The one consolation for not being in the property market and thus not sitting on skyrocketing valuations or skyrocketing debt commitments, is that when it busts, you won't be hurt as badly as those in debt up to their eyeballs. When the downturn comes and the banks come knocking to foreclose and businesses are forced to close as much as private residences are sold out en masse - the sort of scenario you dread because unemployment will be up, economic growth will be negligible and banks too big to fail will be living up for government largesse at the public purse, - the non-owning, non-mortgaged will be the relatively lucky ones to escape the downside of all this risk building up.
Even so, it's kind of scary just how much private debt has been racked up in Australia. A lot of that is in mortgages, rather than credit cards. The build up is so epic, the RBA was in denial about it for the last decade until the last 12months or so where they've started to bleat about the private sector debt, and more recently, specifically the "overheated property market".
And so we come to this entry today:
While our society lacks a meaningful and open debate on the toxic and rising levels of household debt, new home buyers in Sydney and Melbourne are entering the market and taking upon the most illogical sums of debt, courtesy of our over-leveraged banking system.
Based on median multiples, new home buyers in Sydney will spend the better part of 6.54 years savings (using 30 per cent of their income) for a 20 per cent deposit to buy a median-priced home.
When it comes to servicing the first 12 months of a 25-year/80 per cent LVR mortgage, it will cost roughly 65 per cent to 70 per cent of household income to service that debt at current record-low mortgage rates. Melbourne is not too far behind.
So what have our leading economists, regulators, public executives and politicians done to stop this debt-induced folly? Nothing. In fact, they have bent over backwards to inflate prices via stimulants such as housing grants and allowing retirees to tap into their life savings.
These powerful stimulants have been implemented, not to improve home ownership rates, but to boost prices for the benefit of existing owners, bankers' profits and government balance sheets.
Now, just on the point of 'existing owners', the SMH also had this entry right here about politicians who own investment properties, and there fore are beneficiaries of negative gearing.
Mr Daley said if the government was unwilling to remove the capital gains tax discount it should get rid of negative gearing altogether.
"The most important argument against negative gearing is that it drives up house pricesbecause it increases the after-tax returns to housing investors, and so prices are higher than they would be otherwise," Mr Daley argued last week.
Mr David, Mr Egan and Mr Soos last year warned that, with such high rates of property ownership among Australia's senators and ministers, it was "difficult to believe that politicians will address the real causes of housing unaffordability, despite the recommendations from government reports".
It's hard to see the vested interest, collectively acting against itself.
All of this is not new, there are no new wrinkles. The property market has been artificially inflated to pay for the retirement of the Baby Boomers. They're in power, they are invested, but at this point in history, they're not selling up and so the price stays up. They then go and get loans against their assets and invest in property even more, using favourable tax concessions. Given the shortage in relevant housing being built, you can see prices spiral ever upwards. Worse still, there's money coming in from China - some of which used to go to Canada until they shut the doors - and they're bidding up prices just to get in because the very point for them, is to get in.
Thus the ground is laid for one-way bets.
Thus the ground is laid for one-way bets.
With all these complicating factors loading the system so it only goes one way, we can only ask when it will pop, and how bad would it be when it pops. The latter demands that we know more about the circumstance of the former's condition. If you had to guess it would be 'soon', but this 'soon' has been going on for a few years now and not even the GFC killed it, thanks in part to Kevin Rudd's big spend and China's amazing 7+% p.a. GDP growth (scepticism of that figure aside).
If China tanks overnight, one can't be surprised if these prices fall back down to global norms. So until things head back down towards normal, people are going to keep asking, "will it pop? when will it pop?"
If China tanks overnight, one can't be surprised if these prices fall back down to global norms. So until things head back down towards normal, people are going to keep asking, "will it pop? when will it pop?"
Miscalculating Inflation
For quite some time we've seen the debate about how CPI is calculated. The most glaring problem with CPI is that whinnied up against Cost of Living, it under-reports inflation. This is because the CPI system changes the basket of goods and substitutes things based on the assumption that if you can't afford something, you'll substitute it with something else similar. The strange discrepancy can in part be explained by the fact that cost of living has been following the same goods for the twenty-odd years it has been diverging with CPI.
If you looked at cost of living, it is clear that there is a significant amount of inflation going on with staple foods and accommodation. There is of course severe deflation as well, as the global glut for manufactured goods has commodified just about every possible manufactured item. If you parse through the changes, you can make out this horrifying fact that the less elastic a good or service is, the more it has inflated, while the more elastic it is, the more it has deflated. Or put more simply, the stuff that's undergoing steep inflation are things we need like food and shelter. The things that are deflating are things like mp3 players and tennis racquets and electric guitars. CPI says you've never hd it soggy with your mp3 players, tennis racquets and electric guitars being cheap, so you should be happy. Cost of living says inflation is killing you.
And so you wonder how far out this trend can last before something simply breaks. Indeed, the Arab spring that brought down North African military juntas can be sheeted home to the point at which the staple foods trebled, rents doubled and those regimes tried to buy out the difference and failed. The fact that the AK-47 became so cheap was ironically part of that equation.
