Housing Crisis Blues

We Bought A Place

In all this chaos, my better half and I bought a place. It's an apartment in Sydney's Southwest, close to the station. It was time. This blog started the last time I was in home ownership and continued through the years I became a renter again. This blog isn't about housing but over the years the renting thing and the housing bubble made me think deeply about the topic. Until the pandemic I had no idea if I would ever get back into ownership ever again, but then a few things went my way for a change, and I could get something going with my better half. It's not much, but - it turns out it's something-not-nothing.

I didn't inherit my chunk of money. My parents are elderly but still alive. I got it through investing in small cap shares - and boy have I a story to tell there, but that's for another day. All I can say is sometimes you get the breaks and when you do, you really ought to capitalise on them. One thing we're glad about is that we got to avoid the hellish rental market. Having pets tends to make you gun shy about applying for a rental. This way we get to keep our cat and birds without too many questions. 

We got told by the strata management that if the cat and birds made too much noise they might be asked to leave the residence. I wanted to ask how about the two screaming kids on our floor? Can they be asked to leave the residence? 

Everybody's Talkin' (About Real Estate)

It just sucks that property is the paramount topic for people to discuss. You go to dinner with some people and eventually property ends up being the topic of the conversation. Back when I was a teen, the most boring conversations were about the weather, quickly followed by property. Weather got interesting over time, thanks to Global Warming; property, has not. 

People in Sydney are aware how absurd prices have gotten. The numbers bandied about in normal conversation for middle class people went over $1 million some time ago, and since then there has been a weird feeling that all of Australia has become millionaires if you could just buy that house in the 'burbs. It's demented. Conversations invariably turn on if it is worth it. In these conversations, worth and price tag does a pax de deux in the conversation without actually drawing a conclusion. People without a mortgage or property then are the outright losers in society, but honestly, that is turning into a demarcation between generations. 

This is in stark contrast to the way things were seen in the past. Back in the day about 30-odd years ago, the great fear was that the majority of the Baby Boomer generation would go into their dotage without sufficient savings. After all Superannuation in Australia came into existence well late into their active careers. Various tax concessions wee designed to shore up the savings for the Baby Boomers, and thirty years later we find they hold a lot of property that is now worth a stupendous amount of money. It is the young who cannot begin to get into the property market without a leg up from their Baby Boomer parents. The two saving graces in all of this is that they can't take it with them when they die, and they will die. 

Which, in a weird way brings me back to the point - that it is weird that we've become so obsessed over the roof over our heads at the expense of all else that life has to offer.

But You Need A Roof

As it turns out, a roof over your head is something that you can't just not have. Homelessness is a terrible thing in a society where we have to own stuff to get along, and we need a box in which to place these things. I have no special love for my refrigerator or washing machine, but they must go somewhere. As do book cases and shelving for all the physical media I still possess. We become beholden to the stuff we own. As with food and clothing (and now internet) we cannot get along without it. We cannot be hunter gatherers wandering from cave to cave across the steppes chasing some now-extinct megafauna. 

The housing crisis that is gripping this land is in its essence a gross miscalculation on the part of the money people where they have commodified the one thing we cannot do without. This has necessarily caused  a homelessness crisis to run parallel to the housing crisis where even people on good money can't seem to get a place to live. Housing as a financial instrument has been nothing short of a disaster. If it was made to help Baby Boomers who came too late to the superannuation party, then the whole property bubble party that's been going for 3 decades has more than made up for their late start. The corresponding expansion in the Gini coefficient can't be ignored too much. 

I don't know how all this gets wound back and wound down. We may be stuck with this terrible situation for decades more. It has only been going for 30 odd years, why would it stop now? Why would it be wound back overnight when so many vested interests are standing guard against real change? 

With A Little Vision

If you look at the current major cities of Australia, the vested interests have locked themselves in tight. There is no winding it back without mass electoral revolt. Neither major party can realistically wind back the advantages, but it can start anew. Each state should look to establish new cities where there is nothing right now - a but like how Canberra was built. They should move the capitals and State Parliaments to the new cities, and take government bureaus with them. The new cities with newer zoning systems built from scratch to make sure housing will always be affordable in the places. They should be planned for medium density with public transport, and maybe even be given some tax incentives to build there. 

If you start with tracts of cheap land, at least you have a shot at housing more people with less money. If you plan for medium density, you have a shot at creating urban spaces that won't accelerate to insane prices as the city develops. It would be a genuinely egalitarian approach to urban planning.  

Of course, it would never happen because our politicians are so attached to the current capital cities in each state and that is why I say it would need a little of that vision thing. The alternative is to keep going the way we we are and further entrench inequality. something tells me this is exactly what the political classes want. 

Is Our Galaxy In A Bubble?

Doom-scrolling In A Pandemic 

Sometimes you lose perspective on what to write about. That's at the best of times. During lockdown, you lose way more perspective than you realise. My Pandemic Lockdown Rock-down has turned out to have yielded some bonkers ideas for lyrics according to the Dude at Audio Darnok. 

I tend to think the whole galaxy being in a bubble is possibly the most emblematic theory of the universe that befits our time. After all, I'm convinced that we're all living in a financial bubble and nobody ever seems to notice it. If the whole galaxy were in a bubble of its own, who would care? 

There used to be a phrase about the economic bubble in Japan - they called it "that bubbly feeling". Even now when they refer back to that time, they say "that bubbly feeling era". The bubble, metaphorical and otherwise, is all around us. all the time. 

You've been warned!

News That's Fit To Punt - 08/Feb/2017

That John Alexander?

Long time readers know of my immensely low pinion of John Alexander as tennis commentator. He was simply terrible, in as much as he offered no technical insight and often ascribe bad motives to the characters of the players, much like an armchair psychology buff. A typical line of John Alexander commentary would be that a player X missed a shot because he has a bad character. It drove me away from watching tennis on channel 7.

