a com­plete nega­tion of that the­ory.

    I have posted here pre­vi­ously that in “credit impulse” ‘impulse’ is the cor­rect term — and words are impor­tant — vital in fact.

    It can be is seen that this “credit impulse’ is the dri­ver which dri­ves looser credit, higher demand and as a resul­tant con­se­quence, higher debt and of course, higher house prices while at the same time — what is often not seen, is the accel­er­a­tion where the term ‘impulse ’ is cor­rect as it pul­sates.

    This whole described set of event is not causal but resul­tant which can and is fuelled by bil­lions of bucks into adver­tis­ing — the inevitable entry into the ranks of house sales­men, money bro­kers and all other allied in the these pul­sat­ing pan­ics and des­per­a­tions impact­ing and stok­ing the fur­naces of the imma­ture, untested and trust­ing human emo­tions.

    Add to the these emo­tional dri­vers: parental pres­sures, peer pres­sure, height­ened nat­ural needs for shel­ter, nat­ural instinc­tual need of the nest to raise chil­dren, Gov­ern­ment sup­port through Pol­icy in order to pla­cate the Finance indus­tries, Pol­icy that sup­ports polit­i­cal Party re-elec­tion poten­tial, Pol­icy that pla­cates a minor­ity, add also Lobby and Pol­icy that fills the MSM again for sup­port of re-elec­tion by the LCD of soci­ety.

    Of course there are all the other tricks in play to raise house — that is to inflate the house prices — so as to keep the banks prof­itable — gam­ing the sys­tem to keep rents high to suck investor and spec­u­la­tor monies into the Pol­icy game; many more as you all well know.

    Where in Aus­tralia it is the only game in town and Pol­icy across all sec­tors of the polit­i­cal sce­nario — there is noth­ing else but the poten­tial re-elec­tion of polit­i­cal per­sons which class them­selves as “lead­ers”. That is to say, there is no nation build­ing, no char­ac­ter build­ing only elite build­ing. How bank­rupt this pol­icy is indeed.

    I ignore here spec­u­la­tion which is another con­text alto­gether but is also an emo­tional dri­ver for higher prices.
    I also ignore here invest­ment which also has its own com­plex­i­ties as well.

    Read­ers would be well to remem­ber that 98% of Aus­tralia know noth­ing of and have lit­tle and or no inter­est in know­ing any­thing about, “eco­nom­ics” and it is these peo­ple that are being suck­ered into get­ting into a mort­gage and sign­ing their life always for their next 30 years or so; cap­tured, Matrix comes to mind, again.

    So, this ‘impulse”, I believe is cor­rect but it is a syn­thetic and Pol­icy manip­u­lated impulse that inher­ently is encap­su­lated in “credit” or debt”. Credit impulse can be math­e­mat­i­cally defined and charted but the emo­tional dri­vers can­not. This is what I have writ­ten as the Recur­sive Pol­icy — that is to say, the emo­tional guts of the socio-eco­nomic phe­nom­ena, feed­ing — in an accel­er­at­ing frenzy or, “impulse” upon itself. 

    A good anal­ogy is Can­cer.

    In Aus­tralian lead­er­ship today there is no vision, no future, no hope for our youth from this quar­ter and all that hangs off it, except for the increas­ing num­ber of peo­ple tak­ing inter­est through Blogs such as this of Steve Keen. This is a road to tomor­row.

    The image below shows that all fiat cur­ren­cies are damned near worth­less with the Aus­tralian dol­lar trad­ing some ~07 cents higher that the USD — 

    This is not some­thing to be proud of, on the con­trary it should clearly that the whole World is in the final phases of total fail­ure.

    All the facts now point to a World Gold Stan­dard will be intro­duced and is cur­rently being designed where all Nations will bare weighted rela­tion­ships thereto which sug­gests that the price of Gold and Sil­ver will be fixed at a much higher value than that of today. This will occur after the cur­rent West­ern regimes acquire enough of the World sup­ply to sat­isfy the mod­el­ling and this is the sin­gu­lar rea­son behind the huge manip­u­la­tions in the West­ern bul­lion mar­kets. Unfor­tu­nately for these guys, there are two new bul­lion mar­kets com­ing on line and a con­certed group­ing of bul­lion Traders who will act against the Recur­sive jail­ers.

