Reader Mail on Housing, Australia, Industry and Family

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We interrupt your regularly scheduled Daily Reckoning to bring you some views and comments from Daily Reckoning readers all over Australia. When we started the DR Australia in 2005 (your editor was in London at the time, but secured the services of one Kris Sayce) it was a letter without any readers. It was really just a hunch that Bill Bonner had that someone should be writing full time about what was happening in this part of the world.

Today, there are nearly 60,000 (mostly Australian) readers who get our letter every day. That makes for lots of comments that come into the in-box. And many of them are full of insight and real-world examples of the themes we write about. As far as we know, it’s the largest financial e-letter in Australia. And based on the comments below, we’d say we have the smartest readers too!

We’ll be back tomorrow with a look at iron ore, gold, and more on the red flags from the China story. And one quick note on the publishing schedule for the upcoming long weekend. There will be no Good Friday or Easter Monday editions of the DR. There will, Nick Hubble assures us, be a weekend edition published on Saturday. Now to the mail about housing, Australia, industry, and family…

Dear Dan,

After receiving my PhD in 2002 I started working at the University of Adelaide and later moved to Telstra Research Labs in Melbourne. When the TRL started falling apart I dumbed down my job and started working in IT. Twenty years ago we had quite a few R&D institutions such as Telstra Research Labs, BHP Labs, RTZ Advanced Technology Development etc. and a lot of people working on technological innovations with, in some cases, pretty good results.

Houses were just commodity. Now all those R&D institutions are gone and finding capital for even a product development is extremely hard which I know firsthand. At the same time the amount of money poured into housing is mind boggling.

I find it pretty amazing that the government is happy to waste billions of dollars on the FHOG and housing related projects such as roof insulation while very little is spent on R&D. I am not suggesting that they are the best body to support R&D but if they think that they have to stimulate, spending at least part of that money on R&D and innovative start-ups would create hope for something productive. There are a few Ausindustry programs but they are a complete joke.

I have no doubts that wasting capital to prop up the housing bubble will only make us poorer with very little productive capacity in the future.

Regards,
J.

Dear Dan,

I think there is no question that the national bias towards rising home prices is having a detrimental effect on the real wealth of the country.

A vast amount of money has been side-lined from more productive investment – building mines, new railways to carry ore, new ports for shipping ore, ships to carry ore etc. Most of the capital to do this has to be imported which is tantamount to selling off the farm. While there is no question that Australians with Australian capital could dig up the Pilbara or the Bowen basin at the same rate as we are now doing it with imported capital, it begs the question – why the hurry?

Especially as we are at the same time increasing the skilled immigration intake and this has resulted in, for example, Australian welders being layed off in favour of Philippino welders. The bigger issue with regard to labour, though, is the 2 speed economy effect where tradesmen are leaving many towns and heading to Queensland or Western Australia for wages which often double their previous earnings. This has resulted in many country towns losing most of their tradesmen and created a general inflation of trade hourly rates. This has been especially so in the building trade.

In Cairns much of the building over the last decade was of units to supply a tax mitigation demand for negative gearing, not to supply a demand by either growing population or tourism for accommodation. Cairns is in a slump now with more than 12% unemployment. Despite the fact that there are more renters because many have sold their homes, rents have come down and there is plenty of availability.

Yours,
N.

Dear Dan

Investing in housing has been institutionalised in our national psyche. I note your recurring theme that our housing is overpriced, and this view was supported by a recent article in The Economist (at least based on housing value benchmarked against rental income). Yet the price keeps on going up.

House prices are also high relative to wage income, however that may not necessarily be a problem (for a while yet) if buyers have a lot of equity in the asset, or have backing from friendly sources such as parents. How much do we know about the structure of funding in the community, and the effect this might have on future risk of house price collapse?

I believe long term housing price inflation creates both (for now at least) short/medium term blind optimism and risk for future deflation if the bottom were to fall out of the economy (again), as some think it might. Short term optimism might be justified based on recent performance – the REAL question is WHEN it might come horribly undone, and WHERE. I do not think that the market is homogenous. Areas of higher demand, lower supply (because of recent high building costs or short supply of land) might be spared from the apocalypse you predict.