But let's get back to the first world. The RBA has set interest rates according to the CPI, and has done so ever since it became independent. Back in the 1980s when stagflation was the big enemy, the US Federal Reserve Bank chief Paul Volcker opted to fight the rampant inflation by raising rates; And so interest rates went up quite high in the mid to late 1980s in America as well as over here. Yet since those days, if they have been under-reporting inflation through CPI, then it means the successive FRB and RBA regimes have been setting the interest rates too low. If the private debt we've racked up in the last 20years is anything to go by, we've simply bought the economic growth we've had on the back of mounting debts.
When you think about it, the people who benefit the most from all this under-reporting of inflation are bankers themselves. They stand to make a mint, the more people borrow money. Going back to that article before:
No Land Tax, He Says
There's a party contesting the NSW election on one platform - no Land Tax. It's one of those rearguard actions by people with vested interests. Ken Henry's tax review under Kevin Rudd pointed out that Stamp Duty should be thrown out in favour of a Land Tax. The logic of this is quite simple - if you owned a house and never moved or sold it, you'd never pay the Stamp duty and this is the only tax that goes to he State Government coffers based on Land. It would be more efficient and representative of the demographic if they put in a Land Tax instead uncollected something from everybody who owns land instead.
It would go some way towards fair valuations of property, and it would encourage the Baby Boomers to cash out. Given the percentage of people who who own outright and are in mortgages outnumber the renters two to one, you can see there would be a great appeal in putting in a Land Tax, and therefore a great incentive in the electorate to resist it. If you count the fact that the political class is overly landed, there probably is no chance it happens anyway.
For quite some time we've seen the debate about how CPI is calculated. The most glaring problem with CPI is that whinnied up against Cost of Living, it under-reports inflation. This is because the CPI system changes the basket of goods and substitutes things based on the assumption that if you can't afford something, you'll substitute it with something else similar. The strange discrepancy can in part be explained by the fact that cost of living has been following the same goods for the twenty-odd years it has been diverging with CPI.
If you looked at cost of living, it is clear that there is a significant amount of inflation going on with staple foods and accommodation. There is of course severe deflation as well, as the global glut for manufactured goods has commodified just about every possible manufactured item. If you parse through the changes, you can make out this horrifying fact that the less elastic a good or service is, the more it has inflated, while the more elastic it is, the more it has deflated. Or put more simply, the stuff that's undergoing steep inflation are things we need like food and shelter. The things that are deflating are things like mp3 players and tennis racquets and electric guitars. CPI says you've never hd it soggy with your mp3 players, tennis racquets and electric guitars being cheap, so you should be happy. Cost of living says inflation is killing you.
And so you wonder how far out this trend can last before something simply breaks. Indeed, the Arab spring that brought down North African military juntas can be sheeted home to the point at which the staple foods trebled, rents doubled and those regimes tried to buy out the difference and failed. The fact that the AK-47 became so cheap was ironically part of that equation.
But let's get back to the first world. The RBA has set interest rates according to the CPI, and has done so ever since it became independent. Back in the 1980s when stagflation was the big enemy, the US Federal Reserve Bank chief Paul Volcker opted to fight the rampant inflation by raising rates; And so interest rates went up quite high in the mid to late 1980s in America as well as over here. Yet since those days, if they have been under-reporting inflation through CPI, then it means the successive FRB and RBA regimes have been setting the interest rates too low. If the private debt we've racked up in the last 20years is anything to go by, we've simply bought the economic growth we've had on the back of mounting debts.
When you think about it, the people who benefit the most from all this under-reporting of inflation are bankers themselves. They stand to make a mint, the more people borrow money. Going back to that article before:
So what have our leading economists, regulators, public executives and politicians done to stop this debt-induced folly? Nothing. In fact, they have bent over backwards to inflate prices via stimulants such as housing grants and allowing retirees to tap into their life savings.
These powerful stimulants have been implemented, not to improve home ownership rates, but to boost prices for the benefit of existing owners, bankers' profits and government balance sheets.Which just about sums it up. The point is, the bubble is built not on one thing, but many things, including miscounting things that ought to be counted consistently and properly.
No Land Tax, He Says
There's a party contesting the NSW election on one platform - no Land Tax. It's one of those rearguard actions by people with vested interests. Ken Henry's tax review under Kevin Rudd pointed out that Stamp Duty should be thrown out in favour of a Land Tax. The logic of this is quite simple - if you owned a house and never moved or sold it, you'd never pay the Stamp duty and this is the only tax that goes to he State Government coffers based on Land. It would be more efficient and representative of the demographic if they put in a Land Tax instead uncollected something from everybody who owns land instead.
It would go some way towards fair valuations of property, and it would encourage the Baby Boomers to cash out. Given the percentage of people who who own outright and are in mortgages outnumber the renters two to one, you can see there would be a great appeal in putting in a Land Tax, and therefore a great incentive in the electorate to resist it. If you count the fact that the political class is overly landed, there probably is no chance it happens anyway.
It may even be redundant having a single issue party around not introducing a Land Tax, when you consider that it would paint all the other politicians as those who might be in favour. The numbers simply belie the sense of crisis that this bunch of elected officials would be interested in doing anything so fair or rational as implementing a Land Tax.
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