Anyway, it has been the big surprise of his time in politics that he backs building a high speed rail network in this country, and all for the right reasons. He is still continuing his push, and even getting called a crusader for it.

Crusading Turnbull government MP John Alexander, who has supported a debate about negative gearing, said vision and innovation needed to replace the "debilitating political argument" about housing. 

A bipartisan committee chaired by Mr Alexander backed his vision for high-speed rail, recommending the government seek proposals for a link between the two major cities, and evaluate ways to raise private capital through value capture. 

Under that model, previously trumpeted by Prime Minister Malcolm Turnbull, major infrastructure is privately funded by the increase in land values that accompanies the creation of new or larger cities made possible by that infrastructure.

(edit) 

"It would appear there's a perfect storm of opportunity to liberate [regional] cities through high-speed rail," Mr Alexander previously told Fairfax Media. "You will push up prices enormously around Goulburn; people will be delighted." 

But he warned on Tuesday the report's ambitious goals were only achievable if all three levels of government co-operated and were "willing to forgo individual revenues to ultimately maximise total revenues". 

Mr Turnbull and the new assistant minister to the treasurer, Michael Sukkar, have promised the government will say more about housing affordability this year, as Labor continues to push for negative gearing reform.

It's kind of crazy that the only person in government making any bloody sense is John Alexander.

About That Housing Situation...

Turns out the record private sector debt is now sitting at about a trillion dollars, and the cracks are beginning to show. Don't be fooled by the price rises in Sydney and Melbourne, there's substantial pressure on the housing bubble right now.

Homeowners, consumers and property investors around Australia are making more calls to financial helplines as three warning signs back up the spike in demand: mortgage arrears are creeping up, lenders' bad debt provisions have increased and personal insolvencies are near an all-time high.

"It's steadily out of control -- I don't know of too many financial counselling services where demand doesn't exceed supply," said Fiona Guthrie, chief executive officer of Financial Counselling Australia, who says the biggest increase in calls is from people suffering mortgage stress. "There are more people who have got mortgages that they can't afford to pay."

(edit) 

"There's so much household debt that a couple of rate hikes here would completely knock the wind out of the housing market, and a lot of people would be impacted by it," said Gareth Aird, economist at Commonwealth Bank.That's partly why he doesn't think the RBA will lift rates until 2018 at the earliest. 

While most borrowers in Sydney have plenty of equity in their homes as prices keep rising, that's not the case elsewhere. In the mining state of Western Australia, which is struggling to cope with the end of an investment boom, more than 10 per cent of mortgage holders have little or no equity buffer, according to a Roy Morgan report last week. In South Australia and Queensland, 8 per cent and 7.2 per cent of borrowers respectively are in negative equity. 

That may not matter if you're a homeowner with a secure job and comfortably servicing your mortgage. But Australia's labour market is far from solid, with the RBA citing it as one of the economy's biggest uncertainties. The jobless rate rose for the second straight month in December to 5.8 per cent, while underemployment -- the number of workers wanting more hours -- is near an all-time high. At the same time, wages growth is the lowest on record.

It's notably unaffordable, everybody's been so eager to get into it, there are signs of housing being over-bought everywhere. It's okay in the main but the fracture lines are running elsewhere. Hmmm...

The truth is that the RBA sort of glommed into this problem by keeping rates low for such a long time, and because nobody's ever had the negative signal for the market, there's a profound belief that it only goes in one direction, up. All the while they invited the other parts of the economy needed the low interest rates, but also, by under-measuring inflation they've given themselves even more reasons to keep the rates low. If the average household debt is 187% of income, you know it's not sustainable - but all the while they've not really addressed the irrational exuberance.  

Politics being what is, its practitioners like to emphasise different parts of problems instead of talking about the private sector debt for what it is, and despite the more-than-abundant evidence that there's a  property bubble in progress, the politicians have sought to characterise all this as a 'housing affordability' problem. Implicit in this shifting of focus is the idea that the problem isn't with the property bubble, it's with the people who can't afford to get in on the same RBA-funded gravy train investment. Even more pernicious in that shifty little manoeuvre is the idea that they want to keep the asset price gains, and to that end - all the politicians are property owners and investors, as well as the big wigs at the RBA - these people will do and say anything to talk down the bubble. A simple cui bono examination explains how the interest rates stay low in a bid to keep the asset prices inflated.

As somebody who dabbles in the equities market, I find the utter lack of caution for the bubble to be quite absurd. Markets by their very nature are meant to go upend down. The fact that the housing market in Australia hasn't fallen to historic norms in a very long time, can only mean there's long way to fall when the perfect storm will hit.

Housing never falls, right? We all love housing. In case you're wondering how this all shows up in our political rhetoric, have a look at this next one:

"I've Got Mine, You Can't Have Yours" Says Malcolm Turnbull

This is pretty ugly.

Prime Minister Malcolm Turnbull has unleashed a blistering attack on Opposition Leader Bill Shorten, slamming him as a "simpering sycophant" and a "parasite" who yearns for his own harbourside mansion. 

The energetic end to Question Time came after Mr Shorten launched his own barbs at the Prime Minister, accusing him of attacking families, attacking standards of living, of being tough on pensioners and soft on banks. 

"The Prime Minister is seriously the most out-of-touch personality to ever hold this great office of Prime Minister," Mr Shorten said. 

Mr Turnbull's response, which led to the rare display of Coalition members thumping their desks, was brutal and an effort to counter attacks on his personal wealth just days after he revealed his $1.7 million donation to the Liberal Party. 

Mr Turnbull said Mr Shorten was a "would-be tribune of the people" and accused him of rising to prominence by networking with prominent Melbourne businessmen like Richard Pratt. 

"There was never a union leader in Melbourne that tucked his knees under more billionaire's tables than the Leader of the Opposition," he said. 