Has Australia invested more in housing than productive areas – you bet! Our future financial prosperity is linked to our education standards, yet funding for (and management of) education has suffered over the past 10 years or so. Research and development incentives have been hacked to pieces by successive governments – the latest proposed changes remove the small entrepreneur from any real prospect of adding future value based on inventiveness. As a nation we add little value to the primary resources we dig up or grow. We are not investing enough into alternative sources of energy; our country is great, but it needs good management.

Our culture has shifted towards complacency. We have a great country. However sloth is rewarded in this nation state. In contrast wealth is treated with suspicion. Industry (as in ‘hard work’) is not exactly rewarded at least at government level. Government employment is still regarded as a great path to a comfortable retirement. Employment laws entrench an attitude of entitlement based on anything but merit. Government contributes to the hopeless inefficiencies through its gouging state taxes.

I do not wish hardship on this country – but I do think that some sectors of the country need a kick up the pants. No one seems to take the GFC seriously here!

Keep up the contrarian discussions. I enjoy the frankness of your opinions and I learn a lot about the connectedness of economies from you, even if I do not always support your views.

Regards,

M.P.

An Anonymous (but true) Baby-Boomer Story:

In the street where I grew up, my family was a family of firsts.

My mother was the first to work full time. She always seemed concerned that we were “latch-key kids” but said that she had no choice to work because the bills had to be paid.

In fact, my parents had comparatively large amounts of what’s now called discretionary income. But that money burned a hole in my father’s pocket. He loved treating our family to regular dinners out. This “lifestyle” was disparaged at the time. And it did lead to the home having to be re-mortgaged on two occasions.

In spite of this “shameful secret”, those outings are now remembered to be our family’s best times. And still, the house was paid-off free and clear in about 15 years.

Not long after, my mother inherited her dad’s house; which was encumbered by debt, but that was also paid-off within a few years.

Like many Australians, mum was very anxious for me and my brother to buy a house.
In turn, my brother and his wife; and then my sister and her husband got a leg-up into the property market by living at grand dad’s place rent-free while they saved for a deposit.

My turn never came. After dad passed mum needed the income from the rent. Besides, I wasn’t interested in mortgaging myself up to the eyeballs. The idea of McMansion living in satellite suburbs didn’t appeal to me.

Years have passed, and every year at the Christmas get-together I endure the hour or so of my brother and sister gloating about their “investment”… and how “rich” I would be now, if only I had bought when they did.

My mother’s 80th birthday and the 10th anniversary of my Dad’s passing align. And I suggest we all chip-in and take the old girl out to a nice restaurant, just like old times.

The idea is shot down immediately. They say they can’t afford it.
“Can’t afford it, or won’t afford it?” I ask.
No, they genuinely can’t afford it I’m assured.

Minutes later, my brother takes us to check-out his new wafer-thin TV set.

Days later, in a fit of pique, I take my mother out to celebrate her birthday. It’s just her and me. Not the whole family, but it’s an attempt. We toast Dad. It’s all so awkward. Imagine not being able to afford to take your own mother out for dinner on her 80th birthday! The same mother who propelled you into all this wealth you brag about. I lamely apologise on their behalf.

My mother informs me I obviously take after my father.
She also enquires when I’m going to buy a home.

Cheque please.

Dear Dan,

It does seem amazing to what extent the government will go to protect the wealth of property investors and speculators. Young people have been sacrificed to protect the interests of baby boomers with investment properties. Even the first home owner’s grant simply pushed house prices up by more than the bonus. The government could have just given the money directly to vendors and bypassed the middle man.

I also have to question our high immigration rate. The post world war immigration was designed to provide factory fodder for Australia’s new factories. These factories are now closing to be replaced by housing and warehouses for goods from China. With Australian de-industrialising I have to wonder what skills we actually need. As someone who has worked in mining for many years I see exactly how few people are needed for the mining industry.

In the past we value added to our mining products but today we do as little as possible and export the raw product or concentrate. It is unlikely we will make copper from any new copper mines. Simply because high immigration benefited Australia in the past does not mean it will continue to do so. Is this simply another scam to keep house prices high?

If I was in my twenties trying to buy a house I would be manning the barricades! I suppose the odd handouts to the young people have been enough to distract them from realising just how much they have been shafted.

