Biased Lenders

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Oh great.

There’s a federal election in Australia and it’s scheduled for the 21st of August. If it were possible to avoid all the media coverage of the upcoming election by holding our breath while immersed in a bucket of molasses, we would. But the truth is that you cannot separate politics from share markets these days. Like regular prostate checkups, discussing politics is something we have to do for our own financial health, whether we like it or not.

The main reason you have to figure politics and policy into your investment calculations is that governments around the world are in dire financial straits. They need money. So they’re taxing everything in sight to get it. And you are in their sights. This, among other things, is what U.S. healthcare legislation was about (taxing or fining Americans for not having health insurance).

Here in Australia, there are two preferred methods for squeezing the household wallet in the name of the public good. The first is the Mineral Resource Rent Tax. It exists today like a soufflé just taken out of the oven: all puffy and full of promise, but ready to fall flat. It’s hard to say if this is still keeping a lid on the upside in Aussie commodity shares.

The other big tax con game is the assertion that carbon needs a price. We have yet to see a compelling argument about why this is so. The only argument we have seen is that carbon dioxide emissions from man-made activities are causing the Earth’s temperatures to rise. Thus, carbon needs a price so businesses can be discouraged from carbon dioxide emissions and households can foot the bill to halt the oceans from rising and save the Planet (from us, presumably).

There is surely someone in the DR readership who can educate us as to why the free market has yet to establish a price for carbon. Feel free to edify us with your thoughts by sending an email to dr@dailyreckoning.com

In the meantime – since it’ what we try to do – we’ll offer you the alternative for why the global political class is eager to shove a carbon price down your compliant throat: money. If you put a price on something you can sell it. Or, you tax transactions between buyers and sellers. Either way, a price on carbon produces billions in new government revenues at a convenient time, when many governments are staring bankruptcy in the structural face.

Government wants a price on carbon because it is the ultimate cash cow; a way to clip every single ticket in the economy. It can’t tax it right now, though, because there is no market for it. So it must create a market in order to charge a tax to raise the money for the bills it can’t pay because of its previous intervention in the economy and its general overweening pride about how people should live.

Discuss. Or, judging my previous reactions to our view on the carbon con, disgust.

From a business perspective, if you viewed a carbon tax or a price on carbon as some kind of political inevitability, you’d just want some certainty over the matter. The, at least you could figure it in to your models so you’d be able to determine how much higher to raise prices on your customers to cover the new artificially created, government-mandated price.

The lack of certainty for a price on carbon doesn’t justify just making one up. For instance, if you were confronted by a clown with a chainsaw in one hand and a gun in the other and he asked you which way you wanted to be killed and to decide in ten seconds, you might consider rejecting the question altogether and punching him in his big bulbous red nose instead.

Honk.

But whether there is a carbon price – especially in an economy like Australia’s with lots of mining and coal – fired power plants – is another issue (contrived we’d argue, or self-inflicted) that creates uncertainty for business costs and profits. And the more uncertainty, the worse it is for business and share prices. Come to think of it, the more uncertainty, the harder it is for anyone at all to make plans.

Carbon dioxide does have a price already, by the way. It’s zero. No one wants to buy it. No one wants to sell it. The only way to give it a price is to make it a cost. And the only way to make it a cost is to claim that it’s damaging the public good (air quality, the climate).

And speaking of Australia’s public good, what is NAB head of business banking Joseph Healy up to? Last week, according to news accounts, he made the claim, we think, that the Big Four banks have over-invested in residential housing at the expense of small business lending. Hmm. That sounds right.

Healy said the Basel II capital rules we wrote so much about last week have produced a bias toward home lending. He said, “A bias toward allocating capital to home lending may mean there is less credit to allocate to business, the most productive areas of the economy…The is ultimately bad for growth, bad for competition, bad for jobs, bad for business and in the end bad for Australia.”

If it’s so bad, then, why is it so?

Because it’s good, at least in the short term, for the banks, real estate agents, the government collecting stamp duty, and the whole property spruiking industry in general. You promote housing as a national investment priority if your health and welfare depends on it. The nation’s health and welfare, as Mr. Healy points out, cannot be provided for by people buying and selling houses from each other.

And finally, to close the loop on this climate change an emissions trading scheme subject, do you really care about it? Answer honestly.

We’re asking because the media keep claiming that the Australian public turned on Kevin Rudd when he backed down on his ETS (the ‘great moral challenge of our time’). This, we’ve read, is what doomed him. But is that so?

Maybe. But we think it’s not that people really care about climate change. They like to be seen and heard caring about it because it is both fashionable and morally satisfying. But understanding this about themselves, we think they realised that the Prime Minister cared more about getting re-elected than anything else. This is generally unappealing in a politician when displayed so ostentatiously and without shame. Kevin Rudd reaped what he sowed, just as we all will by our choices, financial and otherwise.

But is it true that the electorate turned on the Prime Minister because he did not share their urgency about climate change? We doubt it. Belief in climate change has become an orthodox position within mainstream media and politics. It is natural then, in the echo chamber of the establishment, for everyone to agree with everyone else and assume the rest of us must agree.

As a non-Australian, though, we wonder if it’s true. Feel free to let us know your thoughts at dr@dailyreckoning.com. But keep your comments clean, or at least civil. We’re trying to save the financial planet here.

Dan Denning
for The Daily Reckoning Australia

Dan Denning
Dan Denning examines the geopolitical and economic events that can affect your investments domestically. He raises the questions you need to answer, in order to survive financially in these turbulent times.
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Comments

  1. Dan,

    There is absolutely no need for a carbon price. The most abundant and effective infra red trapping gas in the atmosphere is water vapour, not CO2 which comes a VERY distant second. There is a a little less than 0.04%Co2 and 1 to 4 % water vapour. We can’t do anything about water vapour as 70% of the planet surface is covered in water which is free to evaporate. Water can also change phase and form those cloud things which can cool or warm the surface depending on circumstances. CO2 is a minor bit player except for its biological effects. It is utterly essential for life on Earth as it is plant food. Halve the CO2 and many plants will be close to death. Halve again and life will cease(after all the plants die so do all the animals, including us). I’d like a larger safety margin please. Burn some more coal and oil!
    As for why anybody expects the climate not to be changing – beats me. It was the first thing they told us about at meteorologist school. A geologist friend of mine says we are still in an ice age as frozen water exists at both poles at the same time! We are in a mild interglacial epoch but the story of recent geological history is long periods of extensive ice cover with short(20,000 years or so) warmer periods.