"He lapped it up, yes, he lapped it up." 

The Prime Minister accused Mr Shorten of "knocking back Dick Pratt's Cristal" and looking forward to living at the personal expense of taxpayers. 

"This sycophant, blowing hard in the House of Representatives, sucking hard in the living rooms of Melbourne, what a hypocrite," Mr Turnbull said.
"They call themselves the Labor Party; well Mr Speaker, manual labour is a Mexican band as far as they are concerned. Most of them have never done a day's work in their lives."

If you are an egalitarian liberal as Malcolm Turnbull claims he is, how can he begrudge his fellow citizen for wanting a Harbourside Mansion when he has one himself? I mean, what's wrong with that aspiration if it's good enough for himself? 

How can Bill Shorten be a parasite just because he has had career benefactors, when Malcolm Turnbull himself had a career benefactor in Kerry Packer? People need a break here and there. What is so morally objectionable about that reality? 

It's really weird how the conservatives have a thing about harbourside mansions. Barnaby Joyce recently said people should move out of Sydney because not everybody can afford a harbour views. If you notice, its only the coalition talking about harbourside mansions. It's not as if the ALP's in Parliament screaming everybody needs a harbourside mansion. 

You'd think these people never watched 'The Castle'. 

 

View From The Couch - 25/Jan/2017

The Hollowing Out Of Cities

This is something generational and likely going to freak some people out, but the ageing population situation in Tokyo is creating holes in the urban landscape. As old people pass away, they leave behind apartments in which they dwelled, and because of the age of the buildings, have little resale value. This is creating a problem because the buildings start accelerating in their decrepitude as more people die and fewer people are there to support the body corporate sinking funds.

The thing about this is that a lifetime is spent paying off loans for a box in space and then the box loses value. That's the first problem. The second problem is that there is no real way to redevelop these buildings without public monies. It's beginning to turn into a spiral in Tokyo. This is instructive about what happens when a property bubble keeps out a generation of people from buying in and having kids. In a sense, the collapse of a younger population in Tokyo is a direct reflection of the property Bubble of the 1980s.

Not to say this is whites going happen to Australia's major cities. For one, our cities are not built to such densities, and for another, majority of the high density apartments are relatively new and so will not be spiralling down so soon. It takes a good 50 years for that to take place and that would be four decades away. The more problematic area might be that the ageing population will mean a higher burden on the fewer working generation who will be working from outside the major city centres while the inner city becomes predominantly grey.

It's weird but you can see it already in Sydney, where the people buying into the higher density closer to the city aren't first time buyers because they can't afford it. it's older couples downsizing or investing, and Sydney's urban metropolitan heart is already looking kind of grey.

Sydney's Housing Un-Affordability

Anyway... just how bad is Sydney?

The Harbour City's eye-watering house prices were trumped by only Hong Kong in the Annual Demographia International Housing Affordability Survey, which examined more than 400 cities in nine countries including the United States, United Kingdom, Australia and Canada. 

After being sworn in as New South Wales Premier yesterday, Gladys Berejiklian used her first press conference to put the spotlight on housing affordability. 

The report ranked middle-income housing affordability using a "median multiple" score, which is calculated by dividing the average house price by the average household income. 

Anything with a score of 5.1 and over is dubbed "severely unaffordable", so let's break it down:

Rank: Least affordable City - Median multiple

1. Hong Kong ..................18.1
2. Sydney, NSW ..............12.2
3. Vancouver, Canada ......11.8
4. Santa Cruz, USA .........11.6
5. Santa Barbara, USA.....11.3
6. Auckland, NZ ..............10
7. Wingcaribbee, NSW .....9.8
8. Tweed Heads, NSW .....9.7
9. San Jose, USA ..............9.6
10. Melbourne, VIC ...........9.5

Hmmm. That looks far more insane than any chart I've seen up to this point. We know Hong Kong is nuts because it's essentially an island and a point and lots of land reclamation going on in the attempt to make more Hong Kong than God intended (so to speak). But Sydney to be leading the second pack of cities with multiples at roughly12 is pretty gaudy when London, New York, Tokyo, Paris, Rome and Berlin are entirely missing in the top 10. That's some list. The fact that Wingcaribbee and Tweed Heads makes the list tells you that something stupid is going on. 

Our banks are lending money to people who want to have these multiples, just to live in these places. It has no bearing to the reality of any other real estate market on the planet except maybe Hong Kong,and so you have to say that Australian property owners and investors are collectively bidding up the numbers with no concern of the downside to the market, - which of course is a sign of a bubble.

Of course, Mark Latham has a radical plan to deal with this issue. He says, cut immigration.

“[Housing affordability] is all about supply and demand. It’s not rocket science. The problem with extra supply in Sydney is the urban sprawl, the lack of infrastructure, the wretched traffic jams a million miles from the city centre, people struggling to get anywhere near for their schools, shops their employment. So, supply has the problem of sprawl”. 

“[But] you’ve got to do something about demand. And whether we like it or not – and the two parties have got consensus about a Big Australia – the driver of housing demand in Sydney is immigration. The 200,000 a year plus immigration program – add to that the refugee program – that’s the driver of demand. And unless you address that, you can have all of the housing bonds, press conferences and forums that you like – and sort of puffy stuff in the media – and you won’t get a solution. So, break the consensus about Big Australia, slash the immigration program, drive down demand, and finally you will have a sensible solution to housing affordability”. 

“You won’t have to spend as much on infrastructure funding because the place is not sprawling as much. And the other benefit you get is environmental sustainability. It’s something The Greens used to talk about, but now they talk about 50,000 to 100,000 refugees – they are Big Australia as well”. 

“So, there is real room here for a sensible solution based on cuts to immigration”.