Regards,

Tony

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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29 Comments on "Reader Mail on Housing, Australia, Industry and Family"

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Joe
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I loved ‘An Anonymous (but true) Baby-Boomer Story’.

It seems to me Baby boomer has traded wealth for wealth.
My family and I are attempting to achieve a balance.
An affordable house with a comfortable life not unduly incumberred (SP?) by the shackles of debt.

Biker Pete
Guest

Ahh, the shekels of debt… . Balance is po$$ible, joehopper… .

Stillgotshoeson
Guest
I’m more interested in income flow than “wealth” per se.. How many of the blue rinse set are asset rich and cash poor now.. Many fear selling up and moving from a place they have lived in for years.. kids are waiting for them to die so they can have “their share”. Still, some are even “alone” kids have moved away so the house is the security blanket…a grip on the past. They may have bought a house in a “working class area” 40 years ago that is now worth millions, yet the scrimp fortnight to fortnight on the pension… Read more »
John
Guest
All good points, and all close to home for me raised in the letters. I am also astounded by the current governments management of the economy and trying their hardest to make Australia a banana republic centred around demand for things simply dug out of the ground, failure of this system I think would spark strong moves towards socialism to preserve the status quo and i am watching like a hawk for capital controls (as i see they brought in the US quietly this week) to move out of the country the money I have worked for and earned lest… Read more »
Biker Pete
Guest
“…the “control” enforced so to speak to get the pension means I would rather not have to rely on a pension… ” On this we utterly agree, Shoes. Just one minor disagreement. At the point when you become ‘comfortable’, by which I mean you know you’re right for life however long that is, you start to become aware just how many truly ‘rich’ people there are out there. It’s a little like that old adage about 1% of the world owning 85% of it. I’d be hesitant to dismiss the ‘blue rinse set’ as finished, too early… . Too many… Read more »
Sambo
Guest

Great Baby Boomer story. Sad, yet it draws a parellel with the feelings of some others here no-doubt (myself included). I am glad you know what is important in life :)

technofreak
Guest

Aging population that costs the government lots of money…”how will we pay for this?” the government asks.

Simply prop up the price of all the houses and then they can support themselves!…hopefully. Or better still that wealth can flow on to their family and they can pay for them.

The money isn’t coming from anywhere else anymore…is it??

Biker Pete
Guest

Don’t feel sad, Sambo. It’s a beautiful, wise parable.*

My father’s last word to me were “Look after your mum.”

Because I invested wisely, I have. :)

* JC would have been proud. No jest here… .

Bill f.
Guest
After reading financial sense university, one learns that house prices in Australia, measured in gold have been falling for the last 5 years and that by this measure they have fallen 32%. Prior to the big falls in the Dow, it too fell massively when priced in gold. The nominal prices followed later.Is this a warning for Australian housing?. Also the long term average for house prices is 3 times the average yearly earnings . Currently they are more than 7 times average yearly earnings. combine this with the FHOG, negative gearing and the government buying Residential mortgage backed securities… Read more »
Steve
Guest

Sambo the baby boomer storey is basically a transferal of wealth from one generation to another,
Thats all it is and its Legal

gut feeling
Guest

All great letters Dan, thanks for sharing.

denko
Guest
Dear Dan, sorry I missed the chance to email a OZ property ‘story’ to you. What follows is a letter of advice to a foreign mate of mine – determined to buy into the Gold Coast Gold (as the realtors there would have…) Do I miss something? —————————————————– Howdy XXXXX Yah ? So Gold Coast housing, :o) The Gold Coast is atypical of Australia – largely because its core industry is the hospitality trade. So its long term residents are hoteliers, restaurateurs, entertainers, the organized sex and casino trade, the boating industry and the secondary industries that spawn from that,… Read more »
Big bird
Guest
Big bird
Guest

Dan,

The readers may be interested in Steve Keen’s ‘Debtwatch’ pages;

http://www.debtdeflation.com/blogs/

Steve is walking from Canberra to Mt Kosciuszko this month to draw attention to dangerous debt levels in Australia. I hope to join him for at least part of the pilgrimage. This is one economist who does not appear to have drunk the ‘kool-aid’, and as such probably deserves our support.