    Every time I hear of the current outbreak of “global warming” or “climate change” hysteria I want to beat my head against a wall.

    Mike Borgelt
    July 19, 2010
    Reply
  2. Climate change is very real. Man made climate change is a furfy in my opinion.
    Just a little while ago we had a little volcaniv eruption in Europe, not sure if any one is aware.. caused some minor disruptions to air traffic for a little while, nothing serious.. Earth has been going through global change since it’s inception, long before man was here, and will continue to long after mankind has gone. Volcanic activity alone has put more crap in the air than man ever has.
    Solar activity plays a big part on the earths climate.

    Even if we do believe the pro mankind made global warming theory, how will taxing something stop it? Just making business/people pay to emit emissions would not stop the problem, if it exists, anyway.

    Pollution is a problem and is a cause of many health issues, no denying that..
    Destruction of forests without replanting is bad too.. Trees are the lungs of the world, plant more trees to absorb this so called CO2 problem..

    An emissions trading scheme in Australia will decimate our economy and standard of living and achieve nothing for the cost/destruction..

    Of every poor and ill advised government policy divised/implemented that I can recall ever having been brought on the people of Australia in my lifetime the EMISSION TRADING SCHEME is by far the worst. A few will get rich of the many from this, but not for long as the destruction of our economy and standard of living will then stop the cash cow they created… again I stress.. all for nought effect on the climate.

    Stillgotshoeson
    July 19, 2010
    Reply
  3. The Carbon trade got killed by the revelation that so called impartial scientists were fudging the figures for political purposes. The issue became toxic (even if the scientists were or were not altering the figures. It was a moot point then). Overnight, people who were sold on the issue became as skeptical as those who actually think about issues before they form an opinion.

    Everyone backed off as they didn’t want to be associated with corrupt scientists (the hypocrisy of politicians is astounding).

    The Australian public are NOT outraged at the lack of ETS. The papers are. If you want to see outrage from the Australian public, look at the response to the internet filter.

    If anything, the Australian public are smarter than they’re given credit for. A lot of people refused to be labeled at ‘climate skeptics’ and stuck to their guns and questioned the politicians true objectives, which was a tax grab masked as a think of the children situation.

    Unpopular Truth
    July 19, 2010
    Reply
  4. This is spot on! “A bias toward allocating capital to home lending may mean there is less credit to allocate to business, the most productive areas of the economy…The is ultimately bad for growth, bad for competition, bad for jobs, bad for business and in the end bad for Australia.”

    How hard is this for economists and governments to understand and why is it taking so long to realise. Encouraging house price increases through higher debt levels misallocates capital to non-productive areas. End of story. Yes we all need houses to live in……but….encouraging the buy to hold/rent on a large scale is wasted credit.

    Reply
  5. “A bias toward allocating capital to home lending may mean there is less credit to allocate to business, the most productive areas of the economy…”

    That’s SO true! I wonder why those foolish banks do it????!!!!

    Probably something to do with risk, I suppose, given that 50% of new Australian businesses fail within their first year… and 70% within five years.

    Good Lord! Housing must seem almost _safe_ to banks (and governments) in comparison. :)

    Reply
  6. Although the effectiveness of carbon trading in addressing climate change is debatable, the science of man-made climate change is indisputable. The facts are:

    1. Greenhouse gases in the atmosphere traps heat;
    2. Carbon dioxide is a greenhouse gas;
    3. Human activities, in particular the burning of fossil fuels, release carbon dioxide into the atmosphere; and
    4. The current RATE of carbon dioxide increase in the earth’s atmosphere is unprecedented.

    If points 1-3 are true, then man-made climate change is real. You can argue about the extent of our impacts but to say we have no impacts on climate is clearly counter factual.

    So how do we know what the extent of our impacts is? Well, the vast majority of scientists agree that our impact on climate change is significant and needs to be addressed. Global temperatures have been tracking close to the upper range of climate models.

    Climate science is complex. Numbers such as 0.04%, 1% or 4% are meaningless without context. But as Mike Borgelt pointed out, water is the most significant greenhouse gas in our atmosphere and the world is 70% covered with water. What this means is that any increase in other greenhouse gas is ‘positive forcing’; that is, even if increase in carbon dioxide by itself only causes marginal increase in temperature, this marginal increase in temperature will causes more water to evaporate, causing greater increase in temperature, causing causing increase in evaporation and so on.

    Natural systems exist in balance. They have some flexibility but once the tipping point is over then it is over.

    Reply
  7. Science aside, any carbon price imposed on us while the energy generation industry is so heavily regulated and run by state granted monopolies will do nothing to help the environment but simply, as you insinuate, boost the government’s (and the banks who get to trade it) coffers at the expense of the people who ultimately pay for it, consumers.

    Likewise, any arbitrary ‘investment’ by government on green technology or jobs is just another example of crony capitalism, bureaucrats and politicians picking and choosing the winners and losers.

    The only way to have real progress on this front is for consumers to regain the ability to choose their provider and for the utilities to have the freedom to determine what to charge and what infrastructure or technology to invest in. If the industry was deregulated and power (excuse the pun) was returned to the free market we would see more competition, better pricing, more cost-saving (more resources conserved) and (likely) more money flowing into green power.