That sounds like an oversimplification, but it's certainly one different view to add to the mix.
Anyway, I just thought all that was interesting in light of yesterday's Berejiklian notion that supply would fix housing affordability. It most likely won't, and the longer they leave it, the worse the problem is going to be down the track.


To Un-Fuck The Goat Brexit

Things are getting a little convoluted with this Brexit thing. The Supreme court in the UK has just told the UK Government that Article 50 definitely can't be started by the government alone, it has to be put to the vote both houses.

Lord Neuberger said the judgment was not about the referendum result or a comment on the merits of leaving or staying in the EU. 

"The referendum is of great political significance, but the Act of Parliament authorising it did not say what would happen afterwards," Lord Neuberger said, meaning any action taken now must be in keeping with the UK’s constitution.
The Independent reported today that ministers are likely to be ready to publish the Bill that MPs will vote on by the end of the week. 

After the judgement, Attorney General Jeremy Wright said the Government was "disappointed" by the final decision in its historic battle over who has the right to authorise the start of Brexit. 

He added: "The Government will comply with the judgement of the court and do all that is necessary to implement it." 

It is unclear what would happen legally if MPs vote against such a bill, as much of the constitutional law related to Brexit remains as yet untested, although Jeremy Corbyn has "asked" his MPs to vote not to obstruct it. 

The judges' ruling is a victory for Gina Miller, a philanthropist and banker, who brought the case against the Government. She was also backed by a crowd-funded group called The Peoples' Challenge, who described themselves as a group of "concerned EU citizens". 

Although the Government lost the challenge, the justices unanimously ruled that there was need to consult with the devolved powers in Scotland, Wales and Northern Ireland.
In a statement released immediately after the ruling, Labour leader Jeremy Corbyn said his party would not "frustrate the process for invoking Article 50" but would seek to amend the Government.

Well that's a surprise and a half. Last we knew, 70% of MPs didn't want a Brexit, so this actually offers them a second bite at the cherry. Now, Jeremy Corbyn says he won't frustrate the government over invoking Article 50, but what if enough MPs banded together block it in the House of Commons? Or even if it passes there, what happens if the House of Lords shoots it down?

After the referendum, it sure didn't look like there was an opening for overturning the result, but suddenly there's a puncher's chance of Brexit getting de-railed in Parliament. And if it did, well, would that really be a bad thing after all the sloppy lies that got it over the line?

It would be rather interesting should things come to pass that Brexit couldn't get up because Article 50 couldn't be triggered? They'll laugh in Europe; they'll probably even swear. David Cameron sure would. Of course, the MPs may well rubber stamp the thing to just let it through and out of their hair. after all who would want the furore that would follow a scuttled Brexit?

News That's Fit To Punt - 24/Jan/2017

New Premier, Same Old Song

Gladys Berejiklian is our new Premier in NSW. The most interesting thing she said today might have been the fact that she considers housing affordability to be her top priority but she's not willing to consider replacing Stamp Duty with a Land Tax, and that her principle method of making housing  more affordable was to increase supply. It sounded like somebody insisting that flapping their arms harder will accomplish flight.

The best thing about Berejiklian becoming Premier might be that Alan Jones didn't want it "in a million light years". I guess that's already happened twelve parsecs ago.

More On (Moron?) Housing Affordability

SWTE Scott Morrison is off to London of all places to see what he can learn about making housing affordable. It's a bit like a heroin addict visiting a crack addict how to beat addiction.

Asking the Liberal Party to tackle this problem is a little like asking arsonists to join the fire department because they understand fires really well. The Liberal Party represents the investor class more than anybody else, and so they're hardly likely going to be able to bring themselves to do anything that would put the investors at a disadvantage. For the same reason Gladys Berejiklian won't look at replacing the Stamp Duty with a Land Tax, Scott Morrison isn't going to wind back Negative Gearing.

It's all very strange how this is likely to turn out because it's already slowing down comic growth because people can't spend money on anything other than their mortgages and rent. The rent-seeking in the real estate market has basically maxed out to capacity and nobody seems able to claw back down from the stand-off.

In the mean time, there is all this private sector debt that's waiting to go off like a time bomb and the Treasurer is more worried about finding bandaid solutions.

If The Russians Love Their Spanking Too

Here's a weird one. The Russians want to 'legalise domestic violence'.

Russia's parliament is this week expected to take a step closer toward decriminalising domestic violence that falls short of serious bodily harm or rape. 

Battery is a criminal offence in Russia, but nearly 20 per cent of Russians openly say they think it is sometimes OK to hit a spouse or a child. 

In a bid to accommodate conservative voters, deputies in the lower house of parliament have given initial approval to a bill eliminating criminal liability for such violence. 

If the measure passes its second reading in the Duma on Wednesday, when the draft can be changed, approval in the third and final reading would be a foregone conclusion.

It's hard to imagine it anywhere else but Russia.  I guess that partially answers Sting's rhetorical question in his lyric whether the Russians love their children too. It appears yes they do, but not quite as much as we do.  

"Alternative Facts"

Great scot, it's only been three days of Trump in da White House and it's been a non-stop parade ridiculous assertions and factually challenged statements. Kellyanne Conway has come forward with an eyebrow-raising explanation that the Trump Administration is in possession of "alternative facts". 

Still more chilling was when the White House senior adviser Kellyanne Conway appeared on “Meet the Press” on Sunday to assert that Mr. Spicer’s falsehoods were simply “alternative facts.” 

Ms. Conway made no bones about what she thought of the news media’s ability to debunk those “alternative facts” in a way Americans — especially Trump-loving Americans — would believe. 

“You want to talk provable facts?” she said to the moderator, Chuck Todd. “Look — you’ve got a 14 percent approval rating in the media, that you’ve earned. You want to push back on us?” (She appeared to be referring to a Gallup poll figure related to Republicans’ views.) 