    So Aus-ed I agree some­what that the big drop in prices in Aus­tralian hous­ing will come (soon) when the global sep­a­ra­tion finally snaps, due to the fact that the whole of Australia’s Pol­icy is Recur­sive and a pri­ori, sup­ports the Banks and their nec­es­sary ris­ing house prices. I still see Glen Stevens, for this rea­son alone, rais­ing inter­est rates next month. Of course he will say it is about infla­tion fears.

    But, where is the min­ing boom?

  • I must say I find it amus­ing to find myself lumped in with the neo­clas­si­cal econ­o­mists who gave us LTCM, when I’ve spent my pro­fes­sional career point­ing out what non­sense neo­clas­si­cal eco­nom­ics is, and how it would lead to dis­as­ters just like LTCM–and indeed, of course, the Global Finan­cial Cri­sis.

    This com­ment almost war­rants a free copy of the sec­ond edi­tion of Debunk­ing Eco­nom­ics.

    It’s Nobel, by the way; and it’s not, in fact, a Nobel Prize.

  • Anti­Moral­Haz­ard May 14, 2011 at 12:25 pm | #

    Wow aus_ed is in a warpath! He is show­ing his true col­ors by attack­ing Pro­fes­sor Steve Keen blantly.”

    I don’t read aus-ed com­ments as an attack on Steve Keen at all — i read is as a con­tri­bu­tion wor­thy of con­sid­er­a­tion. You will prob­a­bly find in the final analy­sis that every­body is a lit­tle bit right — but Steve Keen opens the door, or lifts the veils for each of our eyes (ISIS is naked like the Emperor) and it is we that are blind.

    On Gold and the stealth acom­ing of the new Global Gold Stan­dard — after the Great Bul­lion Heist which is cur­rently under­way:

    Total Gold:

    http://www.les-crises.fr/les-reserves-d-or/

    I thought there’s a min­ing boom in WA?”

    There is indeed, and things have never been bet­ter and prices are up — but this boom is about theft of Australia’s resources and is not for the pro­fane, vul­gar and unwashed. Get over it — your taxes at work.

    I must sug­gest that while this hous­ing thing is inter­est­ing, it is not the real issue du jour, which is a Gillard led revival of the Nuclear Aus­tralia Leg­is­la­tion of the USGWB and Oz — JH et al, with Abbott to turn Aus­tralia into the Global Nuclear Waste Dump. I posted on this Blog before. There are recent protest in NT which will be over-ruled, an eager WA and many oth­ers which, of course, is fuelled by the USA who don’t want this toxic shit in their coun­try. The final leg­is­la­tion is said to be ready for final deploy­ment; stealth and decep­tion.

    We are being set up for self-destruc­tion, but then Aus­tralia is just a waste land of no impor­tance.

    You can start here and Google:

    http://www.independentaustralia.net/2011/politics/australia-open-for-nuclear-sewage-business/

  • From @ Mish

    Eco­nomic Bust in Australia:Near-Record Cor­po­rate Bank­rupt­cies, Employ­ment Drops Unex­pect­edly; Rise in Bad Home Loans;Record Low Prop­erty Trans­ac­tions”

    http://globaleconomicanalysis.blogspot.com/2011/05/economic-bust-in-australianear-record.html

    Noth­ing really new here as long as you don’t take any notice of the Aus­tralian Press.

    ” What the hell is it that the RBA sees that I don’t?” Asks Mish

    Answer: It is called ‘salt­ing the mine’.

    ”We’re obvi­ously expect­ing the Reserve Bank to increase rates and there’s pos­si­bly one or two rises to come in the next six months,” Mr Nor­ris told an investor brief­ing.”

    You bet he is right — what do you think Glen Stevens was doing with the Bankers in Europe recently — talk­ing up Aus­tralia as the best geo-politico-banker- loca­tion for hot money in for­eign deposit accounts — for prop­ping up the TBTF 4 Banks. Higher inter­est rates will keep the bankers very happy — and screw to unwashed (soon to be irra­di­ated)

    Manip­u­lated bal­ance sheets and off-the-books- siv’s or not — in nat­ural physics — lack of integrity means unsus­tain­able — it is sim­ple as that.