    Neither party can be serious about helping the environment while these state granted monopolies and excessive regulation are allowed to exist. As Adam Smith said, it’s just “…the insidious and crafty animal, vulgarly called a statesman or politician, whose councils are directed by the momentary fluctuations of affairs,” doing what they do best.

    Reply
  8. Yes to Mick,
    Also if you check how the earth and other planets revolve around the sun. you will see the axis of the earth the equator has move meaning what was sea is now land and what was land is now sea, so even if ice burgs are melting it does not matter as now some other part is being frozen. The Southern Cross as we see it. Is also marked in caves on the other side of the earth where the axis does not revolve. So the earth does move other ways besides the axis movements only at a slower rate of maybe hundreds of years that historical evidents can show us. I think we will suffocate and burn threw acid rain and also the impurities of burning coal ie1% uranium. If you please prove or disprove any of these theory’s with historical evidence or knowledge?

    Reply
  9. Also does excess carbon leave the atmosphere into space or any other imbalanced chemicals?

    Reply
  10. Hay biker how r ya ?
    Now can there be a time when renting is more affordable than buying and paying off alone? I feel in Brisbane even 4 ks out of cbd average 3 beder is selling in Morningside for 500 to 700 hundred grand and only being rented out for 400 to 600 bucks a week?

    So will this be the weight that starts to swing so now people would rather rent and spend up now and enjoy life as one day life will part the bodies? So now the heat will be reduce for buying as smart money go into to renting. Until the rents get too dear and the smart money will go back to buying? I can now see why supply and demand does not always add up.

    Reply
  11. http://finance.yahoo.com/q?s=^DJI

    REFILE-European Factors — Shares set to extend falls
    at Reuters(Mon 2:51AM EDT)

    (this was deleted and replace with this)

    Futures point to bounce for Wall Street
    Reuters(Mon 5:45AM EDT)

    Futures point to bounce for Wall Street
    at Reuters(Mon 5:42AM EDT)

    Wall Street was set for a bounce on Monday, following a sharp fall in the previous session, when disappointing revenue from bellwethers reporting results, and downbeat consumer sentiment data, hurt equities.

    wall street WAS set for a bounce on monday ? (what does that mean?)
    mmmmmmmmmmmmmmm

    Reply
  12. Absolutely love this website guys, long for it every day but you really should stick with something you know about. Global warming is real! I really dont need this shit! Im getting over all this global warming bullshit talk of yours like you know what you are talking about. Stick to gold and silver, inflation, deflation and Im yours. Ill even pay for it. I dont have the time or patience to explain global warming to you because I only have the energy to talk to those willing to change and Im sure you have no intentions of listening. I come to your website to get away from this shit and validate my belief that one day savers will win the battle with debtors and me and my family can have a turn at owning our own home. Please stay on track!

    Reply
  13. Rick: “…can there be a time when renting is more affordable than buying and paying off alone? (If so…) will this be the weight that starts to swing so now people would rather rent and spend up now and enjoy life as one day life will part the bodies?”

    It has always been that way, Rick. If I was young and really fancied a high-flyin’ lifestyle in a McMansion, for up to $650pw, I’d do that. My kids already do*.

    If I was in my forties and I observed that for the last two decades home prices have steadily risen… and that I couldn’t save or invest faster than home prices were rising, I’d be starting to _seriously_ consider getting into _anything_ at all; well prior to retiring.

    Remember that rents are one of the three components in our retirement plan: Rentals + Super + Cash. We’re very much pro-tenant; so much so that we often get written ‘thank-yous’ from our tenants.

    * Sons both own smaller homes, outright, but enjoy renting large luxury apartments. It’s their choice… . :)

    Reply
  14. It is likely that if the climate shifts as significantly as expected then that is going to result in the decimation of humanity, not to mention a whole lot of other species. Does the population at large really understand what this means. Don’t think so. It is beyond our experience.

    Humans are only really good at dealing with threats that are immediate. The time scales of climate change means that it is only understood in the abstract. Furthermore, if it is true, it is unlikely that people will take the sort of action that is necessary. Just look at what governments do with a financial crisis!

    Is the climate shifting due to the impact of humans? Well it appears that the majority of those best placed to know say that it is so. The wider public are of course divided on the matter. Of course vested interests, whether they be politicians or business are all striving to take advantage of the uncertainty.

    Was this the downfall of Rudd? Just one element. The main thing is that he failed to stand for what he believed in. All respect for the man was lost when he was revealed to lack backbone.

    Reply
  15. All the news, docos, ads, etc, etc about climate change just seemed too much and I smelt a propaganda rat several years back. One simple consideration; if the global pollies etc were truly concerned about the looming “climate change disaster”, then one thing they’d do is put upward pressure on interest rates; slow economies and slow carbon burning. But we don’t see that, rather the opposite. Action speaking louder than words….

    For me, one reason Rudd got dusted was because too many constituents woke up to the fact that that climate change is a big fat lie designed to give need for carbon taxes – and he had to go down with the myth. I’m not all that keen on Abbott but at least I am glad he publicly labeled the scam for what it was; a great big new tax on everything and beat the ETS. I do however have a soft spot Barnaby Joyce.

    Don’t hear much from Penny Wong and Peter GArret these days….

    Reply
  16. I’m don’t want to get bogged down in a argument about climate change, there is already information overload and most people have already made up their mind.

    But to me, it seems naive to think that you can dig up 6,000,000,000 tons of carbon per year from the ground (figure taken from wiki) and put it into the atmosphere and not expect to have some impact on the global ecosystem balance.

    I am deeply concerned what the impact of this will be over the coming decades. No one knows and no one can know because it has not happened before. But the effects are starting to show.

    Reply
  17. Lawrence,

    What all the water means is that before you add any CO2 there is already all the water vapour positive feedback that’s going to occur. Also CO2 and water vapour absorb in the same bands. There might be a small effect from the extra CO2 but it is so small(much less than 1 deg C) we can’t measure it or distinguish it from the natural changes that occur all the time.