And really, there it was: an apparent animating principle of Mr. Trump’s news media strategy since he first began campaigning. That strategy has consistently presumed that low public opinion of mainstream journalism (which Mr. Trump has been only too happy to help stoke) creates an opening to sell the Trump version of reality, no matter its adherence to the facts. 

As Mr. Trump and his supporters regularly note, whatever he did during the campaign, it was successful: He won. His most ardent supporters loved the news media bashing. And the complaints and aggressive fact-checking by the news media played right into his hands. He portrayed it as just so much whining and opposition from yet another overprivileged constituency of the Washington establishment. 

But will tactics that worked in the campaign work in the White House? History is littered with examples of new administrations that quickly found that the techniques that served them well in campaigns did not work well in government. 

And if they do work, what are the long-term costs to government credibility from tactical “wins” that are achieved through the aggressive use of falsehoods? Whatever they are, Mr. Trump should realize that it could hurt his agenda more than anything else.

It's going to be a long 4 years. 

News That's Fit To Punt - 27/Feb/2016

The Rich Avoiding Taxes

I missed getting around to this earlier but this came in from Pleiades about how the globalised super wealthy avoid paying tax. It's from behind the pay wall at the Australian Financial Review so I can't go and post the entire thing, but it is a really interesting read.

Gabriel Zucman, who teaches at the University of California at Berkeley, has two goals in his new book, The Hidden Wealth of Nations: to specify the costs of tax havens, and to figure out how to reduce those costs. While much of his analysis is technical, he writes with moral passion, even outrage; he sees tax havens as a "scourge". His figures are arresting. About 8 per cent of the world's wealth, or $7.6 trillion, is held in tax havens. In 2015, Switzerland alone held $2.3 trillion in foreign wealth. As a result of fraud from unreported foreign accounts, governments around the world lose about $200 billion in tax revenue each year. Most of this amount comes from the evasion of taxes on investment income, but a significant chunk comes from fraud on inheritances. In the United States, the annual tax loss is $35 billion; in Europe, it is $78 billion. In African nations, it is $14 billion. 

The fractions of wealth held abroad are highly variable. In Europe, it is about 10 per cent. In African and Latin countries, it is much higher, between 20 per cent and 30 percent. In Russia, it is a whopping 52 percent. It follows that while tax havens hit wealthy nations hardest in absolute terms, they can have especially destructive effects on poorer or developing countries, because such a high percentage of their money is offshore. Zucman does not explain why this is so, but it is possible to speculate that one reason is rampant corruption within both the public and private sectors. The extraordinarily high figure for Russia might be best understood as involving money corruptly acquired or invested, which suggests an important point: All uses of tax havens are not the same. Sometimes government officials are the ones who are evading taxes, and they do not want to stop that evasion. 

In the aftermath of the financial crisis, you might expect that there would be an international crackdown on the use of tax havens, and, as we shall see, international attention is indeed growing. But the numbers demonstrate that no crackdown has occurred. In Luxembourg, offshore wealth actually increased from 2008 to 2012 (by 20 per cent). In Switzerland, the increase has been comparable; foreign holdings are now close to an all-time high. Disturbingly, the new wealth is coming mostly from developing countries, which poses a serious problem in light of the severe strains on their limited budgets. 

Zucman is the first economist to produce specific numbers of this kind, and, to do so, he had to undertake some creative detective work. In order to identify hidden wealth, he focuses on "anomalies" – situations in which international balance sheets show, in aggregate, more liabilities than assets. To see the importance of that inquiry, Zucman asks readers to imagine that a citizen of the United Kingdom holds an American security – say, stock in Google – in a bank account in Switzerland. In the United States, statisticians estimating U.S. wealth overall will record a liability, because a foreigner owns U.S. equities. But in Switzerland, statisticians will see nothing, and for a good reason: Google stock held in Switzerland by a U.K. resident will be, for Switzerland, neither an asset nor a liability. In the U.K. too, nothing will be registered, but for a bad reason: The UK has no way of knowing that one of its citizens owns Google stock in Switzerland. From this example, we can see the anomaly: On the global level, liabilities will be recorded as exceeding assets. 

Zucman puts it this way: "As far back as statistics go, there is a 'hole'; if we look at the world balance sheet, more financial assets are recorded as liabilities than as assets, as if planet Earth were in part held by Mars." For the purpose of producing an accounting of hidden wealth, that is actually helpful, because "money doesn't evaporate randomly into the ether, but instead follows a precise pattern of tax evasion". In 2015, for example, the nations of the world reported $2 trillion as mutual fund holdings in Luxembourg; this is the total of recorded liabilities. But Luxembourg's own statisticians calculated that worldwide, $3.5 trillion in mutual fund holdings were kept in Luxembourg; that is the total of recorded assets. What happened to the missing $1.5 trillion? In global statistics, that amount had no owners. For Zucman's purposes, the anomaly is a revealing one: The amount by which assets exceed liabilities is a measure of wealth hidden in offshore accounts

That is a lot of money leaking out of the system, avoiding tax.  The article goes on to discuss how these rich people might get taxed, but the overarching information is just how much money escapes taxation.

It's galling to think that the government of the wealthy by the wealthy for the wealthy - a.k.a.the Coalition government, wants to re-jig taxation in a way that increases the tax burden on the poor while giving more tax breaks to the rich.

A Different View On The Property Bubble

It would be unfair of me if I didn't put up an article arguing against the Property Bubble being an immediate problem. Here it is in a nutshell:

But the report also caused howls of outrage from local experts, who variously described Tepper's claims as "fanciful" (Australian Bankers' Association CEO Steven Munchenberg) and "as insightful as another work of fiction, Hunter S. Thompson's Fear and Loathing in Las Vegas" (Mortgage Choice chief executive John Flavell). Sure, there may be some vested interests there, but economists point out several reasons why they think Tepper's claims are over the top. The main one is that for a slide of that magnitude to occur, Australia would need to experience a sharp downturn in the economy, causing a spike in unemployment. That's currently not expected. But there are other signs the housing market isn't about to hit reverse, for example credit growth - seen as a key ingredient of a bubble. While housing credit has picked up, it is still a long way from previous highs.