    The com­pe­ti­tion for money is on and here there are no such things as Law that will be respected.

  • ferb
  • Philip

    Steve,

    How about giv­ing a free copy of the 2nd Ed. to loyal Debt­watch sub­scribers rather than prop­erty trolls? This would con­sti­tute an effi­cient allo­ca­tion of scarce resources to con­sumers.

    To go on from pre­vi­ous dis­cus­sion, as for the sup­posed “rental cri­sis” sup­ported by offi­cial vacancy fig­ures sup­plied by the real estate insti­tutes like REIV of 1.5%, that fig­ure only lists the num­ber of vacant prop­er­ties listed by land­lords for the pur­poses of rent­ing. Vacant prop­er­ties that aren’t listed do not count in the offi­cial fig­ures.

    Pros­per Australia/Earthsharing Aus­tralia released a report in 2008 using water con­sump­tion fig­ures of prop­er­ties in Mel­bourne. Using a cut-off fig­ure of 50L/day (effi­cient use is listed as 118L/day by a sole occu­pant) aver­ag­ing over six months, the analy­sis found that there are tens of thou­sands of vacant houses sit­ting around doing noth­ing, lead­ing to a real vacancy rate of 7% in Melbourne’s sub­urbs. Spec­u­la­tors are fore­go­ing rental income in favor of cap­i­tal gains.

    http://www.earthsharing.org.au/wp-content/uploads/iw2lh-08-report.pdf

    As I’ve writ­ten:

    The rea­sons as to why investors will forego rental incomes on vacant prop­er­ties prob­a­bly have most to do with Australia’s gen­er­ous tax­a­tion poli­cies for pur­chas­ing hous­ing. If the costs of financ­ing a mort­gage are greater than rental income (which in this case is zero) the tax­payer will sub­si­dize the investor through neg­a­tive gear­ing. In 1999, the Howard admin­is­tra­tion per­mit­ted a 50% cut to the cap­i­tal gains tax on the nom­i­nal gains of an asset after an asset was held for at least one year, favor­ing short-term spec­u­la­tion (McAuley 2009). Also, vacant hous­ing attracts lower coun­cil rates (no need for util­i­ties and garbage col­lec­tion), lit­tle to no main­te­nance costs and there are no ten­ants to get rid of. Depend­ing on the laws and reg­u­la­tions of each state, ten­ants need to be pro­vided with a notice to vacate, which may take months. Investors may see this wait­ing period as intol­er­a­ble because of per­sonal or finan­cial rea­sons, for instance, want­ing to offload the prop­erty if mar­ket con­di­tions become unfa­vor­able. All these rea­sons coin­cide to pro­vide a favor­able invest­ment cli­mate which fos­ters, not long-term invest­ment for the sake of rental income, but rather short-term spec­u­la­tion in expec­ta­tion of future cap­i­tal gains.”

  • Anti­Moral­Haz­ard

    Steve,

    Can you please kick out aus_ed from this blog? He’s obvi­ously a prop­erty troll who’s delib­er­at­ing wast­ing everyone’s time.

  • Anti­Moral­Haz­ard

    Phillip,

    You’ve got to be care­ful with your com­ment about let­ting invest­ment prop­erty be vacant while col­lect­ing neg­a­tive gear­ing sub­sidy. That is ille­gal and it is what the ATO will want to crack fown on.

  • Philip

    Anti­Moral­Haz­ard,

    While I was not wrong about investors claim­ing neg­a­tive gear­ing while not rent­ing it out, you are still right in say­ing that is ille­gal — I will change this, thanks.

  • @ Ferb May 14, 2011 at 4:56 pm | #

    they say this is rock bot­tom…..http://www.perthnow.com.au/business/wa-suffers-record-low-property-transactions/story-e6frg2ru-1226054805452

    And, I say it is far from “rock bot­tom” — you ain’t seen any­thing low as yet — as it is just get­ting started. Lots of pain in the pipeline to come — grasshop­per — in this Nation of Risk Free Bank­ing..