    The amount of CO2 has increased by 30% or so from 300ppm to 385ppm and what has happened? We can’t even agree on what (and why) has happened to the temperature of the planet or much else! Exotic statistical techniques are used and the result depends on which particular technique it was. None of the surface temperature measurements are very accurate, there are station discontinuities and record gaps(I know, I collected a very small part of the surface temperature record), the weather balloons were never designed for climatological purposes and neither were the satellites which, in any case, only go back 30 years.
    Arctic ice? There are historical records which indicate less ice during the last century and many times before.
    There is NOTHING going on that can be attributed to a little extra CO2 except that there is evidence that plant life is benefiting from this.

    Oh and Greg, there have been times when there was nearly 10 times as much CO2 and life did very well indeed.
    Better get used to it. None of the CO2 reduction efforts has paid off in any way and the Chinese and Indians aren’t going to cut their own throats to allay the superstitious fears of decadent westerners. I hope you are a strong advocate of nuclear power though, to avoid the label “hypocrite”.

    Mike Borgelt
    July 20, 2010
    Reply
  18. Oh no its seems Al Gorers little helpers are all over the net again. Well I suppose our desperate leaders need a new super consumption tax before the drop a new money bomb on the economy…and they know time is short.

    Lets not forget that CO2 climate change is a monumental fraud as we saw by the CRU emails…”hide the decline”.. how sad.

    Reply
  19. It must be election time, the watermelons (green on the outside, red on the inside) are out in force.

    Who will win out of a carbon market? Who’s pushing it the most? BP and merchant bankers, that’s who. Just think of the possibilities of overlaying the complexities of an unproven science with the vagaries of the climate and nature combined with the global banking mess, and I am sure you get the idea on the massive opportunities there for rort and graft to make a quick buck.

    Just think of this – when else in history have the masses demanded to have an extra tax? It’s a left wing dream to have something that scares people so much that they actually demand to be taxed more. Karl Marx would be green with envy.

    PS, don’t trust wikipedia on this subject. It’s about as unbiased as a bunch of union heavyweights in the labor party would be on Industrial Relations.

    Reply
  20. a) I think that global warming is true and nature will start kicking us all up the bum real soon now.

    b) I also think that the powers that be (who may not be the front men) cannot be trusted to tell the truth or listen to scientists. they will expoit whatever situations arise.. they morph , indoctrinate, legislate and buy their ponzie schemes and satanic practices.

    c) Any doubts about the science and the need to act now are allayed by the insurance principle.. if there is only a 10% chance of it being true and a serious issue (life threatening) and it will cost 5% OF gdp to avoid, why not? particulary if there are other reasons to get off fossil fuels.

    d) costing carbon will reduce consmption and make alternatives more attractve, R&D and other investments would be a good use for the raised taxes.

    e) in the event of ongoing climate catastrophies the market can be relied for the efficient pricing of Mars futures. useless with current technology, but some will feel good owning the pieces of paper of gold that represent the idea, feeling special and remote.

    f) without a balance between efficient markets and this crazy little thing called “society” there will not be a solution that is in any way democratic.

    g) if we can get over the next 50 years, there could and should be good things for all. real technological progress and peaceful resolutions of conflict are vital.

    Reply
  21. 89peterg,

    I have seen the “insurance principle” bandied about for years, so let’s just put that one aside shall we?

    If I was to say that 2500 scientists agreed with me that a meteor was going to wipe out all life on earth unless you gave me your house, even though I only emailed the scientists and ignored their comments, using the “insurance principle”, you would be obliged to say well, I guess we’d better give MadJak my house then, just in case.

    I’d also be interested in when you think it’ll kick us in the bum? People have been saying this for decades, and well, according to al gore, we missed the last opportunity to save the earth at copenhagen as being one of the more recent examples.

    I’m all for R&D into alternative forms of energy, because solar and wind right now are too immature for baseload generation (IMHO), but the problem we have is that if this is done via a carbon market, the bankers and the speculators will graft and exploit the system using the vagaries of the science so there is less money to put into it. Likewise, our current govt has some major holes in their budget without the ETS and the original resources grab tax.

    Let me clarify here, I have no vested interests in big oil, mining or any other nasty, it’s just my BS meter is going bananas right now.

    Reply
  22. sorry,

    I meant to say the precautionary principle, which is what I think peter was referring to.

    For a detailed analysis of it, I thought this one was quite good:

    http://brneurosci.org/pprinciple.html

    Reply
  23. Comment by rick e on 19 July 2010:

    Hay biker how r ya ?
    Now can there be a time when renting is more affordable than buying and paying off alone? ( a loan?)

    Renting is nearly always more affordable than buying a home.
    The argument is nearly always is renting better than buying..

    There are good points and bad points to both and the variables that can effect the outcome of either decision are many.
    What is in no doubt, if you choose to rent then the difference between what you pay in rent and what you would have paid in mortgage repayments must be invested.. If you rent and piss the rest against the wall then renting is not better.
    Average house in Melbourne they say is 550k now.
    $550000 – 20% Deposit = $440000 mortgage ( + govt and loan costs to find as well)
    Interest % 7% is as near as damn it to $30000 in interest payments..
    + Council rates, Building Insurance, Water Rates another $3000 a year.

    To rent that same property in Melbourne would be about $400pw round figures $21000 per year + contents insurance
    That $140000 + Govt charges invested along with the $12000 a year saved on mortgage repayments and insurance/rates returning an average of 7% per year would go along way to equalling or exceeding capital growth on the “purchased” property.. Property has had a very good run since 2000, I think it has run out of puff and we won’t see that sort of capital growth in the market for some time now.
    Biker thinks I am anti property, I am not.. Buying a house is a sound move.. I don’t view a house as an investment though.
    Investing in Housing is also sound, will at some point be part of my portfolio of investments, just not yet, I believe I can get better returns on my money outside of property at this point. I am in wealth accumalation phase of my life when I wind down to income phase I will look at investment property for the income stream, not the capital growth.