Hmmm. If you go to the linked article, you'll find that average home loan payments look manageable; mortgage buffers are up;  Credit growth is not extreme; mortgage arrears are low; Low-Doc loans have fallen by proportion; and the Sydney marketing particular was merely playing catch up.

Now here's the thing: none of those charts address the fact that Australia's got the highest private sector debt per capita in the world. Just because on average we're managing this debt and not falling into arrears does not mean there isn't a whole bunch of debt money loaded into the system. As with all dynamic systems, the apparent equilibrium being maintained for now does not indicate the equilibrium is going to hold indefinitely into the future. It's hard to imagine what is going to rock the boat, but should something come along that rocks this boat, it is going to be very susceptible to capsizing.

But then one imagines the government will bail out the banks in order bail out the Mum & Dad investors who put their investment money into housing.

Gerry Harvey Thought It Was Nuts Too

More on the Dick Smith stores closing... Gerry Harvey also thought the AnchorageCapital's float of Dick Smith in 2013 was a bit of a joke.

Retail billionaire Gerry Harvey said he thought the "world had gone mad" when investors paid up in the $520 million float of the now-defunct Dick Smith business.
Dick Smith's receiver, Ferrier Hodgson, announced on Thursday that it was closing the electronics retailer's doors, putting about 3000 staff out of work. 

Mr Harvey said Dick Smith's profits evaporated years ago, prompting then-owner Woolworths to sell the business on the cheap to private equity firm Anchorage Capital in 2012. 

"Then five minutes later this bloke [Anchorage Capital] dresses it up and sells it for $500 million [in 2013], and I'm looking at this and saying 'I don't believe this, this business is stuffed'... I'm thinking I wouldn't buy these shares for 10¢, let alone $2," he said.
"I'm looking at all this and thinking to myself: the world has gone mad."

You would, wouldn't you? 

The Problem That Allegedly Isn't

It's Not A Bubble, It's Just Elevated

Ever since the RBA and its board started talking about housing as potential bubble, there's been increased discussion in the press about what to do about it. As in, if there might happen to be a bubble developing, maybe we should be doing ... (fill in the blank).

Yesterday it was the eminently despicable Paul Sheehan pointing to China and its dodgy dealings ending up as investment money in Australia as the culprit.  Today it is Saul Eslake saying it's the negative gearing that's pushing up prices because it over-incentivises property investors.

It's interesting that the tenor of the discussion has moved towards saying that these elevated house prices might lead to a bubble, as opposed to flatly denying there is a bubble going on. Like a lot of big economic problems, the phenomenon is too big to be seen in small samples because all small samples can be dismissed as anecdotal. That's essentially what's happened to date in claiming there is no bubble going on.

All the same, the mountain of private debt is making things in the economy a lot more constrained. It's a worldwide phenomenon as far as the developed world is concerned, in as much as there is all this investment money that has to go somewhere, and if investing in tech or energy or mining or manufacturing is too hard, people would just prefer to put it into Real Estate and collect the rent as they pay a mortgage. The problem is, when everybody has decided that all these other investment possibilities are no good and property is the only place to be, then it is that classic definition of inflation where too much money is chasing too few assets.

We live in strange times for many reasons, not least of which is that the last global financial crisis was triggered by the sub-prime mortgage market going bust. In other words, the real-estate market killed banking as we knew it; Since then, banks have had to shore up their bottom lines and businesses have had to cut spending to pay down debt. The net result of all this cutting turns out to be a massive loss of confidence in industry and therefore Capitalism. Subsequently a flood of money has gone into residential property. Prices remain elevated in the UK as well as Canada, and in the USA prices are creeping back up to pre-GFC highs. It's not as if Australia is wildly out of line with those places - and so maybe unaffordably high property prices is part and parcel of the 'new normal'?

It's actually a funny moment if you think bout it. The Central Banks of the world have been busy printing money to prop up asset prices. They've well and truly succeeded, in that there is a worldwide housing bubble. So much of the printed money ended up as even more debt taken out by investors to speculate on property because the rest of capitalism has simply lost its lustre, and lost its credibility. If anything this all represents a great no-confidence vote in the Central Banks. It's a bit like a Moebius strip that way. You start out thinking along side with the RBA and you end up realising that there *is* a bubble, but when you go further along the strip you come back to the point where you realise that we only have a bubble when compared to historic norms. These, simply are not normal times.

View From The Couch - 06/Sep/2014

Lessons For A Saturated Economy

I found this commentary about the impact of the property bubble in the Sydney Morning Tabloid this week. it's written from the perspective of the younger people who cannot get into the market. A lot of people seem to think it's young people whining, but there are lessons in history from all this property bubble business (that all these banks are denying exists here). The experience in Japan in the late 1980s through to earl 1990s was pretty instructive. The Bubble and the aftermath of the Pop created economic havoc on the Japanese Gen-X who were coming into the workforce at the time. This resulted in high youth unemployment as well as low rates of marriage and birthrates - and effectively brought forward the peak population date of Japan. The resulting impact of that event was that all the projections the government had made about pension plans and how the labour force was going to support the retiring Baby Boomers went out the window. Much of the low growth and sluggish economy of Japan in the aftermath of The Bubble can be put down to a generation of working people essentially placed out of options and never finding the traction that earlier generations had.

I have friends who are basically economic refugees from Japan. They got out because there were no immediate options that were rewarding or befit their education. Many ended up without kids, others delayed having kids. The 90s and early 2000s saw a remarkable exodus of young, educated Japanese people, who are now not over there contributing to economic growth.