    @ Anti­Moral­Haz­ard May 14, 2011 at 6:43 pm | #

    I don’t see any­one wast­ing your time — you do that your­self. We want all the facts — not just those that you approve of. Are you intend­ing to run for Pope or Gov­er­nor of the RBA? What­ever, all the facts are nec­es­sary.

  • Anti­Moral­Haz­ard

    Phillip,

    I won­der how many land­lords are play­ing with the law by col­lect­ing the neg gear­ing sub­sidy while their prop­erty lie vacant wait­ing for renters to come. If this is a wide­spread prac­tice, than a good shake out is nec­es­sary.

    That comes to my mind regard­ing the quoted rental yields. As I men­tioned ear­lier, I learnt of a novice investor who lis­tened to the agent and raised his rents because he was told it is “too cheap”. That chap lost his ten­ant and his prop­erty was empty for months.

    If we include the peri­ods when the prop­erty is vacant and not col­lect­ing rent, the rental yield for the year will be dragged down. Are the quoted rental yields adjusted for the peri­ods when the prop­erty lie vacant? Maybe house­4aussies have some analy­sis for that?

  • Philip

    Anti­Moral­Haz­ard,

    Well in this case we have to decern between two types of prop­erty investors who claim neg­a­tive gear­ing. In the first camp are the dis­hon­est ones who have no inten­tion of rent­ing at all and declare NG, while the hon­est ones do rent out and declare NG, even though there may be peri­ods between old ten­ants leav­ing and new ten­ants arriv­ing. The ATO requires investors to declare rental income for a fis­cal year, but prob­a­bly not a month-by-month break­down.

    Check out page 15 for a sum­mary of whose mak­ing gains and losses with rental income.

    ATO. (2010). “Tax­a­tion Sta­tis­tics 2007–2008,” Aus­tralian Tax Office, http://www.ato.gov.au/content/downloads/cor00225078_2008TAXSTATS.pdf

    The Aus­tralian Tax Office (ATO) pro­vides an inter­est­ing sum­mary of indi­vid­u­als’ net rental income for the year of 2007–2008, with 69.4% of indi­vid­u­als report­ing that their net rental income was less than $0, mak­ing a loss of $12.75 bil­lion. The remain­ing por­tion made a gain of $4.12 bil­lion. The total net rental income was a loss of $8.63 bil­lion (ATO 2010: 15).”

  • Lyon­wiss

    Aus_ed May 13, 2011 at 8:49 pm 

    You said: “Lyon­wiss, re: retire­ment strat­egy – this is where the gov­ern­ment steps in again. No talk about num­bers but we are head­ing towards 35m pop­u­la­tion by 2050 any­way”.

    The strat­egy of rely­ing on pop­u­la­tion growth to solve eco­nomic prob­lems is the ulti­mate Ponzi scheme. In the US the social secu­rity sys­tem is going bankcrupt based on this idea: ever expand­ing pop­u­la­tion to meet pen­sion promises to pre­vi­ous gen­er­a­tions.

    The ALP is so retarded that it is strug­gling to learn yesterday’s eco­nom­ics. The party is try­ing to prove it under­stands neo­clas­si­cal eco­nom­ics. The Labor gov­ern­ment is com­par­ing its poli­cies to what the coali­tion would have done if they were in gov­ern­ment — a gross infe­ri­or­ity com­plex for a gov­ern­ment to have. A gov­ern­ment has to know and be con­vinced of its own poli­cies or it is all a pre­tense.

    Only Dick Smith and Kelvin Thomp­son appear to under­stand that expo­nen­tial growth and Ponzi schemes can­not last for­ever. Sooner or later, we have to con­sider sus­tain­able eco­nom­ics, which is not yet the par­a­digm. The Ponzi Scheme in Aus­tralian house can go on longer, if the gov­ern­ment is bent on inter­fer­ing, but sooner or later the gov­ern­ment has to rec­og­nize its lim­its.

  • @ Lyon­wiss May 14, 2011 at 10:32 pm | #
    Aus_ed May 13, 2011 at 8:49 pm

    … but sooner or later the gov­ern­ment has to rec­og­nize its lim­its.”