    Stillgotshoeson
    July 20, 2010
    Reply
  24. “Biker thinks I am anti property, I am not…”

    Actually, I think you’re almost as needy as Steve-I-Love-Property-I-Can’t-Live-Without-It, Shoes. (Wonderful post, that one!~) You’re slightly more obsessed by Oz housing movements than Steve is, in fact… .

    Consider your obsession with clearance rates, for example… an ongoing week-by-week analysis…!~ This from a fella who swore black-and-blue he didn’t want a house. ;) The equivalent would be if I posted a weekly commentary on any dip in gold prices, or the current -30% plunge of stocks.
    I’m not that crass, or so obviously _smitten,_ Shoes.

    As I advised Rick, it’s all a matter of _choice._ My sole caution was in regard to leaving the acquisition of a home until too close to retirement.
    If you’ve enough nous to play the market well… or you love hard shiny stuff… or your passion is travel… by all means rent. The more tenants the better, in our view!~ :)

    Reply
  25. Shoes: “I am in wealth accumalation phase of my life when I wind down to income phase I will look at investment property for the income stream, not the capital growth.”

    There’s a large element of that in it for me at least Shoes – Like what do I really care if my investments are earning me disposable income of 3% pa or 13% pa? – If I can live along quite happily on 3% pa and don’t foresee any strong likelihood any of the investments will need to be sold.

    I’d be a Financial Advisor’s nightmare though I guess: But Ned, I could do so much better for you! I don’t need you to do any better for me mate; providing the investments are returning ‘enough’ … :)

    Reply
  26. “I can live along quite happily on 3% pa…”

    That’s certainly a worst-case-scenario, Ned.

    In our No. 1 suburb, our rents are an average of $45.00 higher than in 2008, now delivering at least 4.7% _after_ tax. Rents in our No. 2 suburb are up just $20.00 per week more than in 2008, delivering at least 3.8% after tax*. We had predicted that difference in return and moved our major focus to the beach suburb over four years ago: higher incomes, lower unemployment, 1% vacancy rate, no expensive site works, higher rents.

    Had we listened to an FA we employed six years ago, we’d be down 30% now.
    Had we listened to his successor, we’d be practically broke!!~ In short, if it sounds too-good-to-be-true, it’s probably going to take you out.

    Like you, we need no capital appreciation… no quick returns… just a comfortable living and a reliable, steady income.

    * These figures are straight from The Sunday Times, 28th March 2010,
    p. 28-29. Where rentals are now worth double our cost of building,
    our returns run to 8 – 10% after tax. Of course the 2.74% interest
    saving has helped achieve those better figures, too… .

    Reply
  27. Comment by Biker on 20 July 2010:

    ~ This from a fella who swore black-and-blue he didn’t want a house. ;)

    Love your mis quotes.. I said I did not want a house at the moment, I also said even if the prices crash I still will probably not buy one
    I also said a portfolio should have cash/property and shares in it

    Comment by Biker on 20 July 2010:

    I’m not that crass,

    You are actually….

    Comment by Biker on 19 July 2010:

    If I was in my forties and I observed that for the last two decades home prices have steadily risen… and that I couldn’t save or invest faster than home prices were rising, I’d be starting to _seriously_ consider getting into _anything_ at all; well prior to retiring.

    If I was in my forties (Which I am) and had observed two decades of steadily rising (read unsustainable growth) house prices, which I have, and that I can save and invest faster than home prices were rising I’d be starting to_seriously_consider staying out of the overheated market as those unsustainable capital growth
    figures on property are over for some time and in fact are more likely to decline in the areas I would consider to buy (in the future) I would wait and continue what I am doing and what is working well for me until such time as it is no longer or my goals have been achieved.

    Stillgotshoeson
    July 21, 2010
    Reply
  28. “If I was in my forties (Which I am) and had observed two decades of steadily rising (read unsustainable growth) house prices, which I have, and that I can save and invest faster than home prices were rising I’d be starting to_seriously_consider staying out of the overheated market as those unsustainable capital growth figures on property are over for some time and in fact are more likely to decline in the areas I would consider to buy (in the future) I would wait and continue what I am doing and what is working well for me until such time as it is no longer or my goals have been achieved.”

    Congratulations. Longest sentence ever posted. Take a breath, son. Take a breath! Don’t get so excited.

    Now… breathe in, breathe out. Hyperventilation isn’t good for you.
    We know you’re a gun, that you _never_ lose at anything you do, that your plan is to travel endlessly. Nothing wrong with that, mate… . :)
    As you say, the market is ‘overheated’. Prices will fall at least 40%.
    Interest rates will be zero. Unemployment will be double its current rate. We have all that _in writing_ from a famous Aussie economist!~ ;)

    Reply
  29. I love the way human beings, as ‘tenants’ and ‘citizens’, have become utilitarian assets in someone elses portfolio/career. There is alot of CON_fidence_MAN, in the _eCONomy_too!!

    Bearamundi
    July 21, 2010
    Reply
  30. MadJak..

    sure, my BS detector is full on too… but I try to seperate the “facts” from the exploitation of them.

    I dont look at singular weather events and say that they are, or are not, evidence of global warming.

    it all boils down to a tentative trust that scientists, on the whole, do not lie.

    as for the precautionary/insurance gun to the head,, I remember clearly the crisis in the US with the banksters sayng hand over the money, we are too big to fail…its another thing to be aware of, but it doesnt change the “facts”.

    bottom line, if I have the facts roughly correct, is that the last time CO2 was over 350ppm , the dinosaurs rules the earth and it was 12C hotter. ok if you lived in tropical antarctica.

    the rate of change is unprecedented (so i am told), and we are mostly concerned with complex human technological risks (stuff nature, hey?)… aborinines could easily (with a bit of tribal war) move inland or south. out cities took centuries to build.