The process of writing off and paying down debts in Japan has been grueling, and worse still government intervention into what they called PKOs - price keeping operations for assets - has distorted the markets leaving what can only be called zombie companies.

The PKO money came out of the government to shore up the asset values of shares and property which is to say, they socialised the debts. The Japanese government under Ryutaro Hashimoto argued that this was necessary to stop a disorderly exit, which is to say, it allowed some investors to keep their bubble profits to pay off the bubble debts instead of getting wiped out. You wonder how those parties got to enjoy such favourable treatment, but then if you see how entwined Japanese heavy industry, banking and the old MITI was in its day, it was one of those things that people acknowledged tacitly without putting up a big fight. After all, what happens to Japan should Mistubishi or Sumitomo should fail? The option cost of bailing out those companies essentially ate the future of Japan.  And that's just Japan. The GFC has exposed the same problem in advanced economies across Europe and North America as well as Australia and New Zealand.

The point of all this is to say, private sector debt has a way of becoming public sector debt, and "too big to fail" essentially eats the future. A few things are very clear from the property bubble in Australia is that the private sector debt is bigger than it has ever been, and should it get called in, it would wipe out our four major banks (BASEL II and III notwithstanding). Because those banks are still in the TBTF category, the government will socialise those losses by bailing them out, and then we'll see our future spending go up in smoke to preserve the inflated prices everybody paid for their houses.

The finer point of all this is, if you don't think there's a housing bubble, then that's one problem. If you do think that there is a housing bubble but think it's just a matter of the market correcting itself, then you'll be in for a surprise.

Ross Garnaut Says: There Is a Bubble - But So What? Cut Rates

This one's related but really interesting. Ross Garnaut thinks there is indeed a bubble going on in the housing market, and that the Reserve Bank of Australia is keeping a close eye on it. Basically, Garnaut is saying the rest of the economy outside of housing could do with the lowering of rates. The rates being as they are keeps the Australian Dollar too high, and makes Australia's economy less  competitive. The only thing keeping the rates where they are, is this deep concern that there is a housing bubble going on, so the rates need to sit at as high a place a possible given the parameters. Instead Garnaut is saying if the RBA cuts rates, then the rest of economy would be able to compete and grow, and the housing bubble should be dealt with specific measures. He also says governments should stop favouring housing for the purposes of capital adequacy.

"It is ludicrous to be worried about lending risks in the housing sector on the one hand while at the same time requiring banks to put more capital aside when they are lending to BHP," he said.

"And there are several reasons to do something about negative gearing. There are budget reasons, and reasons to do with keeping within reach the old Australian dream of widespread home ownership.

"It would also contribute to putting a lid on the housing bubble so we could reduce interest rates and the exchange rate as required by the rest of the Australian economy.

"But the problems can't be solved by the Reserve Bank alone. It requires co-ordination of prudential regulation, monetary policy and fiscal policy."

It's an interesting idea that evokes the old definition of inflation. Inflation, is essentially too much money chasing too few assets. This explains exactly why housing bubbles happen. Given that housing is given a privileged position in measuring capital adequacy, banks are better off lending out mortgages than lending out business loans for capital expenditure. The money headed to mortgages become much easier money by dint of a definitions for capital adqaucy. This devalues businesses against property ownership, even though property ownership in of itself - especially home ownership - can't contribute to the economy in the way that a productive business can. Things like negative gearing simply make it worse. So all the money goes into the property market but of course the overall supply side of the property market itself can only grow at a certain rate. As more money gushes into the property market, it can do nothing but create a condition where the prices of homes inflates. Too much money chasing too few assets.

Is China Finally Wobbling (Just A Little bit?)

It's been like five and a half years since the market bottom following the Lehmann Shock which triggered the GFC. Since then the world has looked on... make that Australia... Australia has looked on to China to keep its economy afloat. China in turn obliged by doing massive stimulus spending, which resulted in it sustaining its 7%+ annual GDP growth rate. There are some who think China has been inflating its GDP figures for years to get more investment, and think there is a 30%discrepancy between what China's real size as an economy is and what the stated size is. That would explain the vast lack of growth in consumer spending that China has so needed to move from an export-driven economy to a consumer driven economy.

China subsequently pushed all levels of government to take on debt and give stimulus to the market and that has resulted in a massive ballooning of debt in China to fund this 7+% growth. Since the GFC, year after year, economists, investors, traders ad analysts of all persuasions have pointed at China and said it is unsustainable. Somehow China never imploded or popped or collapsed. All those ghost cities built in the middle of nowhere with speculation money? No problem. All that re-hypothecated collateral minerals that went missing? No problem. All those companies that started going sour and failed to pay their bonds? Government intervention has saved the day. If you had bet on China to unravel in the last few years, you would have lost money on all those bets.  It would've been hard losses to take too, because rationally speaking, China had every reason to come unstuck. The proof was in the pudding, and the pudding's been magic so far.

Now, there are signs the magic pudding isn't going to hold up. I don't know how China is going to kick the can down the road next time, but they may yet have a way of doing so. After all, one of the interesting aspects of the great recession has been the way things just keep going on in spite of the numbers. If China can't kick the can down the road, this is going to be it for the 23 long years of economic growth in Australia. The cracks are already showing up in commodity prices. Iron ore - the biggest corollary to the health of Chinese industry has sunk to a five year low. This is going to hit our export figures. Falling commodity prices should bring the value of Australian Dollar down. Things are about to get very bumpy.

I can report to you that the money-go-around in Sydney has stopped to a snail's pace. There are a lot of companies sitting on unpaid bills, the companies themselves waiting to receive payment to pay those bills. I have to say it hasn't been this slow since August 2007, which was exactly the peak of the market before the GFC. I'd start selling shares this month if I had any to sell.