    Out­ra­geous laugh­ter… are your jok­ing? These peo­ple have no lim­its except in real­ity, trea­so­nous intent and self agenda.

    The insane laugh the loud­est”.

    LOL

  • Lyon­wiss

    peter­jbolton May 14, 2011 at 10:41 pm

    Gov­ern­ment is a com­plex object, depend­ing on which fac­tion is more pow­er­ful. The US gov­ern­ment appears to rec­og­nize some of its lim­its. But whether there is suf­fi­cient resolve to make a dif­fer­ence is moot. Marx would have said his­tor­i­cal forces are unstop­pable. But Marx has not been right on every­thing.

  • Philip

    Lyon­wiss,

    I usu­ally agree with you but not on this asser­tion that the US social secu­rity sys­tem is going bank­rupt. As Dean Baker has pointed out count­less times, SS will func­tion just fine for the next decade, before it runs out of fund­ing. A slight increase in the pay­roll tax will fix it for the indef­i­nite future. At the moment, it has a huge sur­plus and the gov­ern­ment has taken advan­tage of this by stuff­ing SS with non-mar­ketable IOUs and using the sur­plus to pay for its spend­ing.

    At the moment there is a huge fear cam­paign car­ried out against SS in the US. The first rea­son is because it helps mid­dle and work­ing-class peo­ple to sur­vive — an obvi­ous flaw if one believes that poor peo­ple should starve. Clearly, the rich have no use for its mea­ger pay­ments (a drop in the ocean for them).

    The sec­ond is because the rich want to pri­va­tize it and make enor­mous man­age­ment fees from the pro­gram, regard­less of how SS per­forms. At the moment, the admin­is­tra­tion costs are tiny, about 3%. If it were pri­va­tized, those costs could well rise to 20–30%, as with the US’s insanely inef­fi­cient pri­va­tized health care sys­tem. Exec­u­tives and man­agers want inef­fi­ciency, not effi­ciency because this is where they make their obscene incomes and bonuses (fat on the bone).

  • Philip

    An excel­lent arti­cle by the econ­o­mist Saul Eslake on the prob­lems of neg­a­tive gear­ing, debunk­ing the claims its sup­port­ers say about it.

    http://www.smh.com.au/business/time-to-change-the-unfair-rules-for-negative-gearing-20110424-1dsu6.html

  • Lyon­wiss

    Philip May 15, 2011 at 12:22 am

    The US social secu­rity sys­tem is not about pol­i­tics, regard­less of what dean Baker says. It is about arith­metic. It is fun­da­men­tally a Ponzi scheme: new com­ers pay­ing for past and immi­nent retirees. Dean Baker talks about short-term fixes, just like what the US gov­ern­ment did in the past. If you have spent your future, there is no solu­tion, regard­less of who pro­poses it, the mid­dle class, Dean Baker or the bankers.

  • Lyon­wiss

    Philip May 15, 2011 at 12:22 am

    I have to add that when I said “no solu­tion”, I mean no solu­tion from sim­ple adjust­ments within the range of cur­rent pol­icy set­tings, e.g. a small tax hike etc. From what I read, Dean Baker is a neo­clas­si­cal econ­o­mist, admit­tedly of greater inde­pen­dence and crit­i­cal thought than most, but a neo­clas­si­cal econ­o­mist nev­er­the­less.

    An exam­ple is the fol­low­ing state­ment from a recent paper he wrote on US pen­sion cri­sis:

    http://www.cepr.net/documents/publications/pensions-2011–02.pdf

    in which he said: “As a prac­ti­cal mat­ter, the stock mar­ket has pro­vided an aver­age real return of more than 8 per­cent for 30-year peri­ods when the PE ratio at the start was under 15 to 1.” He thinks the US pen­sion cri­sis is only an over-reac­tion to the tem­po­rary plunge in the stock mar­ket.

    Only a neo­clas­si­cal econ­o­mist would think the last 30-year is an indi­ca­tor of the future. In fact, the last 30-year rep­re­sents a period of extreme cap­i­tal­ism, after the demise of social­ism, when credit was allowed to explode lead­ing to the sort of cap­i­tal­ist cri­sis pre­dicted by Karl Marx. (I’m nei­ther a social­ist nor a Marx­ist by the way.)