    Id be happy to declare the whole CO2 thing BS, but I am also aware of my need to be happy and pick and choose what I will.

    all the more reason I am pissed off with the whole BS society (and like DRA for its truthism)

    when will (might) it kick us up the bum?…. probobaly, given the big enough kick required to get through the BS and ignorance, when its too late to do much about it. that;s too late for me.

    Reply
  31. “Comment by 89peterg on 20 July 2010:”

    My thoughts Peter,

    – Governments have absolute power in their borders (by way of being able to change laws and legislation to do whatever they want). External sources of energy change that balance. Behind closed doors I believe the real interest in exploiting this GW situation is that of national independence (Ie, not allowing OPEC like groups to control our operational conditions.). Whilst the national public might not be wooed by this I would be (by way of higher energy costs).

    -The ‘No Nuke’ band wagon brainwashed a whole generation, specifically mine (I walk past an 80’s era sign down here in Leichhardt each day on the way to the bus.). I’m pro nuke (Unsubsidised, heap based) but it would never fly due to perception.

    -Do you think the term ‘Alternative Energy’ draws mental correlation with ‘Alternative Medicine’. If pieces of coloured string can’t really cure cancer, that what the heck are those ‘Alternative Energy’ wacks up to in their garages. Energy is energy. If it moved your car or chills your fridge, it’s energy. All we need to worry about is cost and impact (pollution, NIMBY’s, etc).

    -GW scientists have on many occasions being found to skew results to get grants. So, they are in a situation that benefits them to beat the drum as loudly as possible. Doesn’t mean GW doesn’t exist, just means more concrete justification is required on each claim. As investors and traders we know all about curve fitting and I suspect some of that is going on by the scientists.

    -Correct, Wind\solar don’t provide base load. But add in geothermal, hydro, wave, tidal and heat based solar (not electric cells) and you have a situation where base load can be –almost- eliminated.

    I’d like us to stop kidding ourselves that ‘Clean coal’ is a better solution. It’s the ‘single best solution’ but there is no reason to not just pull the energy out of the environment for zero percent net energy change*. If GW is real (and probably is) than it’s almost certainly due to us unlocking millions of years of stored energy (Sun that was trapped in plans that became coal\oil\gas) all within a few decades.

    * Ok, so I’m an IT guy and have different challenges. One challenge is running a datacentre. A room full of hundreds of servers, thousands of disks, fans, etc. Every watt of power consumed by a server ends up as heat. It’s a closed system that needs to be cooled. The earth is similar at a basic level. You pump in extra energy to a steady state and it’ll get hotter and more active. We just don’t have a big ass water cooler on the roof extracting all the stored energy we’re adding. In contrast if we used the ambient energy already present on the earth, we don’t ‘consume’ anything. It’s a steady state right? So if we capture solar, capture potential energy of water up a hill, or water pushing in an inlet to a lake each day, that energy was already sloshing around. We capture it, then, spend it. Almost certainly it renters the environment as heat and is efficiently moved back in to normal earthy movements. Sure, there is impact of these energy techniques, flooded valleys, ugly devices on the landscape, but considering the fact that these devices are often surrounded by healthy land I’m not complaining.

    I’ve also got a bee in my bonnet over the misunderstanding in storage vs generation, so, Whilst on this soap box, we all need to stop thinking electric or hydrogen cars solves anything other than city smog. Here in Oz, your car would be charged off coal rather than oil. That’s an advantage, but not one worth pursuing directly. (Side benefits come from being able to switch generated sources, and that even burnt coal in a larger facility would be ‘cleaner’ than your Prius.).

    “if we can get over the next 50 years, there could and should be good things for all. real technological progress and peaceful resolutions of conflict are vital.”

    I’m in no way that optimistic! People are inherently stupid and short sighted because the only thing we globally have to compare ourselves to is each other. It’s a scale and our goal is just to be higher up the scale than most others (beauty, wealth, status, facebook friends, etc). Technology will never change people’s desires to be better than other people. It’ll just allow different groups to slide up or down the scale.

    On coal and gas, we’re talking big dollars here. You can imagine what clout they have politically (lobbying), indirectly through unions wanting jobs(Labor) and directly through tax dollars which flows to national budgets. The governments desire to get rid of carbon ‘business’ will probably be less than their desire to abolish speed camera’s.

    Chris in IT
    July 21, 2010
    Reply
  32. “Here in Oz, your car would be charged off coal rather than oil.”

    WHY?~ We’re now equipping our _rentals_ with solar electricity panels.

    You’re in IT? (And you think _within_ the box?!) ;)

    Reply
  33. Shoes, your financial calculations do not accurately capture the full picture.

    Firstly, most people consider their home their domain. Having property inspections is quite invasive and distasteful.

    Secondly, your are living at the whim of others. I recently sold out of property (about a year ago.) I’m sitting this out in rental land and noticed that if something is broken, a drawer slider for example the owner \ agent is under no obligation to fix it. Other factors such has undergassed aircon increase my energy costs, at no detriment to the owner. I have a pond with a non working pump, so the water if not empted with a siphon or bucket will be packed full of mossies within a week. My garden is a personal expense that I’ll ware if I move, not only are vege’s not very transportable and the soil improvements are lost.

    Unless you just want a few rooms with basic amenities renting sucks to lifestyle. A few friends have ‘been moved’ by property sales etc.

    One other thing I have noticed is that rental prices doesn’t exactly match asset values. The higher the value goes, the higher rent goes but moreso. I guess there is a lack of expansive rentals but no a lack of expensive houses. My last owned properly was packed with the best name appliances. Comparing rentals with a similar fitout almost makes me want to flee back to ownership as rental steepens markedly with quality, while the fitout isn’t really that expensive (Having done it myself 40mm ceasar, starfire glass splashback, Smeg, miele doesn’t cost that much more than 5-8% of the asset price, but rentals increase value substantially for this kind of fitout).