Regards,

BB.

Biker Pete
Guest

“Steve is walking from Canberra to Mt Kosciuszko this month to draw attention to dangerous debt levels in Australia.”

Now, _that’s_ spin!~ :)

Biker Pete
Guest

Denko: “I’d also say they’re often the meanest and most ruthless persons and landlords. Guys who would gladly gouge your eyeball out to secure their rent.”

Ah, but we’re far, far worse than that, Denko. Our worst crime is milking the bears for their bile. ;)

Lachlan
Guest

Yep ya got us bears cornered Biker…I thought long and hard about turning that bear milking thing around but I just aint goin there ;)

Biker Pete
Guest

“Eye of newt, and toe of frog,
Bile of bear, and tongue of dog,
Adder’s fork, and blind-worm’s sting,
Lizard’s leg, and owlet’s wing,—
For a charm of powerful trouble,
To inflate the realty bubble.”
Second Witch, Macbeth

Stillgotshoeson
Guest
The crops we grew last summer weren’t enough to pay the loans; Couldn’t buy the seed to plant this spring and the Farmers Bank foreclosed. Called my old friend Schepman up to auction off the land; He said John it’s just my job and I hope you understand. Hey, calling it your job, ol’ hoss, sure don’t make it right, But if you want me to I’ll say a prayer for your soul tonight. And grandma’s on the front porch swing with a Bible in her hand; Sometimes I hear her singing “Take me to the Promised Land.” When you… Read more »
Lachlan
Guest

The corpirate will have to wait
Or just put up the blinkin rate
Theres rain and hope beyond farm gate
Crops and pastures bask in sun
Milking bulls too fat to run

Lachlan
Guest

actually I thought all along the occult was behind these insane property prices :( :(

Lachlan
Guest

ooooopppps!
Just to make clear that “milking bulls” is refering to stud bulls which are enjoying the good post rain feed at present and not insinuating anything about those in the property bull camp. My apologies if any offense taken.

Biker Pete
Guest
No offence taken, Lachlan. “We worked through spring and summer through winter and through fall; But the mortgage worked the hardest and the steadiest of them all; It worked on night and Sunday, it worked each holiday; It settled down among us and it never went away. Whatever we kept from it seemed almost as bad as theft; It watched us every minute and ruled us right and left The rust and blight was with us sometimes, and sometimes not; The dark brown scowling mortgage was forever on the spot. The weevil and the cut worm, they went as well… Read more »
Don
Guest

“Things fall apart; the centre cannot hold;
Mere anarchy is loosed upon the world,
The blood-dimmed tide is loosed, and everywhere
The ceremony of innocence is drowned;
The best lack all conviction, while the worst
Are full of passionate intensity.”

Biker Pete
Guest

Definitely a lift in the quality of posts here!

Here’s Kipling:

“If you can keep your head when all about you

Are losing theirs and blaming it on you,

If you can trust yourself when all men doubt you,

And make allowance for the mortgage too… .”

Stillgotshoeson
Guest
@ Demon Debt and the Dalliance of Denial By Bill Bonner | Baltimore, MD — | 04/02/10 dailyreckoning.com Debt sneaks up on you. Before you know it, it has taken over. It becomes too large to manage. You can’t cut costs enough to stop it. You can’t raise revenue enough to pay for it. You can’t do anything but admit that you’ve been an idiot. That’s not easy for people to do. They’ll try everything else first. Then, with no other way out, they go broke… Sums up the future for many.. Change one sentence to: “You can’t raise rental… Read more »
Don
Guest

Rats, left out the last line of that verse:

“The best lack all conviction, while the worst
Are full of passionate intensity and are taking out interest only loans on 2 bedroom units on the gold coast.”

:)

Biker Pete
Guest

Ha,ha, Don… love it!!~

(But don’t give my missus any ideas. If you think _I’m_ a bull, she’s definitely the Main Mooooover. Out getting new plans today; while I’m home alone, digging thru’ two centuries of ancient bushfires lit by the original Australians to herd game… !!!!~ :) )

Biker Pete
Guest

Shoes: “You can’t raise rental fees enough to pay for it…”

Offset accounts rule, OK?

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