    I would say that the the stock mar­ket is unlikely to have real return of “more than 8 per­cent” for the next 30-year period. In Aus­tralia, for the last decade or so, it was more like 5 per­cent. But there is no rea­son why this real return may not be higher or lower. Dean Baker’s work is pretty much aca­d­e­mic data-min­ing, with­out spe­cial insight which is pos­si­ble only if some­one is pre­pared to work out­side the neo­clas­si­cal par­a­digm.

  • @ Lyon­wiss
    May 14, 2011 at 10:56 pm | #
    peter­jbolton May 14, 2011 at 10:41 pm
    “Gov­ern­ment is a com­plex object, depend­ing on which fac­tion is more pow­er­ful. The US gov­ern­ment appears to rec­og­nize some of its lim­its. But whether there is suf­fi­cient resolve to make a dif­fer­ence is moot. Marx would have said his­tor­i­cal forces are unstop­pable. But Marx has not been right on every­thing.”

    That which you define here are the US ‘gov­ern­ment’ processes which Amer­i­cans’ call “Democ­racy” — that is, where the fac­tions (gangs) rule. But the US sys­tem is unlike the Aus­tralian sys­tem as the Crown (read: UK) dom­i­nates in a colo­nial mod­el­ling, albeit through a sym­bolic Fed­er­a­tion which is made up of each of the inde­pen­dently granted states plus the North­ern Ter­ri­tory.

    How­ever say­ing this, there are some strong affil­i­a­tions that have been built between the US and Aus­tralia which of course are totally in the US favour, but here is an arti­cle in that con­text…

    http://www.independentaustralia.net/2011/australian-identity/australias-vassal-state-relationship-to-the-united-states/

    which you may find inter­est­ing.

    It is now obvi­ous that the US sees Aus­tralia as a con­ve­nience to dump its toxic waste and a “Death Star” plat­form from which to mount its many new aspired wars, par­tic­u­larly in the South East and Far East Asian the­atres. Nat­u­rally, we have our many feral and bogan in high posi­tions of influ­en­tial posi­tion that see this trai­tor­ous course as their only choice — but these types are innately and inher­ently incom­pe­tent, but oppor­tunis­tic, and would nor­mally spend their lives under rocks in some cor­ner of some waste­land.

    Marx said a lot of things that were right, of course, but no man is right q00% of the time; that’s a given, but nev­er­the­less, that is the dri­ving ide­ol­ogy behind Australia’s Gov­ern­ment where the seat of Gov­ern­ment is in Lon­don.

    Aus­tralian are the “can­non fod­der” of the British and we all suf­fer from Stockholm’s Syn­drome but if we all don’t soon wake up, we will be irra­di­ated for the next mil­lion years or so and gone beyond even the reach of a dream.

  • Hi Philip,

    I hope you observed the empha­sized “almost” in that post!

    As for cheaper (not free) copies for Debt­watch mem­bers, that is on the cards once the mem­ber­ship sys­tem for the Cen­tre for Eco­nomic Sta­bil­ity is up and run­ning. There are to be 3 tiers of mem­ber­ship, the sec­ond and third of which get copies of pub­li­ca­tions. Hope­fully that will be in oper­a­tion by around late July.

  • He’s wast­ing his time too AMH, as some­one else recently observed. I haven’t yet evicted any­one from this list (which now has well over 10,000 sub­scribers), and I will only do so for rude­ness or flam­ing.

  • DrBob127

    Home loan fall points to hous­ing weak­ness”

    http://www.abc.net.au/news/stories/2011/05/16/3217854.htm

  • DrBob127

    Aus­tralians credit card debt climbs to $49.3 bil­lion — Reserve Bank”

    http://www.news.com.au/money/money-matters/credit-card-balances-climb-to-50-billion-rba/story-e6frfmd9-1226056643781

  • malaya

    Hi Ak,

    A few of my mates got land in the Ponds most of them paid around 350K for a block size around 450/480sq. There are also the blocks that sell for 400K, those are next to the pro­posed shop­ping cen­ter. The cost of build­ing a house now turn key pack­age is 240K to 255K for a sin­gle story. Plus there are the inter­est cost that would make the total cost almost 600K itself. 