News That's Fit To Punt - 03/Sep/2014

Why? Because Fuck You

Everything this Federal Government does is tainted by a sort of grubby conflict of interest. Of course that's not confined to the Federal Government, because the greater conflict of interest might actually be Clive Palmer who owns a dirty big mining company, gets to make deals where a tax like the mining tax can get repealed. It's hard to imagine a more egregious and gratuitous case of helping yourself because you can.

The deal has meant that the government will halt the rise of superannuation. Naturally, with the sensibility of a cheesy movie villain, Tony Abbott tried to sell this as more cash in hand for employees which, frankly made me choke on my lunch. I'm sorry to tell you Mr. Prime Minister, but that's money that'll stay in the pockets of companies. Paul Keating has lambasted the government but honestly, if he wanted to still have a meaningful voice, he should've stayed on in parliament after 1996.

The repeal of the Mining Tax was of course one of the platforms of the Coalition so we ought not be surprised, but really, it is pretty disgusting how the Coalition are totally happy to sell out Australian citizens in favour of a gaggle of mining billionaires - Clive Palmer among them - and try to sell it as being good for the worker. Can it get any worse?

Yes it can. Here's how.

An Inconvenient Ruse

The emissions for energy generation jumped the most in eight years, since the end of the carbon tax.

So much for Al Gore coming to lend a hand in fighting the good fight against global warming. Thanks to the repeal, polluters have gone back to a kind of burn-baby-burn mentality and now it's out of control. Of course the plan by this government is also to smash the renewables industry, and directly pay these polluters to stop polluting.

It's like government by stupidity. You'd never have guessed thing would get this bad. No sane mind would have guess it would get this bad. But this unrelenting awfulness - "Operation Ongoing Enormous Clusterfuck" according to FDOM - was their platform! Grin and bear it.

Pink Batts Coming Home To Roost

Pleiades swung this one at me today. The best bit of news might be how the Royal Commission into the Pink Batts has yielded interesting results. In as much as it was a blatant witch hunt, it looks like it delivered a result that was assumed by the proponents of the Commission. Here's something from Crikey which is behind a pay wall:

 

First, Hanger found the training regime and regulations at the time of the first of four fatalities in October 2009 to have been seriously inadequate:
"With the exception of South Australia, which had a licensing regime for insulation installers, there was no insulation-industry specific regulation beyond the generally applicable occupational health and safety regulation."
But here’s the thing: then-minister for the environment Peter Garrett and his staff had spent most of 2009 tightening regulations and procedures. Hanger listed more than 40 interventions to address safety deficiencies -- all completed before October. So if the safety framework was still deficient by then, it must have been woefully, if not criminally, inadequate prior to 2008. Having presided over industry growth to the level of about 200,000 new and existing houses insulated annually, the previous Coalition government cannot escape culpability.

Secondly, Hanger opened wide the door to those wanting compensation for the program’s sudden termination:
"I find as follows:
"... the effect of the losses was to devastate many long-standing businesses ... and to cause as well personal financial collapse and severe despair and emotional harm;
"that harm and such circumstances justifies pre-existing businesses being compensated."
If compensation is won, it will be the Abbott government scrambling to find the funds.
This has a certain rough justice about it, of course. There is an argument that the scheme was not intrinsically dangerous and was not failing, rather that it suffered from extreme misreporting from the outset, by both Coalition MPs and a feral media.

Thirdly, the Commissioner was scathing about Abbott’s staff in the course of the inquiry:
"The Commonwealth did not suggest one witness that ought to be called. It did not generally volunteer documents that were not the subject of a summons to produce. It did not elicit any evidence of its own volition. All of this is despite the fact that it was the repository of the critical documents and the corporate knowledge of what had transpired."

Not even Peter Garrett copped such a shellacking:
"Furthermore, the Commonwealth hampered the work of those assisting me by the way in which documents were produced ... Other than in response to a specific request from the Commission, there seemed no logic in the order in which documents were produced. The Commission asked that documents be produced chronologically, however the Commonwealth did not oblige."

Finally, the Commissioner made it clear that if the federal government initiated the program, then safety is definitely its problem. Never mind the long history of state responsibility.
"There was much debate about whether workplace health and safety issues were a matter that was of any concern to the Australian Government, or whether it was more properly the concern of the States and Territories. It was said, by a number of federal public servants, that the Australian Government had no regulatory power in the field of workplace health and safety, and therefore that it was not a risk that the Australian Government could control. In my view, this attitude was deplorable."

That means occupational health and safety is now firmly a problem for the Federal Government. Every time somebody dies in an accident, he article suggests a ministerial head is going to roll. Worse still, the responsibility for the failure didn't just get sheeted home to the Rudd Government, it also got sheeted home to the Howard Government, and last I checked Tony Abbott was the health minister in the government. This thing is going to boomerang right back at him.

The Housing Bubble That Isn't But Of Which We Must Be Wary


For months - no make that years! -we've been hearing that Australia does not have a housing bubble problem. All the economists who have come and pointed out the great anomalies of housing prices in Australia have been laughed out of the public discourse while the anomalies only get bigger. As late as last month Glenn Stevens of the RBA was talking down any possibility that what we had on our hands was an actual bubble! No, he simply reiterated that sometimes the property market goes down. This month he's taking a different tack and saying there might be nasty shocks. Included in that link is a bit covering China where he cites a downturn in China might manifest itself as a nasty shock. If that wasn't enough, David Gonski of the ANZ Bank told the Australian British Chamber of Commerce that booming prices cannot possibly continue forever (now there's a brave call).

And lo an behold there's news that China's real estate market is going screwy. Some might even say it is crashing like it was a Global Financial Crisis. Speaking of crashing, the commodities market in China is crashing. I wonder if those things combined would form this so-called 'Nasty Shock' Glenn Stevens is talking about? Or will Sydney's housing prices simply just shrug it off and keep climbing?

Stay tuned for more fun!