    So yes, financially, renting make sense. But it’s not a nice way to live. To avoid Australia’s great deflation (and probably profit from it) you bear with it however.

    Chris in IT
    July 21, 2010
    Reply
  34. Recent Grantham stuff: Mr Grantham said Australia, along with Canada’s economy growth looked ”okay” but both were propped up ”by raw materials and, so far, un-popped housing bubbles”.

    http://smh.domain.com.au/real-estate-news/home-price-falls-a-near-certainty-grantham-20100721-10k6t.html

    Which may indicate that there is a bit to be said for having an economy that is propped up by raw materials and an un-popped housing bubble?

    But that aside, a pretty important bit of the debate seems to be about whether “downshifts in inflation and interest rates are structural rather than cyclical”. (With Rory Robertson punting on ‘structural’.)

    Reply
  35. Yeah, I thought Rory buried Grantham’s arguments far quicker than he mobilised Keen. His comments about the US rustbelt certainly made sense.
    We’d have to agree that any desirable coastal location in the US has retained value. (Miami? Stucco Paradise!*) Great article. Wish I’d kept it.

    * Sonny Crockett (Miami Vice): “People in stucco houses shouldn’t throw quiche… “

    Reply
  36. Comment by Chris in IT on 21 July 2010:

    Shoes, your financial calculations do not accurately capture the full picture.

    Firstly, most people consider their home their domain. Having property inspections is quite invasive and distasteful.

    So yes, financially, renting make sense. But it’s not a nice way to live. To avoid Australia’s great deflation (and probably profit from it) you bear with it however.

    My post was purely on the financial aspect.. emotional/lifestyle aspect are too variable from person to person.
    Yes inspections and “less” security are impositions of renting..
    Fear of losing a house you have scrimped and saved is an emotional issue as well.. for about half of the recent first home buyers from reports in the media.. Yields vary from state/city/suburb/rural as well.. There was an article on rental yeilds across a range of locations in Victoria that said some areas are grossing better than 10% for the investors, some are grossing 3.5%
    I used the median Melbourne price against average returns…

    The general thrust of my argument is renting is not, or does not have to be a loss making experience. It is not “dead” money if you are sensible with your money. Renting forever and pissing your money up against the wall and just relying on the pension at retirement is foolish.. yet some are still content to do this… “I might die tomorrow, why bother?” mindset.

    Stillgotshoeson
    July 21, 2010
    Reply
  37. “I have a pond with a non working pump, so the water if not empted with a siphon or bucket will be packed full of mossies within a week.” – If my tenant complained about that I’d send him a fiver and a scratchie in the post and ask him to do me the favour of putting a breeding pair of fish in there? :) :) :)

    Reply
  38. Like seriously fellahs, if a bloke has a 90 year old nanna as his tenant then Yeh, maybe he’ll bend over backwards for the old dear. But the time before last I was told my garbage disposal wasn’t working I went over there and pulled out a pork chop bone. So the last time I was told it wasn’t working, the plumber went over there and pulled the garbage disposal unit out – Don’t any of you tenant types own screwdrivers? :)

    Reply
  39. “…the plumber went over there and pulled the garbage disposal unit out…”

    HaHa… Love it!~

    My stuff’s being ‘disappeared’ again, Ned.
    Let’s see if this gets through!~ :)

    Reply
  40. Reminds me of being in Russia Biker – The loo in my motel room was broken – On investigation I found that a bit of gerry rigged wire that held a couple of bits of plastic together had rusted through – So went out into the hallway and asked the attendant if she had any idea where I could find a bit of wire? (PS: There was an attendant on each motel floor.)

    She was quite taken aback – And informed me it was a job for a “technologist” (or somesuch?) – Can’t specifically recall what I found to fix it? But I’m damn sure I found something! :)

    Reply
  41. We’ve found a lot of uses for ‘duck’ tape and cable ties over the years, Ned. One of our realtors has just advised us of new smoke alarm legislation. I rang a couple of tenants in older (5 – 10 y o) houses. One of them advised that compliance had just cost _him_ $2K per house up north. We’ve learned that all ours comply, but maintenance (minimum standard here is tap-with-a-broomstick) is $104 per house per year. Another tax write-off, I guess. :)

    Reply
  42. 89PeterG,

    It’s interesting how I actually agree with a lot of what you say, and my stance is so similar to yours (even though it is completely on the other side of the fence).

    Unfortunately the politics of this issue has made it basically impossible for people to get past the spin and the opportunism that is rampant. Where scientists have said we think this, or we think that, the opportunistic political scum have been bandying about “we now know this” and “we now know that”. All this has done is polarised the issue.

    For the record, I don’t deny climate change (the climate does change, and the name is an oxymoron), I don’t deny there has been warming (since the last ice age, that’s why we’re in an interglacial period right now) however I have serious doubts about how much man made C02 emissions have influenced the climate. And before people start whining about “It’s a greenhouse gas” and “It’s basic science”, I would suggest you look up what Dr Ferenc Miskolczi s work says (and no one has debunked his work) to get another perspective.

    But that would be too much like looking at both sides of the argument for some people, when really they just want what is spoon fed to them through the TV.

    BTW this issue is relevant to DR, as a carbon market would instantly become the largest commodity market known to man. And it would be impossibly complex too, but don’t worry, someone will put a massive bureaucracy in control, at our expense.

    Reply
  43. Hey Biker,

    A friend of mine has an investment property and every year he just goes around and replaces the smoke alarms with new ones. They have a 12 month guarantee and it costs him about $50. Much cheaper and a lot less mucking around with companies testing etc.

    Reply
  44. Once retired I’ll probably do the same, Annie. We have a lot of rentals… .
    As you say, it may be far cheaper to simply replace them all.

    The legislation in WA seems fairly vague. All ours are hard-wired, with separate RCDs for power and lighting. A possible exception, built 2000, is being checked out today.