    I said 640K based on the sur­round­ing houses in my area in Dec 2010. It surely can be down but you are cor­rect as there are dif­fer­ent sub­di­vi­sions within The Ponds so houses in the Water­fall area may be higher than the Lorius etc. The goal of Landcom/Australand was to make The Ponds like Nor West Busi­ness Park and it is indeed a nice sub­urb. I like New­berry, Kel­lyville Ridge and Stan­hope Gar­dens too and I am not sure you can com­pare Quak­ers Hill with these newer sub­urbs. How­ever, I really do not think the cur­rent price is jus­ti­fied even if they had mar­velous water views like the water­fall divi­sion (I really think Jes­sica Irvine lost all cred­i­bil­ity when she said that!).

    Prices increased at the Ponds for sev­eral rea­sons some of them being 1. The home buy­ers grant and 2. The gov­ern­ment sold land at Stan­hope Gar­dens oppo­site the shop­ping cen­ter that was allo­cated to build a pub­lic school to a pri­vate com­pany who sub­di­vided the lots and started sell­ing them for around 300K, then 330K, then 350K and last time I checked there they had houses going for were 740K which is just crazy. When landcom/australand real­ized that peo­ple were buy­ing at these prices, they quickly raised their prices in nearby New­berry, Kel­lyville Ridge and the Ponds. 3. I reckon the Banks had a large part to play in fuel­ing this craze.

    Any­way, com­ing back to the point, I really don’t care if the house is even val­ued at even 500K because I am not inter­ested in mak­ing money out of it and I can­not explain but it is hard to sell one you are involved in the build­ing process it becomes emo­tional not to for­get cost asso­ci­ated with stamp duty for next pur­chase, cost of mov­ing, rent­ing etc. I just want to avoid being in neg­a­tive equity as I had to save for years for the deposit and frankly speak­ing despite hav­ing sav­ings I had no buy­ing power sim­ply because the Banks at that time were will­ing to lend to some­body who had no deposit. So it was all about who was will­ing to bor­row more and sav­ings had no value.

    My salary is reduced to less than 4 months and besides the house expenses I totally for­got about the car expenses. I am frankly fed up and I don’t think life should be so dif­fi­cult. It would be help­ful if my wife was work­ing but I am on a decent income and feel sorry for the newer gen­er­a­tion and new migrants. Before the mort­gage, I was liv­ing with fam­ily and I could save a lot and spend on the local econ­omy. Now, I am forced to buy stuff on ebay, sec­ond hand items. I do not go and eat out­side, I quit smok­ing and drink­ing (which many con­sider might be a good thing) and I am forced to do my bit to kill the econ­omy. I do not have the ben­e­fit of wage infla­tion like the baby boomers who sup­port these high prices and sug­gest gen­er­a­tion X are just spoilt brats and want things easy. 

    The other part that sick­ens me is that the Inde­pen­dent Pric­ing Com­mis­sion has not grip on real­ity, fixed charges for water around 190$ per quar­ter? Even if your water con­sump­tion is 0. They have also approved the increase in elec­tric­ity prices. Not to for­get coun­cil rates are around 240$ per quar­ter and they are ever ready to increase trans­port fairs for our pathetic trans­port sys­tem. Not to for­get the car costs. I reckon guys like Glen Stevens work at these places and are def­i­nitely killing the econ­omy,

    Then you have peo­ple like Craig James who says Aus­tralians should be happy because they are get­ting wealth­ier and they just do not real­ize it? And not to for­get the famous Chris Joye and his fol­low­ers who say Aus­tralia is dif­fer­ent.

    I designed my house to min­i­mize using elec­tric­ity and to reduce car­bon emis­sions. I wanted to go solar because of the scare of ris­ing elec­tric­ity cost even though I can barely afford it. I ulti­mately real­ized that the NSW gov­ern­ment past and present really don’t know what they are doing. I just spoke with clean energy coun­cil and they said it is com­pletely up to the pri­vate retail­ers and they can change the rules to suit them. So does it really make sense spend­ing sev­eral K’s on such a flaky sys­tem? And then there are these peo­ple who want to force a car­bon tax for what?