    Corrosion and spiderwebs appear to be major concerns in the legislation.
    New back-up batteries, a can of WD-40 and Mortein seem a simple solution to these issues. I guess the maintenance companies assume distance and time factors will guarantee them enough ongoing business… .

    Reply
  45. Ned/Biker, you guys aught to get a look at the standard German rental agreement translated and begin a lobby for them. If investors are genuinely after secure long term and even lifetime income & tenure and low costs with renters being legally forced to maintain the property then they are the answer. If you secretly want short term capital gains and tax breaks they are not. You are up against the Australian establishment though. They have set period terms for the renter to fund interior repainting, recarpeting, and more.

    Reply
  46. Thanks, Ross. We’re quite happy to maintain our rentals… and submit tax claims, including for travel, where applicable.

    Several of our older rentals have doubled in value since we bought or built them five – six years ago. We’re happy to keep them up-to-scratch… .

    Reply
  47. “We’ve found a lot of uses for ‘duck’ tape and cable ties over the years”

    without the latter, quite a few mines I have worked at over the years would have incurred several percent more downtime or recovery losses :)

    Cables ties and insertion rubber – a match made in heaven :)

    Reply
  48. It could be entertaining to see a list of stories busted up under the headings “The most lowlife act a tenant has ever bunged on me” as opposed to “The most lowlife act a landlord has ever bunged on me” I guess? But not especially edifying I’d suggest! :)

    As things are, moving is a hassle and a cost for tenants. And having to find new tenants is a hassle and a cost for landlords. Plus landlords can pay to insure themselves against bad tenants. And tenants have a few move rights re moving on from a bad landlord than said landord has re moving them on. While both are potentially afforded a certain amount of protection under the law in cases of outright bastardry.

    With that maybe being about as near as we are likely to get to perfection given the “greedy landlord” versus “lousy tenant” debate has presumably been around since Neanderthals started renting caves to each other?

    Reply
  49. Comment by Ned S on 22 July 2010:
    With that maybe being about as near as we are likely to get to perfection given the “greedy landlord” versus “lousy tenant” debate has presumably been around since Neanderthals started renting caves to each other?

    There are 8 units where I live and my friend owns all 8 (inherited them when his parents died, bought out his sisters share) I have been here 3 years, there are tenants in 4 of the others that have been here years, the other 3 have had tenant turnover pretty much every year or 2. In that the time I have been here there has been only 1 “bad” lot of tenants The long term tenants all pay “under market rates” my friend figures it is easier to have a good tenant stay and pay a little less than the cost and hassle of re letting and running risk of getting bad tenants.. the units that turnover more are at/near market rates.. if a good tenant stays on the rent increases are minimal.. The lowest rental is $260pw (mine :) ) the highest is $350pw. All of them could get $350pw+ on market
    All are 3Bdr 2 Living Areas Double Garage under roofline, floor tiles in kitchen, meals area, family room, hall, bathroom areas, wc and laundry. Carpets in bedrooms and lounge. ducted heating Close to shops, Schools and Rail and bus..

    Stillgotshoeson
    July 22, 2010
    Reply
  50. 89PeterG,
    I watch Tim the tool man and I think Randy his son. The story was about this business which polluted and the boss spoke to Randy about polluting and buying credits off other company’s to continue business. Randy went off his head as to how this could justify humanity’s existence in a justifiably reality. I cannot off memory tell if Tim the tool man lasted another season after this episode like that. So putting a price on pollution (which is not really carbon but all the other sh!t that goes with it) is not new!
    I saw this show without a lie (memory alcohol induce loss of) 20 years ago. May be (duR) saw the same show { but targeted the young }will now…(and thought it was time to try again)[just like it took the GST to happen in OZ].. Which in 5 years time we will under (vote for) stand with a 10% in pension increase (as Kramer would say dededdddeya)

    Reply
  51. On climate change, one thing I have noticed is that life -exploits- it’s environment to the maximum degree available. Basically until it’s stopped by the next bottleneck. If the environment is exposed to more CO2, which is fuel for plant \ algal growth, should we start seeing a new balance formed, more productive farming, algal blooms, stronger forestry returns, better forest regeneration.

    Admittedly at a lower level at first, but I’m surprised that life doesn’t just respond to the stimulus. (Clearly there are mroe requirements than just CO2, but as a keen vege gardener I’ve seen how well plans can grow with increases of things it’s dependent.

    Chris in IT
    July 23, 2010
    Reply
  52. “A bias toward allocating capital to home lending may mean there is less credit to allocate to business, the most productive areas of the economy…The is ultimately bad for growth, bad for competition, bad for jobs, bad for business and in the end bad for Australia.”

    Seems to me there is a bias towards allocating capital to business in Oz – Through super? So I guess governments and banks bias things as it suits them for their own reasons.

    I’m not prepared to air my opinion on bullion as a productive asset class on this web site though! :)

    Reply
  53. Yes Shoes, there’s something in humans that makes us like land and houses and gold even if they mightn’t represent the best possible value investments around at any particular moment I guess. And that’s probably good – I sort of baulk a bit at the thought of government dictating Thou shalt invest in thy fellow’s business and our infrastructure which supports it because we think it might be productive.

    Reply
  54. Some sort of nesting cum hoarding instinct perhaps? :)

    Reply
  55. response to Comment by Chris in IT on 23 July 2010:
    Australian research shows that yes vegetation takes up more CO2 however the plant sees this as an inbalance and produces toxins to off set. At the same time plants also reduce protein and therefore animals eating foliage require to eat more to maintain the same energy requirement and therefore take in more toxins as well.
    Its complicated and our politicians run on fear not fact and the media are just as bad if not worse. The rubbish put out by all media treats Australians as morons, there are very few we pay any attention to, and i don’t waste my precious time on shock jocks, newspapers and most CA’s on TV.

    Reply
  56. Don;t argue the science anymore. People just won’t listen. Just tell you local politician/member that you don;t want their carbon tax.

    Reply

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